Market Stability Reserve: European Council Backs Measures For A Smoother Launch Of ETS2

Today, the Council (at EU ambassadors level) adopted its position on a targeted amendment of the market stability reserve for the new emissions trading system for buildings, road transport and other sectors (ETS2). The amendment aims to ensure a better price stability and predictability for a smoother start of ETS2 in 2028. The amendment does not change the overall design of the market stability reserve.

The market stability reserve helps address supply and demand imbalances in ETS2. It automatically adjusts the number of emission allowances available when prices fluctuate.

The new emissions trading system for road transport and buildings should begin on firm ground. The Council’s position on adjusting the market stability reserve — the safety valve of the system — sends a clear signal that the EU is committed to a stable and predictable carbon market.

Maria Panayiotou, Minister of Agriculture, Rural Development and Environment of the Republic of Cyprus

Stability and predictability for the European carbon market

The Commission proposal for a targeted amendment of the market stability reserve was supported by the Council without changes. This proposal follows a July 2025 initiative, supported by 19 member states, calling for a smooth start of ETS2.

To improve longer-term market predictability and confidence among market participants, the market stability reserve will be extended beyond 2030. The 600 million allowances held in the reserve — equivalent to around ten years of required ETS2 emission reductions — will remain available for future release if needed.

The current price control mechanism triggers a release of 20 million allowances when the cost of carbon exceeds €45 per tonnes CO2 equivalent (in 2020 prices). The amendment adds a top-up of 20 million allowances to each release and provides for it to be triggered twice per year. This means that up to 80 million additional allowances can be injected into the market annually.

Moreover, the Council position endorses the need for a more gradual and responsive release of allowances from the reserve into the market, as a safeguard for market stability. Currently, when the number of allowances in the system falls to 210 million, 100 million allowances are released from the market stability reserve. According to this amendment, if the number of allowances drops below 260 million allowances, but still stays above 210 million, a lower number of allowances will be released. This will avoid sudden and sharp supply fluctuations and will send a stable price signal to the markets.

Next steps

The Cyprus presidency can now start talks with the European Parliament on the final text, once the latter has adopted its position, with the ambition of advancing negotiations as much as possible under its term.

Background

The ETS2 applies to distributors supplying fuels to the buildings, road transport and certain other sectors. These suppliers must monitor, report and surrender allowances equivalent to the emissions from the fuels they sell, while the total limit of available carbon allowances within the EU decreases each year to incentivise decarbonisation.

The system was established as part of the ‘Fit for 55’ package in 2023. The aim of ETS2 is to reduce emissions from these sectors by 42 % by 2030, compared to 2005 levels.

The ETS2 will become fully operational by 2028, as agreed during negotiations on the European Climate Law.