There is still a surplus of emissions allowances in circulation; hundreds of millions more will be withdrawn from September

There is currently a surplus of emissions allowances within the EU Emissions Trading System, and their volume will continue to be regulated through the Market Stability Reserve next year. From 1 September this year, a further 332.5 million emissions allowances will be placed in the reserve over a period of twelve months. 

The European emissions allowance market remains oversupplied, and the number of allowances in circulation needs to be reduced by placing them in the Market Stability Reserve, according to a document published in the Official Journal of the European Union.

Historical data suggest that, despite the gradual increase in the price of emissions allowances, the market remains oversupplied. The Market Stability Reserve began operating at the start of 2019, and more and more allowances have been added to it since then. During its first 8 months of operation, 264 million allowances were added, followed by 397 million over the next 12 months, with a further 332 million due to be added from this September.

The number of allowances withdrawn from trading and placed in the Market Stability Reserve is decided each year in mid-May. If there is a surplus of emissions allowances in circulation, 24% of allowances are withdrawn and placed in the reserve (equivalent to 2% each month).

Under European rules, there is considered to be a sufficient number of allowances on the market whenever more than 833 million are in circulation (the European Commission report states that 1.385 billion are currently in circulation). Allowances are withdrawn by not being offered by member states at primary auctions.

The number of withdrawn allowances may not be sufficient

However, there are already calls for more allowances to be withdrawn from the market in the event of a surplus. Until 2023, 24% of emissions allowances are withdrawn in the event of a surplus. This should subsequently fall to 12%, although it is not ruled out that the higher percentage will remain in place after 2023.

Among those advocating an increase in the volume transferred to the reserve is Sandbag, an organisation that closely follows the EU ETS. It says that the volume of allowances transferred to the MSR must also be reviewed as part of the 2021 review of MSR rules in order to reduce the historical surplus of allowances in circulation.