The EUETS has proven its effectiveness over the last decade. The market has been largely stable, with prices at appropriate levels, despite the pandemic and two wars that have disrupted world energy supply. Its continuing effectiveness has shown the system to be robust, in large part due to the operation of the Market Stability Reserve (MSR).

In July 2026, the European Commission is due to publish its review of Phase 5 of the EUETS, which covers the 2030s. As part of the development of Phase 5, a range of interacting design features and parameters will need to be specified that together are consistent with emissions reductions goals. The elements of design that need to be specified go well beyond simply setting a level for the Linear Reduction Factor (LRF), important though that is.

Among other things, mechanisms are needed to ensure that the EUETS remains robust to risks from changes in circumstances and unexpected outcomes, and any market imbalances that may arise as a consequence. This is especially the case if volatile international circumstances continue to prevail.

The MSR is currently the main mechanism for dealing with such risks. However, circumstances in the 2030s will be very different from those prevailing when the MSR began operation in 2019. It is likely that the MSR will at least need to be updated to recognise new circumstances, for example by adjusting thresholds. Other mechanisms may also have a role to play in maintaining the stability of the EUETS. For example, existing provisions to respond to price volatility under Article 29a could be expanded. Various combinations of approaches are possible. For example, price-based triggers could be integrated with the operation of the MSR to allow release of allowances from the MSR if certain price thresholds are reached.

This discussion paper provides a brief overview of some of the design options that are available to address the risks associated with market imbalance. It is intended to help structure discussions around the proposals, with a view to achieving smarter policy design. 

Options need to be considered together, as they may interact. For example, the effect of additional allowances from the New Entrant Reserve (NER) reaching the market may depend on the provisions of the MSR.