European Union negotiators have reached a provisional agreement to revise the rules governing the bloc’s carbon market, increasing the number of emissions allowances that can remain in reserve before being permanently cancelled.
The agreement, reached by the Council and European Parliament on 20th October and announced the following day, raises the invalidation threshold of the EU Emissions Trading System’s market stability reserve from 400 million to 700 million allowances.
The compromise reached by EU negotiators follows months of pressure from energy-intensive industries concerned about carbon prices, electricity costs and competition from manufacturers operating under less restrictive environmental regimes.
The measure requires formal approval before entering into force and forms part of a wider review of the EU’s principal carbon-pricing mechanism.
A larger reserve for future market disruptions
Established in 2019, the market stability reserve was designed to address the accumulation of surplus emissions allowances that had weakened the effectiveness of Europe’s carbon market.
Under the Emissions Trading System, companies in covered sectors must surrender allowances corresponding to their greenhouse gas emissions. The total quantity available is progressively reduced, creating a financial incentive to cut emissions.
The reserve adjusts the supply of allowances entering the market, withdrawing them when there is a substantial surplus and releasing them under specified conditions when supply becomes scarce.
Existing rules also provide for the permanent cancellation of allowances held above a threshold of 400 million.
Under the new agreement, that threshold would increase to 700 million, allowing a larger stock to remain available for potential future release.
The change does not automatically introduce 300 million additional allowances into circulation. Releases would continue to depend on the reserve’s operating rules and market conditions.
According to the Council, more than three billion allowances have been invalidated since the mechanism began operating in 2023.
The Commission initially proposed ending automatic invalidation indefinitely, while the Council’s September negotiating position envisaged a temporary suspension followed by a higher threshold.
The compromise retains invalidation but increases the amount protected from cancellation.
Industry competitiveness enters climate negotiations
The agreement follows growing concern about the cumulative cost of European climate regulation, particularly for steelmaking, chemicals, cement and other energy-intensive sectors. Manufacturers have warned that carbon costs, combined with relatively expensive electricity and industrial gas, complicate investment decisions and weaken their ability to compete internationally.
Brussels must also consider the consequences of production shifting to jurisdictions with lower emissions-related costs, a phenomenon known as carbon leakage. Earlier this year, EU Today examined the Commission’s consideration of changes to industrial protections under the ETS, including the relationship between free allowances and the Carbon Border Adjustment Mechanism.
The latest reserve agreement does not directly change the allocation of free allowances, the emissions cap or the obligations imposed on individual industrial installations. Its principal effect would be to preserve a larger buffer that could become available if future market conditions trigger the release mechanism.
For manufacturers planning investments extending into the 2030s, the availability of allowances and the future trajectory of carbon prices influence production costs and the commercial case for decarbonisation technologies.
Carbon market figures reveal changing conditions
The European Commission reported in May that the total number of allowances in circulation during 2025 stood at approximately 1.023 billion.
Its annual market stability reserve calculation provided for approximately 190.5 million allowances to be withdrawn from auctions between September 2026 and August 2027.
These withdrawals reflect the existing mechanism for reducing market surpluses. The proposed higher invalidation threshold concerns how many allowances can subsequently remain in reserve rather than being cancelled.
The overall emissions cap will continue to decline under the legislation already governing the ETS.
Consequently, preserving a larger reserve does not remove the long-term constraint on emissions or guarantee lower carbon prices for European industry.
The agreement also concerns the established ETS covering power generation, industry and certain other sectors, rather than the separate ETS2 regime for emissions associated with road transport and buildings.
The latter has generated its own political controversy, as EU Today reported following the October European Council summit.
Broader ETS reform remains unresolved
The Council and Parliament have agreed that the question of gradually reducing the invalidation threshold should be considered during the broader ETS review.
That exercise will address the carbon market’s operation over a longer period, when the declining supply of allowances could create tighter conditions.
The present agreement therefore provides an adjustment to the reserve mechanism without reopening the entire emissions trading framework. Following legal and technical finalisation, the provisional deal must be endorsed by both institutions and formally adopted.
The new 700 million threshold would apply after the legislation takes effect, while the larger review of the ETS continues through the EU legislative process.
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