KEY MESSAGES:
- The EU Emissions Trading System (EU ETS) should remain the primary mechanism for achieving net-zero emissions. Predictability over the long-term evolution is key for ensuring necessary decarbonisation investments and cost-effective emissions reductions, as well as meaningful, long-term carbon price signals
- The ETS has been effective in decarbonising the power sector, with 72% of electricity being already net-zero in 2024 and approaching carbon-neutrality around 2040. Meanwhile other ETS sectors still rely on fossil fuels. Thus, we consider the ETS has been moderately effective in reducing EU-wide emissions. Tackling uneven sectoral reduction requires sufficiently robust carbon pricing to drive the final investment decision and complementary measures, including among other, a harmonised EU wide application of indirect cost compensation and Carbon Contracts for Difference, which could mitigate price risks if the overlaps with are correctly managed.
- The Market Stability Reserve (MSR) has been effective in tackling structural surplus, but only slightly in improving resilience. Going forward we encourage the European Commission to enable the MSR to recalibrate potential imbalances:
- improving its responsiveness to periods of high volatility (alongside improvements to article 29a),
- exploring if additional indicators and activation parameters are needed depending on market changes (i.e. triggered by the potential inclusion of removals). This needs to be balanced against the risk for of unnecessary complexity, administrative burden, and costs for operators.
- keeping MSR relevant even for post 2040, by adjusting the upper buffer zone level and threshold for hedging to reflect decarbonisation levels and hedging requirements.