EU Council and Parliament advance ETS reforms to protect industrial competitiveness

Brussels, 21 October 2026

On 20 October 2026, the EU Council and the European Parliament reached a provisional agreement on amending the rules on the invalidation of allowances in the market stability reserve (MSR) for the EU emissions trading system.

This targeted amendment of the MSR will increase long-term market liquidity and predictability while protecting industrial competitiveness. The provisional agreement still needs to be confirmed by both institutions before formal adoption.

The agreement bolsters the MSR’s ability to respond to evolving market conditions, including any potential market tightness after the mid-2030s as the overall cap on emissions continues to decrease. The updated rules increase the firepower of the MSR for possible future allowance releases to shield European industry from extreme price volatility, while sending a strong market signal with safeguards against allowance surpluses.

The MSR is a mechanism created to address imbalances in the carbon market by absorbing excess allowances or releasing them to stabilise prices. This targeted amendment does not alter the overall design of the MSR. A broader review of the ETS, including the rules governing the MSR, is currently underway.

In response to European leaders’ call for accelerated action, we reached a balanced outcome on the market stability reserve that provides European industry with immediate flexibility, while ensuring price stability and protecting the integrity of the EU carbon market. The EU is delivering on the ‘One Europe, One Market’ roadmap.

^{Darragh O’Brien, Ireland’s Minister for Climate, Energy and the Environment}

Future-proofing the market stability reserve

Since the invalidation mechanism began in 2023, over 3 billion allowances have been invalidated and removed from the market, restoring balance between supply and demand and addressing the historical oversupply of allowances accumulated in the ETS.

While the Commission proposal provides for the indefinite halt of its invalidation mechanism, the co-legislators provisionally agreed on a balanced compromise: the invalidation mechanism will still be in place, with a higher invalidation threshold of 700 million allowances (compared to the current 400 million threshold) entering into immediate effect, after the proposal is formally adopted. The larger number of allowances will enhance the long-term stability of the EU carbon market and will provide a larger buffer for future market fluctuations, while providing a safeguard against excessive oversupply of allowances

The co-legislators also agreed that a gradual decrease of the invalidation threshold should be included in the context of the wider ETS review to ensure a consistent overall approach.

Next steps

The provisional agreement will now have to be endorsed by the Council and the Parliament. It will then be formally adopted by both institutions following legal-linguistic revision.

Background

The Commission proposal is one of the short-term measures announced by the Commission to address high and volatile energy prices, as referred to in the March conclusions of the European Council. It is a first, stand-alone amendment to the market stability reserve, which is to be followed by a broader reform of the reserve in the context of the ETS review, currently under discussion within the Council.

Source – EU Council

EU Commission welcomes political agreement on rules enhancing stability and long-term resilience of EU carbon market

Brussels, 21 October 2026

The European Commission welcomes the provisional political agreement reached by the European Parliament and the Council on a targeted amendment to strengthen the Market Stability Reserve (MSR) of the EU’s Emissions Trading System (EU ETS).

Following the Commission’s proposal in April 2026 and delivering on the European Council conclusions last week on 16 October, this swift agreement will help to ensure a stable, well-functioning carbon market in the EU and enhance EU ETS’ resilience to excessive price volatility. As a result, it also makes concrete progress on the implementation of the ‘One Europe, One Market’ roadmap agreed among EU institutions to strengthen Europe’s competitiveness by the end of 2027.

Under the current system, all emission allowances in the reserve above 400 million are invalidated. Thanks to the agreement, the reserve will be able to retain up to 700 million allowances as a buffer to support future market stability and predictability. These new rules will reinforce the reserve’s capacity to operate in the longer term, while preserving the fundamental rules-based design of the system and its environmental integrity. The MSR reduces the supply of allowances to the market when there are too many in circulation and injects allowances when there is scarcity.

This agreement sends a clear signal that the EU is committed to a predictable and reliable carbon market, providing greater certainty for businesses, and investments in clean transition. It is a first step towards a wider modernisation of the Market Stability Reserve, for which further reforms have been proposed by the Commission as part of the separate MSR reform and the EU ETS review on 17 July 2026.

Next steps

Following this provisional agreement, the European Parliament and the Council of the EU will have to formally adopt the text. Thereafter, the amendment of the Market Stability Reserve Decision enters into force upon publication in the Official Journal of the EU.

Background

First introduced in 2019, the MSR is designed to enhance the resilience of the EU ETS by adjusting the supply of allowances in response to market developments, making the carbon market more resilient to future shocks and price volatility. The MSR contains price volatility by reducing auction volumes during periods of supply surpluses and releasing allowances in periods of scarcity based on predefined rules.

The Commission tabled its proposal to strengthen the MSR in April 2026, following President von der Leyen’s announcement at the March European Council. This provisional agreement addresses an immediate need to strengthen the resilience of the carbon market by preserving allowances in the reserve, while the broader ETS review provides the opportunity to modernise the MSR’s functioning for the next decade.

For more information

Quote(s)

This agreement is an important deliverable in making the ETS fit for the future and a strong response to the calls of EU leaders last week. It will strengthen market stability and predictability over the next decade, enhance EU industry and competitiveness, and give businesses greater certainty to invest. It will also support industrial decarbonisation by reinforcing the resilience of the EU ETS against future shocks and excessive price volatility.

^{Wopke Hoekstra, Commissioner for Climate, Net Zero and Clean Growth}

Source – EU Commission

MEPs want extra free allowances to shield industry from carbon leakage

19 October 2026

More free allocation under heat and fuel benchmarks to reduce carbon leakage risk
Unused allowances split between industry, district heating and innovation
Sector-specific benchmarks for industries to which the general fuel benchmark is ill-suited

Environment MEPs back nearly 100 million extra free EU Emissions Trading System (ETS) allowances for industry in 2026-2030 and more funding to modernise district heating.

On Monday, the Environment Committee adopted its position on the Commission’s proposal to revise the EU ETS heat and fuel benchmarks for 2026 to 2030, by 64 votes in favour, 11 against and 2 abstentions.

More free allowances for industry

The MEPs are in favour of increasing free allocations for 2026 to 2030 under the heat and fuel benchmarks, the “fallback benchmarks” used when no product-specific benchmark applies. The aim is to give industry more protection against the risk of “carbon leakage” (when energy-intensive businesses relocate their activities outside the EU to countries with looser climate rules). Like the Commission, they want to use all allowances available for free allocation in that period, now estimated at around 88 million. The MEPs also want to add around 11 million allowances withheld from installations that failed to meet ETS conditions, for instance did not implement energy audit recommendations, bringing the total to nearly 100 million. This means that, on average, fallback benchmark values would be around 12.5% lower than in the 2021-2025 period, a smaller cut than under the current rules.

Support for district heating and innovation

The MEPs propose splitting the allowances that are not allocated because of reduced free allocation into three equal parts. One third would go to the fallback benchmark adjustment. Another third would be auctioned, with the revenues going to the Modernisation Fund to support investments, including in modernising district heating systems. The last third would go to the Innovation Fund.

Benchmarks that reflect sectors’ real performance

The EU-wide fuel benchmark may not always reflect how some industrial processes perform. Where there are significant and clearly documented differences, MEPs want the Commission to set sector-specific sub-benchmarks based on the 10% most efficient installations in that sector. The Commission would set out the criteria within three months of the regulation’s publication and the values within six months, starting with certain ceramics sectors. The MEPs stress that the benchmark values must be set transparently, while protecting commercially sensitive information.

Quote

Rapporteur Adam Jarubas (EPP, PL) said:

By increasing the free allocation proposed by the Commission, the Committee recognises, with broad support, that certain sectors need stronger protection against carbon leakage. At the same time, it takes into account the diversity range of industries covered by the general fuel benchmark. It also calls on the Commission to act swiftly for sectors such as ceramics, which, according to the calculations, should receive a higher allocation than the general benchmark gives them.”

Next steps

Parliament is dealing with the file under its urgent procedure It will vote in plenary on its position on Thursday 22 October, after which negotiations with the Council can begin. The aim is to apply the new benchmark values from the 2027 update.

Background

Companies covered by the EU ETS must surrender one allowance for every tonne of CO2 (or equivalent) they emit. Installations in sectors deemed at risk of carbon leakage receive free allowances based on benchmarks set by the Commission. These reflect the average performance of the 10% most efficient installations in each sector. Where no product benchmark exists, free allocation is based mainly on heat and fuel use (the “fallback benchmarks”).

The benchmark values for 2026 to 2030 were updated in June 2026, prompting concerns from several industrial sectors about sharp cuts in their free allocations. In response, on 17 July 2026 the Commission proposed amending the ETS Directive to use all remaining allowances available for free allocation in the 2026-2030 period, then estimated at around 80 million, to increase allocations under the fallback benchmarks. According to the Commission, this would save the industries concerned around €6 billion.

Further information

Source – EU Parliament