New EU Carbon Market to Have Shields From Price Spikes

The European Union is designing a mechanism to protect its planned emissions market for heating and road transport fuels from excessive price swings.

The European Commission, the 27-nation bloc’s executive arm, is set to propose the creation of a new pollution trading system for buildings and vehicles as part of an overhaul to align the economy to a stricter 2030 climate goal. The new program will run adjacent to the existing EU Emissions Trading System, which currently covers factories, utilities and aviation and is poised to expand into shipping.

The Commission plans to propose that the new program includes a Market Stability Reserve that would absorb or release carbon permits into the market under certain circumstances, according to a draft law seen by Bloomberg News. The regulation is set to be unveiled on July 14 and may change before it is adopted and made public.

While the MSR in the new program will mirror a similar mechanism in the existing emissions system by controlling the supply of allowances, it will also have a tool where permits are added to the market based on their price.

“In order to address the potential risk of excessive price volatility, measures are foreseen to allow for release of additional allowances from the MSR,” the Commission said in the document. “However the triggering mechanism for this additional release will be based on the increase in the average allowance price and not on the surplus of allowances in the market.”

The Commission has a policy of not commenting on draft laws.

The planned emissions trading program will impose pollution limits on companies further upstream in the supply chain rather than on emitters, building on existing EU measures on tax warehouses and fuel suppliers. It will regulate the release for consumption of fuels which are used in the heating and transport sectors, according to the document.

The new MSR will start operating from Sept. 1, 2027. If the total number of allowances in circulation is above 440 million, 100 million permits will be deducted from auctions and placed in the reserve.

If there is less than 210 million allowances in circulation, 100 million will be released from the reserve and added to the auctioning volumes.

For the price triggers, the draft law envisages that if for more than three consecutive months the average price of allowances at auction is more than twice the average rate during the six preceding consecutive months, the Commission will adopt a measure to issue 50 million allowances from the reserve.

If the three-month average price is more than triple that of the six preceding months, 150 million allowances would be released.

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