To ensure the price doesn’t swing wildly, the Commission has a few tools at its disposal. The most important one is the Market Stability Reserve (MSR), a mechanism that withdraws allowances if there are too many and releases permits if there’s too few on the market. A certain amount of permits held in the MSR stash are deleted every year, eliminating those allowances — and possible emissions — for good.
Another option under discussion is introducing offsets — in the form of carbon removal certificates and/or international carbon credits.
Removal certificates would represent one ton of CO2 taken out of the atmosphere through carbon capture technology, while foreign carbon credits account for emissions reduced outside the EU. Integrating either or both in the ETS would give companies more options to cover their pollution as the cap on domestic emissions allowances tightens.
What to watch for: Whether the Commission will tinker with the MSR, whether it will open the door to international carbon credits in the ETS, and how carbon removals will be added into the market. Removals are less controversial, as their addition would also incentivize investment in much-needed carbon capture tech, but foreign credits — which depressed the ETS price when they were traded in the 2010s — are highly contentious.
4. Polluting for free
The manufacturing sector, and some power plants, currently receive a certain share of pollution permits for free to reduce the cost burden and protect them from being outcompeted by foreign firms not subject to carbon pricing. Compliance with sector-specific performance benchmarks determines how many freebies a factory gets.
Sectors covered by the EU’s new carbon border tax — steel, cement, aluminum, fertilizers, hydrogen and electricity — will see their free allowances phased out until 2034. That’s to ensure the EU remains compliant with World Trade Organization subsidy rules.
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