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The European Union Emissions Trading System Market Stability Reserve: Does It Stabilize or Destabilize the Market?

Author

Listed:
  • Grischa Perino
  • Maximilian Willner
  • Simon Quemin
  • Michael Pahle

Abstract

The Market Stability Reserve (MSR) was introduced into the European Union Emissions Trading System to address a historical surplus of emission allowances and to improve the system’s resilience to major shocks through automatic adjustments to the supply of allowances. We summarize the main strengths and weaknesses of the MSR and identify when it stabilizes the market as intended, as well as when it is destabilizing. We argue that recently proposed design changes strengthen both its stabilizing and destabilizing effects. We conclude that a price-based supply adjustment mechanism would help to address the main shortcomings rooted in the banking-based approach of the current MSR design.

Suggested Citation

  • Grischa Perino & Maximilian Willner & Simon Quemin & Michael Pahle, 2022. "The European Union Emissions Trading System Market Stability Reserve: Does It Stabilize or Destabilize the Market?," Review of Environmental Economics and Policy, University of Chicago Press, vol. 16(2), pages 338-345.
    • Handle: RePEc:ucp:renvpo:doi:10.1086/721015
    DOI: 10.1086/721015
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    Cited by:

    1. Keppler, Jan Horst & Quemin, Simon & Saguan, Marcelo, 2022. "Why the sustainable provision of low-carbon electricity needs hybrid markets," Energy Policy, Elsevier, vol. 171(C).
    2. Heijmans, Roweno J.R.K. & Engström, Max, 2024. "Time Horizons and Emissions Trading," Discussion Papers 2024/2, Norwegian School of Economics, Department of Business and Management Science.
    3. Rickels, Wilfried & Rothenstein, Roland & Schenuit, Felix & Fridahl, Mathias, 2022. "Procure, Bank, Release: Carbon Removal Certificate Reserves to Manage Carbon Prices on the Path to Net-Zero," Open Access Publications from Kiel Institute for the World Economy 266370, Kiel Institute for the World Economy.
    4. Lidia Vidal-Meliá & Eva Camacho-Cuena & Till Requate & Israel Waichman, 2026. "Timing of Environmental Regulation and the Adoption of Low-Pollution Technologies: An Experiment," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 89(4), pages 1-29, April.
    5. Perino, Grischa, 2024. "Carbon market design and market sentiment," Journal of Environmental Economics and Management, Elsevier, vol. 128(C).
    6. Yongyang Cai & Khyati Malik & Hyeseon Shin, 2023. "Dynamics of Global Emission Permit Prices and Regional Social Cost of Carbon under Noncooperation," Papers 2312.15563, arXiv.org, revised Jan 2026.
    7. Pahle, Michael & Quemin, Simon & Osorio, Sebastian & Günther, Claudia & Pietzcker, Robert, 2025. "The emerging endgame: The EU ETS on the road towards climate neutrality," Resource and Energy Economics, Elsevier, vol. 81(C).
    8. Fabio Di Dio & Lorenzo Frattarolo, 2026. "Environmental Regulation, Firm Heterogeneity and Macroeconomic Volatility," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 89(3), pages 1-47, March.
    9. Salant, Stephen & Shobe, William & Uler, Neslihan, 2023. "The effects of seemingly nonbinding price floors: An experimental analysis," European Economic Review, Elsevier, vol. 159(C).
    10. Shobande, Olatunji A. & Ogbeifun, Lawrence & Tiwari, Aviral Kumar, 2024. "Extricating the impacts of emissions trading system and energy transition on carbon intensity," Applied Energy, Elsevier, vol. 357(C).
    11. Heijmans, Roweno J.R.K., 2023. "Adjustable emissions caps and the price of pollution," Journal of Environmental Economics and Management, Elsevier, vol. 118(C).
    12. Rickels, Wilfried & Rischer, Christian & Schenuit, Felix & Peterson, Sonja, 2023. "Potential efficiency gains from the introduction of an emissions trading system for the buildings and road transport sectors in the European Union," Kiel Working Papers 2249, Kiel Institute for the World Economy.
    13. Carattini, Stefano & Figge, Béla & Gordan, Alexander & Löschel, Andreas, 2024. "Municipal building codes and the adoption of solar photovoltaics," Journal of Environmental Economics and Management, Elsevier, vol. 124(C).
    14. Estelle Cantillon & Aurélie Slechten, 2024. "Market Design for the Environment," NBER Chapters, in: New Directions in Market Design, pages 31-63, National Bureau of Economic Research, Inc.
    15. Lebeau, Alexis & Petitet, Marie & Quemin, Simon & Saguan, Marcelo, 2024. "Long-term issues with the Energy-Only Market design in the context of deep decarbonization," Energy Economics, Elsevier, vol. 132(C).
    16. Eslahi, Mohammadehsan & Mazza, Paolo, 2023. "Can weather variables and electricity demand predict carbon emissions allowances prices? Evidence from the first three phases of the EU ETS," Ecological Economics, Elsevier, vol. 214(C).
    17. Yoon, Beomseok & Filipski, Mateusz & Landry, Craig E. & Yoo, Seung Jick, 2024. "Endowment effects, expectations, and trading behavior in carbon cap and trade," Energy Economics, Elsevier, vol. 139(C).
    18. Muhammad Mushafiq & Muzammil Muhammad Khan Arisar & Hanan Tariq & Stanislaw Czapp, 2023. "Energy Efficiency and Economic Policy: Comprehensive Theoretical, Empirical, and Policy Review," Energies, MDPI, vol. 16(5), pages 1-22, March.
    19. Mohammadehsan Eslahi & Paolo Mazza, 2023. "Can weather variables and electricity demand predict carbon emissions allowances prices? Evidence from the first three phases of the EU ETS," Post-Print hal-04282454, HAL.
    20. Fernando Mata & Meirielly Santos Jesus & Concha Cano-Díaz & Maria Dos-Santos, 2023. "European Citizens’ Worries and Self-Responsibility towards Climate Change," Sustainability, MDPI, vol. 15(8), pages 1-13, April.

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