Reforming the market stability reserve: the 2026 reform proposals and the road to the trilogues

In this article, we will trace the political and legal trajectory of the MSR from its origins in the allowance-surplus crisis of the early 2010s, through the successive legislative amendments, to its current incarnation under the MSR Proposal and the EU ETS Proposal (together the 2026 proposals) and assess the institutional and legal tensions that will shape the legislative outcome in the months ahead.

What began in 2015 as a rules-based, quantity-adjustment mechanism designed to eliminate a structural surplus of emission allowances has progressively evolved to an instrument that now serves multiple policy objectives: greenhouse gas reduction, industrial competitiveness, energy security, and geopolitical resilience.

This article:

• traces the origins of the MSR from the allowance-surplus crisis of the early 2010s through the successive legislative amendments of 2018 and 2023 (Section 2)
• sets out the 2026 Proposals, including the MSR Proposal’s cessation of invalidation and the EU ETS Proposal’s recalibration of the MSR’s parameters and wider ETS reforms (Section 3)
• examines how the MSR now operates within a broader industrial-policy framework, analysing the linear reduction factor (LRF), the Industrial Decarbonization Bank (IDB), the Investment Booster and international carbon credits (Section 4)
• addresses the interaction between the EU ETS and the Carbon Border Adjustment Mechanism (CBAM), the reintroduction of free allocation and the resulting trade law tensions under WTO law (Section 5)
• maps the diverging positions of the Commission, Parliament and Council on the invalidation mechanism (Section 6)
• considers the legislative road ahead and key developments warranting close attention (Section 7).

Footnotes

1. Decision (EU) 2015/1814 of the European Parliament and of the Council of October 6, 2015 concerning the establishment and operation of a market stability reserve for the Union greenhouse gas emission trading scheme and amending Directive 2003/87/EC, available here.

2. European Commission proposal for a decision amending Decision 2015/1814, April 1, 2026; press release available here, legal text available here.

3. European Commission, proposal for a directive amending Directive 2003/87/EC and Decision (EU) 2015/1814, 2026/0212 (COD),