Getting the balance right – reforming the European Union’s Emissions Trading System in an even way
Press release
Berlin, 19 May 2026
Getting the balance right – reforming the European Union’s Emissions Trading System in an even way
In July, the European Commission will present its draft reform of the European Union’s Emissions Trading System (EU ETS 1). One proposal of the Commission is already on the table: to abolish the cancellation of allowances from the Market Stability Reserve (MSR). There is also discussion of auctioning allowances from the reserve for new market entrants to finance an Industrial Decarbonisation Bank. A policy brief published today by Oeko-Institut shows that these two changes would be sufficient to meet demand in the EU ETS 1 by 2040 without the need for further measures to increase supply.
Taking a holistic view of reform proposals
The study compares various combinations of reform options relating to the Linear Reduction Factor (LRF), the MSR and the use of the New Entrants Reserve (NER). It concludes that, in many scenarios, the total volume of available allowances is not only sufficient but even excessive when existing surpluses, MSR holdings and additional auctions are taken into account. This means that all changes can only be considered and decided upon collectively. Otherwise, there is a risk of a renewed surplus of allowances in the EU ETS 1 and a risk of missing the binding EU climate target for 2040.
The analysis also shows that an overly generous supply can not only weaken the CO₂ price in the short term, but also has long-term effects: large surpluses could be carried over beyond 2040 into the trading period up to 2050 and have a lasting negative impact on the effectiveness of the EU ETS 1.
“We are at risk of repeating the mistakes of the past: the combination of the possible reform elements would lead to a structural surplus of allowances by 2040 and jeopardise Europe’s climate targets,” says Jakob Graichen, Senior Researcher at Oeko-Institut.
Reforming emissions trading in a coordinated way up to 2040
According to the analysis, a balanced ETS reform scenario would provide a sufficient supply of emission allowances up to 2040 without creating new surpluses. Careful calibration of key parameters is crucial: an LRF that remains at 4.4 percent until 2036 and is only lowered thereafter would keep the emission reduction targets within reach. This prevents additional supply from entering the market too early. At the same time, allowances become more readily available when the MSR is adjusted. This is achieved by aligning the total number. ”It is a bad idea to auction additional allowances from the New Entrants Reserve. This destabilises the market and penalises plant operators who have planned and invested on the basis of the current rules,” says Graichen.
Policy Brief ‘Getting the balance right’ by Oeko-Institut
This study was conducted by Oeko-Institut Consult GmbH.
Contact at Oeko-Institut
Jakob Graichen
Senior Researcher in Energy & Climate Division
Oeko-Institut Consult GmbH, Berlin office
Phone: +49 30 405085-366
Email: j.graichen@oeko.de
Oeko-Institut is a leading independent European research and consultancy institute working for a sustainable future. Founded in 1977, the institute develops principles and strategies for ways in which the vision of sustainable development can be realised globally, nationally and locally. It has offices in three cities in Germany: Freiburg, Darmstadt and Berlin.
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