The European Commission announced a new proposed measure to adjust a key mechanism in its carbon pricing system, the EU ETS, aimed at addressing concerns from industry facing pressure from soaring energy costs as well as increasing carbon prices.

The Emissions Trading System (ETS) is the EU’s internal cap and trade carbon pricing mechanism. Established in 2005, the ETS puts a price on carbon emissions for key GHG intensive sectors, including electricity and heat generation, oil refineries, steel, cement, paper, chemicals, and commercial aviation, among others.

As Europe has faced rising energy prices, first driven by the Russia-Ukraine war, and now exacerbated by the war in Iran, several member states have recently called on the Commission to review the ETS to help reduce pressure on industry. In March, following a Euro Summit meeting with member states at the European Council, EU Commission President Ursula von der Leyen pledged to introduce near-term measures to revise the ETS, with a comprehensive review of the ETS planned for July 2026.

While committing to update the ETS, however, von der Leyen has defended the system as an effective tool to drive reduced dependence on imported fossil fuels, accelerate the shift to cleaner energy sources and fund investments in decarbonization-focused technologies. In its statement announcing the new proposal, the Commission credited the ETS as a driving factor in the EU’s 39% reduction in emissions since 2019, as the economy grew by 71%.

The Commission’s new proposal focuses on the ETS’ Market Stability Reserve, the mechanism that manages the supply of carbon allowances under the system to support price stability. The MSR has been operational since 2019, acting by reducing the supply of allowances that are traded in the market when too many are in circulation, and injecting allowances back into the system in conditions of market scarcity.

Under the current system, the MSR automatically invalidates allowances above a 400 million threshold. The new proposal would stop the invalidation of allowances, enabling the MSR to keep them as a buffer against increasing prices.

The Commission said that the proposal is part of its effort to “keep the EU ETS fit for purpose, maintaining its core design while strengthening its ability to deliver decarbonisation, competitiveness and energy security.”

The new proposal will be required to be adopted by the European Parliament and Council in order to be enacted.

Wopke Hoekstra, Commissioner for Climate, Net Zero and Clean Growth, said:

“Today, we are delivering on the one of the commitments made by our leaders. This marks an important first step in modernising our carbon market. By strengthening the Market Stability Reserve, we enhance EU ETS’ resilience to volatility and ensure that it continues to drive decarbonisation, support competitiveness and foster clean investment.”