On 1 April 2026, the European Commission tabled a targeted legislative amendment to the Market Stability Reserve (MSR) — the mechanism that manages the supply of EU Emissions Trading System (EU ETS) allowances to stabilise the carbon market. The proposal's headline measure: stop the automatic invalidation of allowances held in the reserve above the 400 million threshold. Under the current system, any allowances above that ceiling are permanently cancelled each year. Under the proposed amendment, they would be retained as a strategic buffer.
The MSR was created in 2019 to address the structural oversupply of ETS allowances that had kept prices depressed for years. It works by adjusting how many permits are auctioned each year based on the Total Number of Allowances in Circulation (TNAC). When the TNAC is too high, the MSR absorbs allowances; when it is too low, it releases them. Any allowances held in the reserve above the 400 million threshold are currently cancelled — permanently removing them from the market.
This cancellation mechanism has become increasingly controversial as the EU approaches its 2030 and 2050 climate targets. Industry groups and market analysts have argued that erasing the buffer reduces the EU's ability to respond to future price spikes or unexpected economic shocks — the kind of volatility that could undermine the ETS's credibility as a long-term carbon pricing signal.
The April 2026 amendment proposes that allowances above the 400 million threshold would no longer be cancelled. Instead, they would remain in the reserve indefinitely, available for release only under two conditions: genuine market tightness (when the TNAC falls below the lower threshold) or excessive price increases. This shifts the MSR from a one-way ratchet (absorb and destroy) to a two-way buffer (absorb, hold, and conditionally release).
Market reaction: EU ETS futures held above €70 per tonne in the first week of April, reaching a seven-week peak following the announcement. The limited scope of the reform — widely seen as less aggressive than feared — alleviated market concerns about a more disruptive MSR overhaul that could have flooded the market with allowances.
The proposal now enters the EU's ordinary legislative procedure, requiring co-decision by the European Parliament and the Council. A comprehensive review of the EU ETS — covering all major structural elements — is scheduled for July 2026. That review will assess whether the MSR remains fit for purpose across the next decade, and may trigger further amendments depending on price trajectory and the pace of industrial decarbonisation.
The CBAM definitive phase, which began 1 January 2026 (with a first certificate price of €75.36/t for Q1 2026), adds further complexity: as more embedded carbon costs are reflected at the EU border, the domestic ETS price signal becomes even more consequential for industrial competitiveness and trade flows.
TrustVal helps corporate buyers and project developers navigate carbon markets with confidence. Understanding EU ETS price dynamics and CBAM compliance obligations is critical for any EU-exposed industrial operation in 2026 and beyond.
Sources: European Commission, 1 Apr 2026 · Carbon Pulse analysis · IndexBox — EU ETS April 2026