The new mechanism, called the market stability reserve (MSR) is designed to balance out the allowances in the EU ETS from one year to another, the Council said. If one year sees the total of emission allowances crossing a set threshold, a percentage of allowances will be automatically withdrawn from the market and placed in the reserve. In other years, when allowances are low, they will be returned from the reserve to the market.
There is a surplus of around 2 billion emission allowances in the EU ETS for the current trading period, from 2013 to 2020. This lowers the price of allowances and discourages low-carbon investment. If not addressed, this would affect the ability of the EU ETS to reach its targets, the Council said.
The market stability reserve will be set up in 2018 and will be operational from the start of 2019, the Council said. 'Backloaded' allowances, whose auction was postponed from 2014-2016 to 2019-2020, will be placed in the reserve when it launches, and unallocated allowances from phase 3 of the EU ETS (2013 to 2020) will be added in 2020.
The MSR was first proposed by the European Commission in 2014, the Council said. The European Parliament approved some reforms to it in July 2015 and the Council's approval means it is now adopted, it said.
From 2013 to 2020, the EU ETS cap is reduced annually by 1.74%. In 2021 this will increase to 2.2%, to meet the EU's 2030 target for emission reductions, the Council said.
The EU ETS was launched in 2005 and aims to control emissions. Each year the EU sets a cap on overall emissions from power plants, energy-intensive industry and airlines. Companies can buy and sell allowances, each of which gives the right to emit one tonne of CO2.