The European Union agreed earlier today to increase the buffer for surplus carbon allowances under its Market Stability Reserve, marking a new step in efforts to balance industrial competitiveness with the bloc’s climate objectives.

The provisional compromise increases the threshold above which allowances held in the reserve are invalidated from 400 million to 700 million. The change is intended to improve the availability of permits over time and make the carbon market more predictable for businesses.

The agreement follows months of debate over how to maintain the carbon market’s role in reducing emissions while responding to concerns about costs and future supply. It must still be endorsed and formally adopted by both institutions before becoming law.

The Market Stability Reserve was established to address a historical oversupply of emissions permits that had weakened the EU carbon market’s price signal. Under the mechanism, allowances can be withheld from auctions when supply is high, while permits held above a defined threshold have been subject to permanent cancellation since 2023.

The European Commission says more than 3 billion allowances have been invalidated since that cancellation mechanism began. Raising the threshold would allow a larger stock of permits to remain available within the reserve, providing more flexibility if market conditions tighten.

“In response to European leaders’ call for accelerated action, we reached a balanced outcome on the market stability reserve that provides European industry with immediate flexibility, while ensuring price stability and protecting the integrity of the EU carbon market. The EU is delivering on the ‘One Europe, One Market’ roadmap,” said Ireland’s Minister for Climate, Energy and the Environment Darragh O’Brien.

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