In response to pressure from national governments, the European Commission has proposed changes to the Market Stability Reserve that will regulate the supply of pollution allowances for the new Emissions Trading System for road transport and buildings (ETS2). While a couple of changes are welcome, others risk stifling the system’s climate effectiveness. 

In recent months a majority of EU member states have been pushing proposals to change the forthcoming Emissions Trading System for road buildings and transport (ETS2) based on a fear of potentially high and volatile prices. 

At a meeting of environmental ministers on Tuesday evening (21 October 2025), the European Commission responded by announcing a number of proposals to address member state concerns.

Decisions to enable frontloading and early trading of emission allowances bring welcome predictability and enable funds generated by the system to be invested into climate-friendly measures a year ahead of launch, yet other proposed changes that allow more emission allowances to flow in the ETS2 market are certain to lessen its environmental impact.

It is only by reducing the demand for allowances via investments in climate measures and complementary policies, that the ETS2 price can be sustainably contained. Unfortunately, many governments are falling short in their climate commitments. According to civil society and European Commission assessments of National Energy and Climate Plans, many fall short, particularly regarding efforts in the building and road transport sectors. 

Rather, many governments are pushing to weaken key complementary policies such as the proposed ban on new sales of CO2-emitting vehicles or clean heating standards, driving the carbon price up rather than down. All EU governments genuinely interested in containing the ETS2 price must uphold and push for stronger, not weaker complementary policies.

As 40% of the EU’s carbon pollution stems from road transport and building sectors the need for transition is urgent, and it is vital that the Commission’s proposals will not slow down progress towards reducing these emissions. 

The need for complementary policy and investments

The EU should not respond to high price forecasts with more emissions. Instead, to prevent steep price increases, it is crucial to address the demand for emission allowances in the first place. 

The LIFE Effect consortium finds it concerning that the Commission did not mention complementary measures at all in their response to the member states. To contain the risk of a high ETS2 price, member states should be reminded that their actions and initiatives have a significant role to play and to deliver a policy mix that drives socially fair climate action on road transport and buildings.

National governments have it within their power to make the carbon price picture less daunting and to lessen the risk of spiralling prices by reducing the demand for allowances via socially targeted climate investments and complementary policies. Regrettably, member state preparedness is lagging, with currently only two member states having submitted a mandatory social climate plan setting out their domestic actions to support vulnerable households.

The sooner investments are made in fossil-free solutions, the lower ETS2 prices will be, and the smoother and less demanding the transition for households and small businesses. The Commission’s proposal to allow early access to ETS2 auctioning revenues, via the European Investment Bank, is therefore very welcome. Early access to these funds can help households switch to clean heating and transport, cutting emissions before the carbon market kicks in. 

Beginning auctions for ETS2 in 2026, one year before the system starts operating in 2027 is another positive step. This can increase credibility of the system and a clear expectation for the carbon price at introduction, encouraging timely investments to help the shift away from fossil fuels benefiting both people and the climate.

Reopening MSR decision risks weakening climate ambition

The Commission’s proposed changes to the Market Stability Reserve (MSR2) could also help contain the ETS2 price, but will do so by dampening the ETS2’s climate ambition.

The purpose of the MSR is to regulate the supply of emission allowances circulating in ETS2 to ensure a well-functioning market. In the MSR2, there are 600 million additional emission allowances that can be released if certain price and quantitative thresholds are reached. All 600 million allowances in MSR2 are additional to the ETS2 emissions cap, meaning that the more allowances flow from the MSR2 into the market, the more the carbon budget for ETS2 sectors will be exceeded. For context, 600 million emission allowances is equivalent to six years worth of Czechia’s total emissions (99 million tonnes of emissions in 2023).

Under current rules, only a small proportion of the 600 million allowances placed in the MSR2 are expected to be used. A key reason for this is that all remaining allowances in the MSR2 at the end of 2030 were planned to be cancelled under current rules, which is important to reduce the risk of oversupply in later years under high emissions scenarios.

The Commission is now proposing to suspend the cancellation of allowances and instead keep them running beyond 2031, making it much more likely that a significant portion of the allowances are used. If all 600 million allowances were to be used between 2027-2035, this would raise the total supply of allowances by 5-10%, potentially undermining ETS2 as an effective carbon pricing tool.  

In addition to extending the MSR2 beyond 2030, the Commission proposes to loosen the rules regulating how the MSR2 operates which in turn will lead to an increase in the number of allowances from the MSR2 that are used. In particular, the proposal includes quadrupling the number of allowances released into the market in the event that the carbon price exceeds the ‘soft price cap’ of €45 per emission allowance, allowing up to 240 million allowances to be released between 2027-2029, instead of the initial limit of 80 million.

The next steps

By mid-November 2025, the Commission will present a formal proposal. EU Better regulation guidelines require an accompanying impact assessment and public consultation. Negotiations will then continue between the European Parliament and the Council. 

By proposing to reopen the MSR decision, the Commission has opened up the potential for ETS2 to be undermined as an effective climate tool. The European Parliament and the Council must take responsibility to maintain a well-functioning ETS2, which is critical to achieving European climate targets. 

Instead of diluting the ETS2 with more emission allowances, EU policymakers must uphold and push for stronger complementary policies and national governments must make urgently needed socially targeted climate investments. This is the only way that the ETS2 price can be sustainably contained and EU climate targets can be reached. 

The LIFE Effect consortium counts on policymakers to uphold their climate responsibilities and continue pushing for an environmentally effective and socially fair ETS2, which has never been more at risk.