EC proposes keeping surplus ETS allowances in the MSR, not cancelling them
Proposed rule change preserves a supply buffer rather than shrinking the cap, keeping the benchmark revision as the market's real swing factor.
The European Commission proposed on Wednesday (2026-05-20) keeping surplus ETS allowances in the market stability reserve instead of cancelling them automatically when stockpiles exceed 400m, according to Montel.1
The change would "better equip" the reserve to manage supply shocks, the Commission said. But the detail that matters for carbon traders is what the proposal does not address: it offers no direct tightening of the benchmark revision process that governs free allocations to industry.1
Free allowances are the main channel through which industrial emitters receive cost relief. The Commission said on Wednesday (2026-05-20) it expected to propose updated product benchmarks after Easter that would determine how free allowances are allocated from 2026 to 2030, a senior EU official told Montel.2 That revision is politically contested. Italy urged the EU on Thursday (2026-04-23) to scrap the planned benchmark revision, warning that proceeding now could raise compliance costs for energy-intensive industries and weaken European industrial competitiveness.5
RWE CEO Markus Krebber added a direct warning on Thursday (2026-05-07): parts of Germany's industrial sector risk failing without ETS reform, he said.4 The combination of rising carbon costs and unchanged benchmark rules, Krebber said, could throttle the very industries the scheme is meant to decarbonise.4
The MSR proposal runs against what some market participants had anticipated. Keeping allowances in the reserve rather than retiring them outright means the stockpile remains available for future release if prices spike, rather than shrinking the total cap permanently.1 That preserves a release valve for the front end of the EUA curve. The real supply-side question remains the benchmark revision: tighter benchmarks mean fewer free allowances, which forces industrial emitters to buy more on the secondary market.2
Carbon traders are now parsing two competing signals from Brussels. The MSR retention rule preserves future supply capacity. The benchmark revision, if implemented aggressively, would tighten the industrial demand side. One argues for lower long-term prices, the other for higher.1,2
The Commission's broader deregulation push, flagged by The Economist on Tuesday (2026-05-19) under the headline "The EU wants to unshackle its economy," suggests the political appetite for raising industry compliance costs is limited.3 Italy's explicit opposition to the benchmark revision reinforces that read.5
The legislative process — how the European Parliament and Council handle the benchmark file — will determine whether free allowances shrink fast enough to force genuine industrial abatement or slowly enough to keep ETS compliance costs manageable. The MSR change shapes the scheme's mechanics, but the benchmark revision is where the market's direction gets decided.1,2