$21 Billion expected from EU Market Stability Reserve Sales

The European Union plan to tap its carbon market for €20 billion ($21.4 billion) by selling 250 million Market Stability Reserve (MSR) credits. The funds will go towards helping ease the transition to phase out Russian fossil fuels while respecting the emissions cap.

The 20 billion-euro plan won’t compromise the EU’s long-term green goals, as per the emissions trading system’s (ETS) architect.

The revelation of the plan caused carbon prices to fall as investors criticized the EU for such a move. They said that it shows a lack of political predictability from the bloc and may weaken its Market Stability Reserve (MSR).

MSR is a supply-control mechanism that helps drive emissions costs to record levels.

But for Jos Delbeke, a former European Commission (EC) climate official and ETS architect, the EU’s proposal to sell around 10% of carbon credits held by MSR is justifiable.

EU’s Plan to Sell 250M Carbon Credits from MSR

The EU’s plan is a defendable way to raise climate funds according to Delbeke.

He said that the release of the MSR shows that the EU is willing and able to deal with the issues and trade-offs that the energy transition calls for. He further said:

“It’s a “wholly defendable way” of raising funds amid exceptional circumstances while respecting a cap on pollution.”

The 10% percent translates to about 250 million carbon credits or permits that allow a certain amount of carbon emissions.

Carbon credits are used by companies to offset their emissions. For every carbon credit bought, one metric ton of carbon is offset through an environmental project like reforestation.

The attack on Ukraine by Russia, Europe’s major gas supplier, drove the EU to rethink its energy policies amid grave concerns of supply shocks.

Hence, the bloc decided to ditch its dependency on Russian fossil fuels via its REPowerEU plan. And that will cost the region some €20 billion or $21.4 billion in carbon credits auctions.

The proposed REPowerEU plan is three-pronged:

a shift to importing more non-Russian gas,
a faster rollout of renewable energy, and
more effort to save energy.

These measures need a mix of EU laws and recommendations to the EU’s 27 member states.

This bold climate policy requires 210 billion euros in extra investments by 2027 and 300 billion euros by 2030 to meet the EU’s 2030 climate target.

The investments will also slash Europe’s fossil fuel import bill and include the following components:

86 billion euros for renewable energy,
27 billion for hydrogen infrastructure,
29 billion euros for power grids, and
56 billion for energy savings and heat pump

Opposing Views on REPowerEU Plan

At the end of last year, the EU’s MSR held 2.6 billion carbon credits. The proposal won’t affect the reserve’s purpose to reduce surplus carbon permits and boost market resilience, as per the EC.

Under the proposal, there’ll be amendments to the regulation on the MSR. In particular, it will release carbon permits until the end of 2026 when auction sales hit €20 billion.

The European Investment Bank will perform the sales.

But others are uncertain about the plan’s impact on the market.

The head of carbon markets at a financial service company noted that:

“The key of the whole MSR system is raising trust and credibility in the system; without MSR we would have notional floor prices.”

Likewise, the director of carbon research from Refinitiv stated that:

“The issue now is that people believe that the auction revenues are used for other things than for what it was supposed to do… And the market is triggered by this.”

The price of EU carbon credits was down about 10 euros compared with levels before revealing the plan to sell the permits.

Yet, prices quadrupled over the past two years on expectations that the EU will tighten its climate policies.

Meanwhile, other commentators said that tapping MRS reserved carbon credits will risk the EU’s climate architecture and plunder its ETS.

But then again Delbeke defended that such language is not helpful and is based on a misunderstanding of the purpose of the MSR. He added that,

“The spike in EU ETS prices is boosting costs for EU companies… And “a moderate increase” in the supply of allowances [carbon credits] in the shorter term would be a relief.”

The EC president, Ursula von der Leyen, also justified the EU’s plan to sell MSR carbon credits reserves. She said that RePowerEU will help the bloc save more energy and speed up the phasing out of Russian fossil fuels. And most importantly, it will kickstart investments on a new scale.

While for Mette Quin, EC’s deputy director of carbon markets,

“We have done the assessment and we know that we need 250 million allowances [carbon credits] to be auctioned to meet the REPowerEU goals. The raise of energy prices has a much bigger impact, and the carbon price is only a small fraction of it.”

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