Safeguarding Against Price Shocks
EU countries have agreed to update a key financial tool designed to prevent sudden spikes in carbon prices, as the bloc prepares to launch a new carbon tax covering road transport and buildings. The updated system, part of the European Union’s emissions trading system (ETS2), will take effect in 2028, and the revisions aim to ensure that prices remain stable and predictable for households and businesses relying on fossil fuels.
While some countries, including Slovakia and the Czech Republic, have pushed to delay the tax until 2030 due to social concerns, Sweden, Denmark, Finland, the Netherlands, and Luxembourg warned that any postponements or weakening of the system could undermine EU climate policy and create uncertainty for long-term investments.
Adjusting the Market Stability Reserve
The changes focus on the EU’s Market Stability Reserve, a mechanism designed to manage the supply of carbon allowances and prevent volatile price swings. Under the updated rules, the reserve — currently holding 600 million allowances — can release up to 80 million allowances per year if carbon prices rise too sharply, up from the previous 20 million per release. This buffer acts as a safety valve, helping to keep carbon costs from spiking while maintaining the market’s credibility.
The carbon market expansion to cover transport and buildings was first introduced in 2023 as part of the EU’s climate law, with the target of reducing emissions in these sectors by 42% by 2030 compared to 2005 levels. The start of ETS2 was delayed from 2027 after concerns were raised about the potential social impact.
Preparing for a Stable Transition
EU officials have emphasized that the updates send a clear signal of commitment to a stable and predictable carbon market. Wopke Hoekstra, Commissioner for Climate, Net Zero and Clean Growth, said the measures strengthen affordability within ETS2 and provide a framework to intervene quickly if prices rise too high.
The Council’s decision now moves to the European Parliament for final approval, with lawmakers expected to review and sign off on the rules before ETS2 launches in 2028. These steps aim to balance the EU’s climate ambitions with social and economic considerations, ensuring a smoother transition to a low-carbon future.
