EU keeps carbon allowance invalidation but lifts the reserve threshold to 700 million

The Council of the EU and the European Parliament reached a provisional agreement on 20 October to keep the invalidation mechanism of the EU Emissions Trading System's market stability reserve but to raise its threshold from 400 million to 700 million allowances, the Council said in a press release of 21 October. The higher threshold takes effect as soon as the amendment is formally adopted. Both institutions must still endorse the deal, and it then goes through legal-linguistic revision before adoption.

The market stability reserve absorbs surplus allowances or releases them to stabilise prices, and the invalidation mechanism cancels allowances held in the reserve above the threshold. More than 3 billion allowances have been invalidated since the mechanism began in 2023, the Council says.

How the deal differs from the proposals

The Commission had proposed halting invalidation indefinitely, as one of its short-term measures on high and volatile energy prices. The Council's own position, agreed by EU ambassadors on 23 September, would have suspended invalidation until the end of 2030 and set the threshold at 800 million allowances from 1 January 2031, according to the Council release of that date. The agreed text keeps invalidation running, at 700 million allowances, from adoption.

The agreement also gives the reserve greater capacity to release allowances in future, which the Council says could shield industry from extreme price volatility, in particular if the market tightens after the mid-2030s as the cap keeps falling. It keeps the safeguards against surplus allowances and does not change the overall design of the reserve. The co-legislators agreed that a gradual decrease of the threshold should be considered in the wider ETS review, which the Council is still discussing.

Darragh O'Brien, Ireland's Minister for Climate, Energy and the Environment, said in the release that the deal "provides European industry with immediate flexibility, while ensuring price stability and protecting the integrity of the EU carbon market."

Why exporters outside the EU should follow it

The release does not mention the carbon border adjustment mechanism (CBAM). The link runs through price: the Commission sets the CBAM certificate price as a weighted average of the auction clearing prices of EU ETS allowances, published quarterly in 2026 and weekly from 2027, according to its CBAM price page. A change in the supply of ETS allowances can therefore reach EU importers of goods covered by CBAM through the certificate price. The third-quarter price of €82.32 is covered in our report on the Commission's publication.

The Council does not estimate the effect on prices. For producers outside the EU selling into it, the amendment is a first step before the broader ETS review, which our analysis of Türkiye's ETS pilot sets against Türkiye's own pilot rules.

The next steps are endorsement by the Council and by the Parliament, then formal adoption. The Council's September position set the end of 2026 as the target for concluding negotiations.