MSR revision in the “Fit For 55” package – new analysis

MSR revision in the “Fit For 55” package – new analysis

MSR revision in the “Fit For 55” package – new analysis

We are pleased to present the latest publication by the Centre for Climate and Energy Analysis (CAKE) entitled “Reform of the market stability reserve (MSR) in the new EU climate policy until 2030 “.

•   Reform of the market stability reserve (MSR) in the “Fit for 55” package (2.3 MiB, 832 hits)

  – full analysis in English language
• Reforma rezerwy stabilności rynkowej (MSR) w ramach pakietu “Fit For 55” – summary in Polish language (to be available soon)

The purpose of this analysis is an attempt to estimate the impact of the changes in the EU ETS proposed by the European Commission as a part of the Fit for 55 package, in particular changes in the functioning of the market stability reserve (MSR) on the volumes of emission allowances available for installations and to estimate the impact of these changes on the annual average prices of emission allowances in the EU ETS. Additionally, the report presents the economic consequences of changes in the prices of emissions allowances on volumes and changes in production prices in the European Union.

Key Messages:

• Study shows that the strengthening LRF with one-off rebasing of the cap presented in „Fit for 55” package have significant impact on tightening the supply of allowances on the market and leads to a higher EUA price in 2030.
• Extension of the current 24% intake rate until 2030 would result in a much faster tightening of supply by increasing EUA transfers to MSR and accelerating emissions reduction by 2025. This combined with a strengthened LRF and one-off reduction of the cap in 2024 would imply an extremely tight supply in 2025 which could result in a higher EUA price in 2025 (EUR 76). However, when the surplus is between the new thresholds introduced in the Fit for 55 package (1096-833 million), the intake rate drops below 24% easing the path of EUA price increases until 2030.
• In all scenarios with MSR the EU meets the 2030 target (61% reduction in 2030 vs. 2005) and significantly reduces the surplus of allowances close to upper MSR threshold (eliminating the historical structural surplus). In without MSR scenario, the EU is close to reach the reduction target to 2030 (a few % points were missing).
• Maintaining the intake rate at 12% level until 2030 would mitigate the supply tightening effect by reducing the EUA transfers to MSR and preventing higher EUA prices. This indicates that increasing intake rate to 24% until 2030 would not be necessary, in particular taking into account that the 2030 reduction target would be met.
• Implementation of the „Fit for 55” package as proposed by the European Commission would increase EUA price to approx. EUR 130 in 2030 (medium price scenario). Depending on hedging needs parameters (EU ETS participants behaviour) EUA prices could achieve almost EUR 200 in the most extreme Fit for 55 price scenario.
• The analysis shows that the change of the upper MSR threshold is of great importance for the results. Lowering this upper threshold from 833 to 600 million could result in achieving the highest level of emission reduction in all scenarios but at the expense of fewer allowances available at auction pool, more allowances to be invalidated in the MSR and extremely high EUA prices (almost EUR 250 in 2030).
• The increase in the EUA price in 2030 has serious effects that are reflected in the increase in the cost of producing energy from fossil fuels and the increase in production prices in energy and emission intensive sectors in the EU. The most sensitive are the prices of electricity, water and air transport, ferrous metals and non-metallic minerals. In all analysed options of MSR after implementation of Fit for 55 package the variation of average EU electricity prices in MSR scenarios is between –4% and +4% in 2030. However, the effects of changes in the allowances price could be very different between EU countries and in regions with a high share of hard coal and lignite in energy mix, the consequences could be many times greater than those observed at the EU level.
• The macroeconomic effects of the MSR reform at the EU level are rather negligible however, it cannot be excluded that they would be significant at the level of individual EU member states. Output changes of individual sectors are of the order of a few percent and have typically a very small share in total value added in the EU and translate to GDP effects of the order of –0.2% to 0.1%.
• The growing activity of financial institutions on the CO2 market and the stricter MSR reserve would contribute to additional sharp increases in EUA prices which can put pressure on the entire EU economy. That is why the EU ETS needs proper safeguards to effectively protect the market in the form of, e.g. the reform of Art. 29a of the EU ETS Directive which currently does not fulfil its role.