MSR Simulator (Fit-for-55 Proposal)

Updated on 29/07/21 and 13/05/22

Try our MSR Simulator to estimate how many allowances will be invalidated during Phase IV under the Commission's Fit-for-55 ETS proposals.

See below for an explanation of the model and its assumptions in more detail. The parameters can be adjusted directly below.

For further information, or to provide feedback, contact damien.green@perspectiveclimate.com

OVERVIEW 

• The model generates an MSR projection based on how you set the adjustable parameters.
• General parameters for the Phase are set in the top table and are applied from the year you select. Maritime and aviation sectors are also automatically added to the TNAC calculations from this date.
• The withdrawal rate of the MSR and assumptions concerning issuance and surrender/cancellation are entered on an annual basis in the lower table.
• If your assumptions are generating a negative TNAC in the graph they are inconsistent and should be revised, i.e. you are assuming more allowances have been surrendered (or cancelled post-issuance) than have been issued.
• The parameters are set by default to generate a projection based on applying the Commission’s proposals from 2024.
• If you would like to generate a projection that assumes current MSR rules change in 2025 or later (or not at all), set the withdrawal rate to 12% in years when existing rules remain unchanged from 2024 onwards.
• Alternative versions of the model will be produced as required to generate projections in relation to proposals from the other institutions during the ETS reform debate (if they require different built-in assumptions).

   
METHODOLOGY 

• The model uses the simplified accounting method proposed by the Commission, where TNAC is the difference between i) the number of allowances that have actually been issued (including MSR releases) and ii) the number of allowances that have been surrendered or cancelled post-issuance. In other words, allowances that go straight in the MSR are ignored in the calculation, as are allowances that are cancelled pre-issuance (notwithstanding cancellation due to the phasing in of maritime surrender obligations).
• The model starts from known TNAC values and generates projected TNACs by calculating how many allowances would be issued and surrendered (or cancelled post-issuance) each year based on your assumptions.
• Based on the generated TNACs, the model calculates MSR withdrawals and releases to track MSR stock levels, invalidating allowances above the threshold in place at the time based on your assumptions.
• In years when the current invalidation rules would apply, the model estimates the number of allowances auctioned in the previous year by taking a share of the Phase IV stationary cap (assuming some CSCF buffering) and reducing it by the MSR withdrawal volume that year. No consideration is given to pre-issuance cancellation, increased aviation auctioning, or other factors that might affect auction volumes. In particular, no consideration is given to the influence of the CBAM Factor on auctioning because it is assumed that this would only apply if rules changed, in which case the invalidation threshold would no longer be defined as the auction volume of the preceding year.
• The model counts 585 million ‘Article 10a (19) and (20)’ allowances as being in the MSR. The 2021 TNAC Supply also includes additional issuance in relation to the final exchange of international credits, which has now come to an end.
• The model assumes that MSR withdrawal/release rules associated with a given calendar year apply to the full Sep-Aug period that begins in that calendar year (which is a simpler reading of the MSR Decision than our previous model).

   
TNAC SUPPLY 

• Issuance estimates generated by the model are a function of the annual ‘extended ETS cap’, which covers all TNAC-relevant sectors that year (based on the date you enter in the top table) as well as an equal share of Phase III allowances that are available for issuance in Phase IV.
• The Phase IV non-aviation component of the extended cap is adjusted according to the 2030 target and date you enter in the top table, following the same method set out in our CSCF Simulator (which is based on the Commission's proposal).
• The aviation component of the cap, which is only factored into TNAC calculations from the date you enter in the top table, is based on applying a cumulative LRF haircut to 2020 allocation (adjusted in light of the EU and UK Cooperation and Free Trade Agreement) throughout the Phase, with a 10% increase in the baseline allocation in 2024 due to the proposed extension in scope.

   
TNAC DEMAND 

• The model estimates how many allowances will be surrendered based on the assumptions you enter in the lower table concerning how emissions compare to 2019 in each year of the Phase.
• The 2019 baseline value used to generate this value is adjusted to cover TNAC-relevant sectors at the time based on the date you enter in the top table, and excludes the UK. The inclusion of maritime and aviation emissions in the baseline is consistent with the scope of the Commission's proposal. 
• TNAC Demand equates verified emissions and surrender, when in actual fact the maritime sector would not have to surrender allowances for all emissions during the Commission's proposed phase-in period. To compensate for this, TNAC Supply is not adjusted down to reflect the proposed pre-issuance cancellation of auction volumes during the phase-in.
• Although the Commission's proposal is ambiguously worded, it is assumed that the intention is to include historic net demand from the aviation sector fully from the year changes enter into force. This results in a bump in Surrender volumes in this year.

   
CONSIDERATIONS 
 
When adjusting the parameters, it may be useful to bear in mind the following:

• If changes are applied from the year after the law enters into force, as proposed by the Commission, '2024' is a reasonable assumption to enter in the top table, based on how long it may take for the ETS reforms to go through the ordinary legislative process.
• 833 million and 400 million are the current TNAC thresholds for MSR withdrawal and release, respectively, and the Commission has not proposed changing these.
• 100 million is the current quantity that the MSR releases when triggered (assuming sufficient allowances are available) and the Commission has not proposed changing this.
• Under current rules, the MSR withdrawal rate will switch from 24% to 12% in 2024. The Commission, however, has proposed applying the 24% withdrawal rate throughout the Phase when TNAC is above 1096 million, and withdrawing whatever quantity is required to reduce TNAC to the withdrawal threshold (833 million) when the TNAC is between this threshold and 1096 million.
• You can set a different 'buffer intake' threshold to the Commission's proposal in the top table, or remove this functionality entirely by setting the parameter to the same value as your withdrawal threshold.
• The proportion of the 'annual extended cap' that is issued reflects the extent to which the annual free cap, past free cap, and NER are used that year, as well as how auction volumes are distributed, and the extent to which there is pre-issuance cancellation (not including cancellation due to the phasing in of maritime surrender obligations).
• The default emission values are set on the assumption that emissions in TNAC-relevant sectors fall by 4% a year compared to 2019 throughout the Phase. In reality, the reduction rate is unlikely to be uniform and would be affected by sectoral coverage, as well as your cap assumptions and wider economic/technological factors.
• Voluntary cancellation (of previously issued allowances) is set to 50,000 allowances a year. Cancellation has averaged about 40,000 a year to date but exceeded 90,000 in 2020 and 180,000 in 2021.

   
DATA SOURCES  
 
Commission’s ETS reform proposal  
   
Commission’s Aviation ETS proposal  
   
Commission’s MSR proposal