Understanding the Council's MSR proposals

The Council's MSR proposals could cancel 2-3 billion ETS allowances in Phase IV (2021-30)

The Council has proposed doubling the withdrawal rate of the MSR for 5 years, and cancelling MSR allowances from 2024 when the number exceeds the amount auctioned the previous year.

Parliament by comparison has proposed doubling the MSR rate for ~4 years, and cancelling 800 million allowances ahead of Phase IV.

Our provisional modelling suggests that the Council position would cancel far more allowances, perhaps 2-3 billion, with the vast majority being cancelled in 2024.

We estimate, for instance, that 2.7 billion allowances would be cancelled during Phase IV, with 2.1 billion being cancelled in 2024, making the following assumptions:

• Emissions run 5% below the Phase IV cap
• The auction share is 55% each year (i.e. the Council's proposed 2% flexibility is used)
• Surplus allowances enter the MSR at an annual rate of 24% until 2024 and 12% afterwards, unless the market surplus is below 833 million
• Allowances are cancelled from 2024 when the number exceeds the amount auctioned the previous year

If emissions run further below the cap, we would expect greater cancellation. Bearing in mind this sensitivity, we estimate that cancellation would fall in the range of 2-3 billion, with around 2 billion cancelled in 2024.

Contact:

damien.green@perspectiveclimate.com