EU ETS Reforms: MSR Invalidation Threshold Raised and Free Allowance Boost for Industry

EU lawmakers reached a provisional deal on 20 October 2026 to adjust the Market Stability Reserve (MSR) under the EU Emissions Trading System. The agreement keeps the allowance invalidation mechanism in place but raises the threshold from 400 million to 700 million allowances. That gives the carbon market a larger buffer against oversupply, while preserving the option to release allowances later if prices spike. A broader review of the ETS and MSR rules is still underway. On the free allocation side, the European Parliament's environment committee backed nearly 100 million extra free allowances for industry in 2026-2030 under the heat and fuel fallback benchmarks. The plan uses all remaining allowances for free allocation, adds about 11 million withheld from non-compliant installations, and splits unused allowances three ways: one third for benchmark adjustments, one third for the Modernisation Fund, and one third for the Innovation Fund. MEPs also want sector-specific sub-benchmarks for industries like ceramics where the general fuel benchmark does not fit. Next steps are formal approval by the Council and Parliament, then negotiations on the wider ETS review. The benchmark values are expected to apply from the 2027 update.