Brussels: The Market Stability Reserve of the EU emissions trading system will keep more allowances in the bank after Parliament and the Council struck a provisional deal on 21 October 2026. Negotiators raised the threshold at which the reserve cancels surplus allowances from 400 million to 700 million, with the new rule applying from 1 January 2031.

Under current law, the Market Stability Reserve invalidates every allowance it holds above 400 million. The deal changes that: allowances between 400 million and 700 million stay in the reserve, and only the volume above 700 million disappears. The cap will fall gradually each year, so the approach stays consistent over time.

The compromise replaces a more radical idea. The European Commission had proposed to suspend the cancellation mechanism immediately and indefinitely, which environmental groups feared would weaken the carbon price. Lawmakers rejected an open-ended pause and instead kept a cancellation rule, only with a higher bar.

Pierfrancesco Maran, the Italian S&D lawmaker who chairs the Environment committee and led the file, said climate ambition and industrial competitiveness can and must go hand in hand. Irish climate minister Darragh O’Brien, whose government holds the Council presidency, called the result a balanced outcome. The Council says the change strengthens the reserve’s ability to respond to shifting market conditions, including a supply contraction after the mid-2030s.

The Market Stability Reserve matters because it works as the safety valve of the carbon market. It absorbs surplus allowances when supply runs ahead of demand and releases them when prices spike. A higher cancellation threshold gives it a bigger buffer, which can calm prices for utilities and industry that must buy allowances for their emissions.

Climate advocates will watch the 2031 start date and the annual reduction of the cap. A large stock of unused allowances can depress prices and weaken the incentive to cut emissions, which is why the cancellation rule existed in the first place. The EU also wants the system to match its 2040 climate target, a 90 percent emissions cut, so the final design of the Market Stability Reserve has implications beyond the next few years. Utilities, steelmakers and traders will test the new Market Stability Reserve rules against their own hedging plans before 2031.

Industry reaction will shape the debate in the coming weeks. Heavy emitters want predictability, because the price of allowances feeds directly into investment decisions on new plants. Consumer groups, meanwhile, watch whether a stronger carbon price could raise heating and fuel bills once the buildings and transport scheme starts.

Next, the Market Stability Reserve text goes back to the institutions, where Parliament and the Council must approve the text formally. The amended regulation enters into force three days after publication in the Official Journal and applies immediately. The Parliament’s press release on the deal sets out the agreed changes in full.