On 8 May 2020, the European Commission released the total number of allowances in circulation (TNAC) for 2019, as well as the number of allowances to be withdrawn under the Market Stability Reserve (MSR) until 2021.

A total of 1.4 billion allowances were circulating in the EU ETS by the end of 2019, a 16% reduction compared to the year before. In line with MSR rules, more than 332 million allowances will consequently be placed in the reserve from 1 September 2020 to 31 August 2021 in the form of reduced auction volumes. This is slightly lower than the 397 million allowances that are due to be placed in the MSR through August 2020.

The Commission calculates the yearly TNAC by subtracting total allowance demand (i.e. verified emissions and cancelled allowances) plus allowances held in the MSR from the total allowance supply in the system. Total allowance supply includes allowances banked from Phase 2 (2008-2012); allowances allocated in Phase 3 (2013-2020), ; allowances sold by the European Investment Bank to finance low-carbon innovation; and international credits.

The new figures come against the backdrop of record emissions reductions. In 2019, emissions covered by the EU ETS declined by 8.9%, according to recent estimates by the European Roundtable on Climate Change and Sustainable Transition, four times faster than the of 2.2% scheduled for Phase 4 (2021-2030). Most of the emissions reductions were driven by the power sector (13.9%) thanks to fuel-switching effects and increasing shares of renewable electricity generation, followed by the heat (5%) and industry sectors (1.8%).

The MSR was launched in 2019 to address the EU ETS’ structural market surplus and improve the system’s resilience to supply-demand imbalances. It sets quantitative thresholds for regulating market supply: when the TNAC is above 833 million, 24% of the total volume is withdrawn from future auctions over a period of 12 months and placed into the reserve (under current provisions, the withdrawal rate will be reduced to 12% starting 2024). When the TNAC is below 400 million, 100 million allowances are released from the reserve and injected into the market through increased auction volumes. From 2023 onwards, the number of allowances held in the reserve will be limited to the auction volume of the previous year; holdings above that amount will be invalidated.

The MSR will undergo a review in 2021, which, in light of the European Green Deal, is expected to result in more ambitious withdrawal rates, thresholds, or invalidation criteria. Revised MSR rules would also serve to offset a potentially rising surplus resulting from abatement under the ETS and reduced allowance demand caused by the economic downturn from Covid-19.