Green Climate International
Market Stability Reserve
MSR is a mechanism designed to help stabilize carbon markets, particularly in systems like the European Union Emissions Trading System (EU ETS). The MSR aims to address fluctuations in the supply and demand for carbon allowances and to prevent the market from becoming oversupplied or undersupplied.
Here’s how it works:
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Purpose: The MSR’s primary goal is to ensure a stable carbon price by adjusting the number of allowances available in the market. If there are too many allowances in circulation (which can drive the price of carbon too low), the MSR can absorb some of these excess allowances. Conversely, if there are too few allowances (which could cause prices to rise too quickly), the MSR can release allowances back into the market.
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Operation: The MSR works by automatically taking in or releasing allowances based on the current supply in the market. If the number of allowances in circulation exceeds a certain threshold, the MSR will remove some allowances from the market. If the number of allowances falls below a certain threshold, it will add allowances back.
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Effect on Carbon Price: By controlling the supply of allowances, the MSR helps to avoid extreme price fluctuations, promoting a more predictable and efficient carbon market. This helps businesses plan better and strengthens the effectiveness of emissions reduction policies.
The MSR is a key feature of modern emissions trading systems, as it provides a safety net to keep the market balanced and ensures the overall system is effective in driving down emissions over time.