Stabilizing Carbon Prices: Assessing the EU ETS Market Stability Reserve Through Synthetic Control Method

This study examines the effects of the Market Stability Reserve (MSR) policy on carbon emission prices within the European Union Emissions Trading System (EU ETS), focusing on both price levels and volatility. Employing the Synthetic Control Method (SCM), the analysis constructs a counterfactual scenario using data from Korea, New Zealand, and China—countries that have not adopted the MSR. The validity of this donor pool is verified through cointegration tests and a Vector Error Correction Model, which confirm both long-run equilibrium relationships and short-run causal interactions with the EU ETS. The empirical analysis reveals that all four MSR implementations between 2020 and 2023 significantly increased the average price of EU allowances, thereby validating the policy’s effectiveness in addressing oversupply. Additionally, MSR2 (2021) and MSR3 (2022) are found to have significantly reduced price volatility, indicating the MSR’s partial success in stabilizing market expectations. Robustness checks, including placebo tests, support the credibility of the estimated effects. The findings affirm the MSR’s role as an effective market-based instrument for enhancing price stability, sustaining investment incentives in emissions reduction, and ensuring the long-term credibility of the EU ETS.