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EU Emissions Trading System for buildings and road transport ("EU ETS 2")

ETS Status
under development
Jurisdictions
Austria
Belgium
Bulgaria
Croatia
Cyprus
Czech Republic
Denmark
Estonia
Finland
France
Germany
Greece
Hungary
Iceland
Ireland
Italy
Latvia
Liechtenstein
Lithuania
Luxembourg
Malta
Netherlands
Norway
Poland
Portugal
Romania
Slovakia
Slovenia
Spain
Sweden
Sectoral coverage
Transport
Buildings

General Information

In July 2021, the European Commission proposed the “Fit for 55” package of reforms to align EU climate and energy policy with the objectives of the “European Green Deal”, most importantly the ambitious 2030 climate target of reducing net emissions to at least 55% below the 1990 level. The package included important amendments to the EU ETS framework, including a proposal to extend emissions trading to new sectors. These amendments were adopted in the first half of 2023 and are now in force.

A new, separate emissions trading system (ETS 2) will be established for emissions from fuels used for combustion in buildings, road transport and additional sectors (mainly small industry not covered by the existing EU ETS. The ETS 2 will complement other policies of the European Green Deal in the covered sectors, helping Member States achieve their emission reduction targets under the “Effort Sharing Regulation” (Regulation (EU) 2018/842).

The ETS 2 is based on the ‘cap-and-trade’ principle. It will cover emissions upstream, meaning the obligation to surrender allowances will fall on the fuel suppliers rather than end-consumers. The ETS 2 cap will be set to bring emissions down by 42% by 2030 compared to 2005 level.

The ETS 2 is due to become fully operational in 2027 (in 2028 in the event of exceptionally high energy prices). As a first step, the monitoring and reporting of emissions from the covered sectors will already start in 2025. To necessary rules were adopted in October 2023. 

Allowances in the ETS 2 will be distributed exclusively via auctioning. In 2027, an additional auction volume will be front-loaded to ensure a smooth start of the system. The ETS 2 will also operate with a dedicated, rule-based market stability reserve to mitigate insufficient or excessive supply of allowances to the market.

A share of revenues from the ETS 2 will be used to support vulnerable households and micro-enterprises through a dedicated Social Climate Fund, created as part of the “Fit for 55” package. Member States will be required to use the remaining ETS 2 revenues for climate action and social measures.

The revision of the ETS Directive in the context of the European Green Deal and the “Fit for 55” was adopted in May 2023 and is now in force. It has introduced ETS 2 for emissions from fuel combustion in buildings, road transport and additional sectors (mainly small industry not covered by the EU ETS). A separate regulation which was also adopted in May 2023 created the Social Climate Fund, which will pool a share of revenues from the auctioning of allowances in the ETS 2 to finance decarbonisation measures and investments in the covered sectors.  

In October 2023, rules for the monitoring and reporting of emissions in the ETS 2 were approved.

Transport
Buildings

Emissions & Targets

3,468.3  (2021)

By 2030: Reduce net emissions to at least 55% below 1990 levels (European Climate Law)

By 2050: Climate neutrality (European Climate Law)

Size & Phases

Fuel combustion in road transport, heating and cooling in buildings and additional sectors (mainly small industry*)


* Energy Industries (1A1) and Manufacturing Industries and Construction (1A2) according to IPCC guidelines categorization, excluding other EU ETS installations. 

Upstream

Allowance Allocation & Revenue

Allowances in the ETS 2 will only be auctioned. A share of ETS 2 allowances will be allocated to and auctioned for the Social Climate Fund. All remaining ETS 2 allowances will be distributed among Member States to be auctioned, based on the average distribution of emissions in the covered sectors over 2016 to 2018.

The Social Climate Fund is created alongside the ETS 2 to help EU Member States in financing structural measures and investments in energy efficiency and renovation of buildings, clean heating and cooling and integration of renewable energy, as well as in zero- and low-emission mobility solutions. Member States will also have the option of spending part of the resources on temporary direct income support. 

All measures and investments will be compiled in national Social Climate Plans. The Fund will pool resources from the auctioning of allowances in the ETS 2 as well as of 50 million allowances from the EU ETS. Together with a mandatory 25% contribution of the Member States to their Social Climate Plans, the Fund should mobilise at least EUR 86.7 billion (USD 94.2 billion) between 2026 and 2032. 

Member States will be required to use their remaining ETS 2 revenues for climate action and social measures.

Compliance

One year. Deadline for surrendering allowances: end of May every year from 2028. 

MONITORING: Starts in 2025. The monitoring approach is to use scope factors to distinguish final consumption sectors   and emission factors for fuel types.

REPORTING: Starts in 2025. By the end of April 2025, covered entities must submit their first emission reports for the historical emissions in 2024. From 2026, covered entities will report verified emissions based on the monitoring.

VERIFICATION: Verification of emission reports by an independent accredited verifier is required from 2026. 
 

Market Regulation

The ETS 2 has been designed to start smoothly and efficiently. Over the course of 2027, a 30% higher volume of allowances will be auctioned to provide market liquidity. The ETS 2 will also operate with a dedicated, rule-based market stability reserve to mitigate insufficient or excessive supply of allowances to the market, and with measures in the event of an excessive price increase.

ETS 2 MARKET STABILITY RESERVE (MSR): The reserve will be initially endowed with 600 million allowances.

TRIGGERS: During the first three years the ETS 2 is operational, if the price of allowances exceeds EUR 45 (USD 49) (in 2020 prices, i.e. adjusted for inflation), additional allowances may be released from the ETS 2 market stability reserve to address excessive price increases. Allowances may also be released from this reserve if the price of allowances increases too rapidly, according to specific rules and conditions. 
 

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EU Emissions Trading System (EU ETS)

ETS Status
in force
Jurisdictions
Austria
Belgium
Bulgaria
Croatia
Cyprus
Czech Republic
Denmark
Estonia
Finland
France
Germany
Greece
Hungary
Iceland
Ireland
Italy
Latvia
Liechtenstein
Lithuania
Luxembourg
Malta
Netherlands
Norway
Poland
Portugal
Romania
Slovakia
Slovenia
Spain
Sweden
Start of operation (year)
2005
Sectoral coverage
Maritime
Domestic Aviation
Industry
Power
Allocation
Auctioning; Free Allocation (Benchmarking)
Offsets and credits
The use of offsets is not allowed
Cap
1,386 MtCO2e (2024, electricity and heat generation, industrial manufacturing and maritime transport), 28.9 MtCO2e (2024, aviation)
GHGs covered
CO2, HFCs, N2O, PFCs, SF6
Average auction price
EUR 83.24 (USD 90.00)
Average secondary market price
EUR 83.47 (USD 90.25)
Total revenue since beginning
EUR 184 billion (USD 206 billion)
Total revenue
EUR 43.6 billion (USD 47.1 billion)

General Information

Operational since 2005, the European Union Emissions Trading System (EU ETS) is the oldest cap-and-trade system in force. It is a cornerstone instrument of the EU’s policy framework to combat climate change under the “European Green Deal” and reduce GHG emissions cost-effectively. Until 2023, the system covered emissions from over 10,000 installations and airlines operating in the EU. Collectively, they represent around 38% of the EU’s total emissions. From 2024, emissions from large ships are included in the EU ETS. 

The EU ETS is currently in its fourth trading phase (2021 to 2030). Every year, covered entities must surrender allowances for their emissions under the EU ETS. Auctioning is the main method of distributing allowances, with free allocation, based on benchmarks, issued to address the risk of carbon leakage.  

The EU ETS was revised in 2023 in the context of the European Green Deal to align the system with the 2030 climate target of at least 55% net emissions reductions compared to 1990 levels. 

In the first half of 2023, the EU adopted important reforms of the EU ETS framework as part of:

  • the “Fit for 55” package, to align the system with the EU’s 2030 climate target of at least 55% net emissions reductions compared to 1990 levels and the European Green Deal objectives,
  • the EU’s response to the energy crisis caused by Russia’s invasion of Ukraine (“REPowerEU” plan).

These reforms:

  • increased the ambition and expanded the scope of the EU ETS to maritime transport, and introduced a new, separate emissions trading system for buildings, road transport and additional sectors* (ETS 2)**;
  • strengthened the Market Stability Reserve (MSR);
  • updated the EU ETS regarding aviation;         
  • updated the rules of the monitoring and reporting of emissions from maritime transport;
  • created the Social Climate Fund to complement the new ETS 2; and
  • established a Carbon Border Adjustment Mechanism to address the risk of carbon leakage from specific sectors under the EU ETS (as an alternative to free allocation).

They are in force and their implementation has followed in the second half of 2023.

In May, the European Commission published the seventh communication on the MSR indicator. In addition to managing the supply of allowances to auctions, from 2023 onward the MSR cancels allowances in its holdings above a certain threshold. At the start of January 2023, 2.5 billion allowances from the MSR were cancelled. 

To address the impact of the energy crisis following Russia’s invasion of Ukraine, the Commission put forward targeted reforms and investments to phase out the EU’s dependence on fossil fuel imports, ensure the security of the energy supply, promote energy efficiency, and accelerate the clean energy transition. The REPowerEU Regulation mobilizes the ETS Innovation Fund as one of the funding sources. At the same time, it directs 27 million unallocated allowances from the MSR, which would otherwise become cancelled, to replenish the Innovation Fund.

 


* Mainly industry sectors not covered under the existing EU ETS. 

** See ETS 2 factsheet.

Maritime
Domestic Aviation
Industry
Power

Emissions & Targets

3,468.3 MtCO2e (2021)

By 2030: Reduce net emissions to at least 55% below 1990 GHG levels (European Climate Law)

By 2050: Climate neutrality (European Climate Law)

EUR 83.24 (USD 90.00) (average 2023 auction price; updated prices available here)

EUR 83.47 (USD 90.25) (average secondary market price 2022)

Size & Phases

1335.00MtCO2e
CO2, HFCs, N2O, PFCs, SF6

PHASE ONE: Three years (2005 to 2007)

PHASE TWO: Five years (2008 to 2012)

PHASE THREE: Eight years (2013 to 2020)

PHASE FOUR: Ten years (2021 to 2030)

A cap limits the total emissions allowed in the system It is set to bring emissions down by 2030 by 62% compared to 2005.

PHASE ONE and PHASE TWO: The cap was calculated bottom-up, based on the aggregation of the national allocation plans of each Member State. Phase 1 started with a cap of 2,096 MtCO2e in 2005; Phase 2 started with a cap of 2,049 MtCO2e in 2008.

PHASE THREE: 

Installations: A single EU-wide cap was calculated based on emissions’ monitoring and set at 2,084 MtCO2e in 2013. It was reduced annually by a linear factor of 1.74% (applied to the midpoint of 2008-2012 baseline emissions). This translated into a year-on-year reduction of the cap by some 38 million allowances and resulted in a cap of 1,816 MtCO2e in 2020. 

Aviation: Included in the EU ETS in 2012, with a cap calculated separately. Legally, the system covers all outgoing and incoming flights to the EEA. The 2012 cap for aviation amounted to 221 million MtCO2e (95% of 2004 to 2006 emissions). In 2013, however, the EU temporarily limited ETS obligations to flights within the EEA to support the development of a global market-based measure to reduce aviation emissions by the International Civil Aviation Organization (ICAO). The number of aviation allowances put into circulation in 2013 to 2016 was reduced to 38 million allowances annually. This ‘stop-the-clock’ limited scope of the EU ETS for aviation was extended until 2023.

PHASE FOUR: 

From Phase 4, the linear reduction factor applies annually to the overall cap. The factor is set at 2.2% per year (of 2008 to 2012 baseline emissions) for the period 2021 to 2023, 4.3% for the period 2024 to 2027 and 4.4% from 2028. The cap is also reduced in two steps, by 90 million allowances in 2024 and 27 million allowances in 2026.

Installations: A single EU-wide cap subject annually to the linear reduction factor. Following the 2023 ETS revision, the cap in 2024 amounts to 1,386 MtCO2e. From 2021, the UK is no longer part of the EU ETS except for electricity generators in Northern Ireland.

Maritime: The 2024 cap has been increased by 78.4 million allowances based on the sector’s average emissions reported for 2018 and 2019.

Aviation: The aviation cap in 2024 amounts to 28.9 MtCO2e. 

From Phase 4, a Member State may cancel allowances from their auction share if they take additional policy measures that result in a closure of electricity generation capacity. The quantity of allowances cancelled shall not exceed the average verified emissions of the installation from five years preceding the closure.

The EU ETS scope in terms of activities and greenhouse gases is specified in Annex I and Annex II of the “ETS Directive”. 

PHASE ONE: Power stations and other combustion installations with >20 MW thermal rated input (except hazardous or municipal waste installations), industry (various thresholds) including oil refineries, coke ovens, and iron and steel plants, as well as production of cement, glass, lime, bricks, ceramics, pulp, paper, and cardboard.

PHASE TWO: Several countries included NOx emissions from the production of nitric acid. The EU ETS also expanded to include Iceland, Liechtenstein, and Norway.

Aviation: Emissions from international aviation were included in the EU ETS in 2012 (>10,000 tCO2/year for commercial aviation; >1,000 tCO2/year for non-commercial aviation since 2013). However, the EU temporarily limited the scope of the EU ETS for aviation to flights within the EEA. Exemptions for operators with low emissions were introduced.

PHASE THREE: Carbon capture and storage installations, production of petrochemicals, ammonia, nonferrous and ferrous metals, gypsum, aluminum, as well as nitric, adipic, and glyoxylic acid (various thresholds) were added to the scope.

Aviation: In 2017, the limited scope of the EU ETS for aviation was extended until 2023 to support the development of a global measure for aviation emissions under ICAO. Under the Linking Agreement between the EU and Switzerland, from 2020, the EU ETS covers emissions from outgoing flights to Switzerland.

PHASE FOUR: Amendments introduced in view of the UK’s departure from the EU and in the 2023 revision of the EU ETS. 

Power and industry: The scope of ETS and benchmarks used for free allocation is broadened from 2024 to remove barriers for the deployment of new technologies such as green hydrogen or hydrogen-based steel.

Aviation: Under the “Trade and Cooperation Agreement” between the EU and the UK, the EU ETS applies to emissions from flights departing from the EEA to the UK from 2021 (the UK ETS applies to flights departing to EEA airports). 

Emissions from most flights to and from the EU’s nine outermost regions as well as from departing flights from these regions to Switzerland and the UK are added to the scope from 2024. 

Maritime: From 2024, emissions from all large ships (of 5,000 gross tonnage and above) entering EU ports are covered by the EU ETS, regardless of the flag they fly, covering:

  • 50% of emissions from voyages starting or ending outside the EU;
  • 100% of emissions that occur between two EU ports and when ships are in EU ports. 

Initially, the scope extension to maritime transport concerns CO2 emissions and then CH4 and N2O emissions from 2026.

The obligation for maritime companies to surrender allowances for their emissions is being gradually phased in. 

  • 2025: for 40% of emissions reported in 2024;
  • 2026: for 70% of emissions reported in 2025;
  • 2027 onward: for 100% of emissions reported in 2026 and later years.

To ensure environmental integrity during the phase-in, Member States will cancel the number of allowances equivalent to the difference between the surrendered allowances and the verified emissions in 2024 and in 2025. 

Point source

2022: 8,640 installations, 390 aircraft operators

The number of regulated shipping companies will become known throughout 2024.

Allowance Allocation & Revenue

PHASE ONE: Allocation was based on Member States’ national allocation plans. Allowances were allocated through grandparenting. Some Member States used auctioning and some used benchmark-based allocation. 

PHASE TWO: 

Auctioning: Eight Member States (Germany, United Kingdom, the Netherlands, Austria, Ireland, Hungary, Czechia, and Lithuania) held auctions corresponding to ~3% of the total allowance allocation. 

Free allocation: ~90% of allowances were allocated for free. 

PHASE THREE: 

Auctioning: The main method of distributing allowances, accounting for up to 57% of the cap. Of the share of allowances to be auctioned, 88% were distributed to Member States based on verified 2005 or average 2005 to 2007 emissions; 10% were allocated between 16 lower-income Member States under the solidarity provision; and the remaining 2% were allocated between the Member States that had reduced their emissions by at least 20% compared to the applicable base year under the Kyoto Protocol.

Free allocation: A significant volume of allowances was allocated for free to address the risk of carbon leakage, based on sectors-specific performance benchmarks. As the demand for free allowances exceeded the volume of allowances available, the free allocation of each installation was subject to a uniform cross-sectoral correction factor — which was revised in 2017. 

Power: Auctioning, with an optional transitional free allocation for the modernisation and diversification of electricity generation in ten lower-income Member States. At the end of Phase 3, eligible Member States could decide to continue using this option in Phase 4 (2021 to 2030), monetize remaining allowances, or transfer them to the Modernisation Fund, created under the EU ETS in 2018. 

Industry: Free allocation based on sector-specific performance benchmarks, which reflect an average emissions intensity per unit of product of the most efficient 10% of installations in each sector. The European Commission established 54 benchmarks in 2011, using 2007 and 2008 activity data and literature sources (when data was missing). Sectors deemed at risk of carbon leakage received free allocation at 100% of the relevant benchmark. Sub-sectors deemed not at risk of carbon leakage had free allocation reduced gradually from 80% of the respective benchmark in 2013 to 30% by 2020. 

The carbon leakage risk was assessed against emissions intensity and trade exposure:

  • direct and indirect cost increase >30%; or
  • non-EU trade intensity >30%; or
  • direct and indirect cost increase >5% and trade intensity >10%.

Cost intensity was determined by the formula:

[Carbon price × (direct emissions × auctioning factor + electricity consumption × electricity emission factor)]/ gross value added

Trade intensity was determined by the formula:

(imports + exports)/(imports + production)

New Entrants’ Reserve (NER): 5% of the cap for Phase 3 was set aside to assist new installations or to cover installations whose capacity significantly increased since their free allocation had been determined. 300 million allowances from the reserve were allocated to the NER300, a large-scale funding program for innovative low-carbon energy demonstration projects. 

Aviation: 15% of allowances were auctioned and 82% were allocated to aircraft operators for free. The remaining 3% constituted a special reserve for new entrants and fast-growing airlines. The number of allowances put into circulation for the aviation sectors was reduced to reflect the temporary limitation of the scope of the EU ETS to flights within the EEA. 

PHASE FOUR:                                

Auctioning: the main method of distributing allowances, accounting for up to 57% of the cap. Of the share of allowances to be auctioned, 90% are distributed to Member States based on their share of verified emissions, with 10% distributed among the lower-income Member States under the solidarity provision.

Free allocation: A significant volume of allowances is allocated for free to address the risk of carbon leakage, based on sectors-specific performance benchmarks. Benchmark values are updated twice in Phase 4 to reflect technological progress in different sectors. In 2021, the European Commission updated benchmark values for the first time.* They apply in 2021 to 2025. The values are adjusted for technological progress on a yearly basis. An annual reduction rate is determined for each benchmark. For the steel sector, which faces high abatement costs and leakage risks, a fixed reduction rate applies. 

The uniform cross-sectoral correction factor for the adjustment of free allocation is 1 for 2021 to 2025. 

The Phase 4 cap includes a buffer of more than 450 million allowances, initially earmarked for auctioning, which can be made available if the initial free allocation volume is fully absorbed (thereby avoiding the need to apply the cross-sectoral correction factor). 

Free allocation for 2026 to 2030 will become conditional on the implementation of energy efficiency measures (based on audits or energy management systems) and of carbon neutrality plans for the worst performing installations, in order to incentivize decarbonization.

Free allocation to specific sectors will be gradually phased out from 2026 to 2034, in parallel to the phase-in of EU Carbon Border Adjustment Mechanism (CBAM) for third-country imports. Those sectors are - iron and steel, cement, aluminum, fertilizers and hydrogen. The CBAM will also apply to electricity imports. The transitional, data collection phase of CBAM started on 1 October 2023, with only reporting but no charges due.

Power Sector: Auctioning, with an optional transitional free allocation for the modernization and diversification of electricity generation in ten lower-income Member States. Three of the eligible Member States decided to continue using this option in Phase 4. It can be used until the end of 2024. After this time, any leftover allowances will be either added to a Member State’s share of allowances to be auctioned or its share of the Modernisation Fund.

Industry: Updated benchmark values that apply for 2021 to 2025 were calculated based on activity data for installations over 2016 to 2017, supplied by Member States.

The updated values were compared to the original benchmarks to determine the reductions to be applied over the 15-year period between 2007/08 and 2022/23. Benchmarks could be reduced between 3% and 24% over this period. In total, 31 out of 54 benchmarks have been reduced by the maximum rate of 24%.

There are revised rules covering adjustments to free allocation when an installation makes a significant change to its production. These rules apply from Phase 4. The threshold for adjustments is a 15% increase or decrease in production. Adjustments to free allocation are issued based on yearly production data reports that operators submit to national competent authorities. Adjustments to the level of free allocation are made from the New Entrants’ Reserve.

Carbon leakage rules: The third carbon leakage list, adopted in February 2019, applies for 2021 to 2030. The list includes a reduced number of sectors classified at risk of carbon leakage. Free allocation for other sectors will be discontinued by 2030 (except for district heating). 

Carbon leakage is assessed against a composite indicator of trade intensity and emissions intensity, according to the following criteria: 

Trade intensity x emissions intensity > 0.2

Trade intensity x emissions intensity > 0.15 but < 0.2; qualitative assessment will follow based on abatement potential, market characteristics, and profit margins.
Emissions intensity is determined by:

[direct emissions + (electricity consumption x electricity emission factor)]/ gross value added

Trade exposure is determined by:

(imports + exports)/(imports + production)

New Entrants’ Reserve (NER): The initial volume of the NER at the start of Phase 4 amounted to 331.3 million allowances. This included unallocated allowances from Phase 3 and 200 million allowances from the MSR.

Aviation: Phase 3 breakdown applied until 2023. Free allocation to aviation will be phased out gradually – reduced to 75% in 2024, 50% in 2025 and eventually to 0% from 2026 onward. 

 

* Revised benchmark values for free allocation of emission allowances for 2021-2025.

EUR 184 billion* (USD 206 billion) since 2013 

EUR 43.6 billion** (USD 47.1 billion) in 2023


* Includes revenues from Iceland, Liechtenstein, Norway, and the UK, as well as of the Innovation and Modernisation Funds funded by the EU ETS.

** Includes revenues from Iceland, Liechtenstein, Norway, and Northern Ireland, as well as of the Innovation and Modernisation Funds funded by the EU ETS.

Revenue from the auctioning of allowances under the EU ETS accrues primarily to Member States’ budgets. Of the revenues generated until mid-2023, Member States were instructed to use at least 50% for climate- and energy-related purposes. Member States are required to use all revenues generated from that point onward to support climate and energy objectives. 

Member States can use their EU ETS revenues to finance State aid to certain electricity-intensive industries to compensate for the additional electricity costs they face as a result of the EU ETS.They do so under State aid schemes that are approved by the European Commission. Every year, they must publish the total compensation amounts paid out, including a breakdown per recipient sector and subsector. The overall spending under a scheme should not exceed 25% of a Member State’s ETS revenue.

Member States report annually to the European Commission on how they spent their auction revenues. To date, Member States have reported having spent ~76% of EU ETS revenues on climate- and energy-related purposes, both domestic and international. 

A share of EU ETS allowances is auctioned to supply the Innovation and Modernisation Funds – two funds established for Phase 4 to support decarbonization in the covered sectors. 

Innovation Fund: Supports the commercial demonstration of innovative low-carbon technologies and industrial solutions to decarbonize Europe’s energy-intensive industries, as well as the development of renewable energy, energy storage and carbon capture use and storage. 

Modernisation Fund: Supports investments in lower-income Member States aimed at modernizing energy systems, improving energy efficiency, and supporting a socially just transition to climate neutrality. It is one of the solidarity mechanisms of the EU ETS, which addresses Member States’ different starting points in the decarbonization challenge.

Flexibility & Linking

Banking is allowed (since 2008). 

Borrowing is not allowed. 

PHASE ONE: The use of the Clean Development Mechanism (CDM) and Joint Implementation (JI) credits was allowed without limitation. In practice, no offset credits were used in Phase 1

PHASE TWO:

The use of offset credits was allowed. 1,058 MtCO2e of international credits were used.

Qualitative limits: Most categories of CDM/JI credits were allowed, except for LULUCF and nuclear power. Strict requirements applied for large hydro projects exceeding 20 MW.

Quantitative limits: In Phase 2, operators were allowed to use JI and CDM credits up to a certain percentage limit determined in the respective country’s National Allocation Plan. Unused entitlements were transferred to Phase 3.

PHASE THREE:

The use of offset credits was allowed with strict limitations.

Qualitative limits: Newly generated international credits (post-2012) had to originate from projects in least developed countries. Credits from CDM and JI projects from other countries were eligible only if registered and implemented before the end of 2012. Projects from industrial gas credits (projects involving the destruction of HFC-23 and N2O) were excluded regardless of the host country. Credits issued for emission reductions that occurred in the first commitment period of the Kyoto Protocol were no longer accepted after March 2015.

Quantitative limits: The total use of credits for Phase 2 and Phase 3 was capped at 50% of the overall reduction under the EU ETS in that period (~1.6 Gt CO2e). 

PHASE FOUR: 

The use of offset credits is not allowed.

The EU ETS and the Swiss ETS have been linked since 2020. This means that allowances issued in one system can be surrendered for emissions generated in either of the two systems. The “Linking Agreement” between the EU and Switzerland sets out the conditions and requirements under which the two systems are linked. A direct link was created between the registries of both systems. It allows regulated entities to transfer allowances from an account in one system to an account in the other system. 

Compliance

One calendar year.

A harmonized framework of monitoring, reporting, verification and accreditation requirements underpins the EU ETS functioning. Every year, Member States report on implementation of this framework: 

  • “Monitoring and Reporting Regulation (2018/2066)”
  • “Accreditation and Verification Regulation (2018/2067)”
  • “Monitoring and Reporting Regulation for maritime transport (2015/757)”

MONITORING: Each installation, aircraft operator and maritime transport operator is required to have an emission monitoring plan, approved by a national competent authority. The deadline for submitting an emissions report is the end of March (for the preceding calendar year).

REPORTING: Emission reports submitted annually using templates.  

VERIFICATION: Emission reports are verified by independent accredited verifiers before the end of March of the following year. Once verified, operators must surrender the equivalent number of allowances by the end of September.

In addition to the detail set out here, a dedicated monitoring, reporting and verification framework for non-CO2 aviation effects is due to start from January 2025.

Regulated entities must pay an excess emissions penalty of EUR 100 (USD 108.13), adjusted for inflation, for each tCO2 emitted for which no allowance has been surrendered, in addition to buying and surrendering the equivalent number of allowances. The name of the non-compliant operator is also made public. Member States may enforce different penalties for other forms of non-compliance.

Market Regulation

MARKET PARTICIPATION: Compliance entities and non-compliance entities.  

MARKET TYPES: 

Primary: Uniform price auctions with single rounds and sealed bids, conducted daily by EEX. Germany has opted out of the common auctioning platform, instead running national auctions through the EEX. Poland has also opted out but continues to participate on the common auction platform at the EEX until further notice. 

Secondary: Spot, futures, options, and forward contracts are traded on the secondary markets, both on exchange and over the counter. Besides the EEX, futures are traded on ICE, ENDEX and Nasdaq. 

LEGAL STATUS OF ALLOWANCES:

Classified as financial instruments. The associated derivatives can hence be traded on secondary markets.

BACKLOADING: As a short-term measure implemented in Phase 3 to address a growing surplus of allowances in the EU ETS. Auctioning of 900 million allowances was postponed from the period spanning 2014 to 2016 until 2019 and 2020. The allowances were eventually placed in the Market Stability Reserve. 

MARKET STABILITY RESERVE (MSR): The MSR was created in 2015 as a long-term measure to address a growing surplus of allowances in the EU ETS. It adjusts auction volumes according to pre-defined thresholds of the total number of allowances in circulation (TNAC), fostering balance in the EU carbon market and resilience to demand shocks. The MSRstarted operating in 2019. 

Triggers: The Commission publishes the TNAC communication every year. 

  • If the TNAC is above 1,096 million, 24% of its volume is withdrawn from future auctions and placed into the MSR over a period of 12 months.
  • If the TNAC is between 833 and 1,096 million, to mitigate threshold effects a smaller share of allowances is deducted from auction volumes and placed in the MSR. 
  • If the TNAC is less than 400 million allowances, 100 million allowances are released from the MSR and auctioned. 

CANCELLATIONS: From 2023, allowances in the MSR above a certain threshold are cancelled annually. In 2023, the applicable threshold was the 2022 auction volume. From 2024, the applicable threshold is fixed at 400 million. 

At the end of December 2022, the MSR contained over 3 billion allowances. The 2022 auction volume amounted to 486 million allowances. This led to a cancellation of 2,515 million allowances in January 2023.

Swiss ETS allowance supply is not considered in the TNAC, and Swiss auction quotas are not affected by the MSR.

Other Information

European Commission: Responsible for establishing the regulatory framework of the EU ETS and centralized administration of the system, e.g., the EU registry.

Competent authorities of all EU Member States as well as Iceland, Liechtenstein, and Norway: implementation, e.g., verifying compliance with MRV and surrender obligations.

The European Commission publishes annual reports on the functioning of the European carbon market (2023 report on the EU ETS functioning in 2022). 

The ETS Directive stipulates that the system is kept under review in light of the implementation of the Paris Agreement and the development of carbon markets in other major economies. Three major EU ETS reviews — before Phase 3, before Phase 4, and in the context of increasing the EU 2030 climate target — have been conducted to date. 

By the end July 2026, the European Commission will assess:

  • how negative emissions could be accounted for and covered under the EU ETS,
  • the feasibility of lowering the 20 MW total rated thermal input thresholds for the activities under the EU ETS, 
  • effective accounting and avoidance of double counting of CCU products under the EU ETS,
  • the feasibility of including municipal waste incineration under the EU ETS,
  • the functioning of the EU ETS for aviation, including the functioning of CORSIA. 

By the end of December 2027, the Commission will assess the possibility of the scope of the EU ETS to include non-CO2 aviation emissions.

Directive 2003/87/EC of the European Parliament and of the Council establishing a scheme for GHG emission allowance trading within the Community and amending Council Directive 96/61/EC.

Decision concerning the establishment and operation of a market stability reserve for the Union GHG emission trading scheme and amending Directive 2003/87/EC (6 October 2015).

Consolidated Auctioning Regulation: Commission Delegated Regulation 2023/2830 supplementing Directive 2003/87/EC

All other legislation and documentation can be found here.

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