Compare ETS
Use this function to compare the design elements and characteristics of up to three ETSs from around the world.
New Zealand Emissions Trading Scheme
General Information
The New Zealand Emissions Trading Scheme (NZ ETS) was launched in 2008 and is a central climate change mitigation policy for the country. It covers roughly half of New Zealand’s GHG emissions. The “Climate Change Response Act 2002” sets the legislative framework for the NZ ETS and incorporates all of New Zealand’s key climate legislation under one Act.
The cap is set in a top-down process to align with New Zealand’s 2050 net zero targets and associated emissions budgets. Covered entities must surrender allowances for all their reported emissions.
The NZ ETS has The New Zealand Emissions Trading Scheme (NZ ETS) was launched in 2008 and is a central climate change mitigation policy for the country. Designed as an economy-wide system, excluding only the agriculture sector, it covers nearly half of New Zealand’s GHG emissions. The “Climate Change Response Act 2002” sets the legislative framework for the NZ ETS and incorporates all of New Zealand’s key climate legislation under one Act.
The cap is set in a top-down process to align with New Zealand’s 2050 net zero targets and associated emissions budgets. Covered entities must surrender allowances for all their reported emissions.
The NZ ETS has broad sectoral coverage, including forestry, stationary energy, industrial processing, liquid fossil fuels, waste, and synthetic GHGs. Allocation is based primarily on auctioning, which began in March 2021. Free allocation is only granted for emissions-intensive, trade-exposed (EITE) activities and depends on a combination of emissions intensity benchmarks, production levels, and international trade exposure. Uniquely to the NZ ETS, the forestry sector has both surrender obligations and the opportunity to earn units for emissions removals.
The agricultural sector used to face processor-level reporting obligations with the prospect of compliance obligations under the NZ ETS, but this is no longer the case.
In 2025, the government made 6 million units available for auction across four quarterly sales, down from 14.1 million units in 2024. However, all four auctions failed to clear as secondary market prices remained below the floor price of NZD 68 (USD 39.52). In line with NZ ETS auctioning regulations, all 6 million units that remained unsold after the December 2025 auction, as well as 7.1 million units held in the Cost Containment Reserve (CCR) for 2025, were permanently withdrawn from the market.
In August 2025, the government announced the annual unit supply settings for the five-year period 2026 to 2030, maintaining a tight supply trajectory through 2030. Base auction volumes, excluding CCR, will decline from 5.2 million units in 2026 to 1.7 million units in 2030. The overall limit on units, or cap, comprising all units from auctioning and industrial allocation, will decline from 16.3 million in 2026 to 9.6 million in 2030.
The 2026 auction reserve price floor is NZD 71 (USD 41.27), and the first CCR trigger price is NZD 201 (USD 116.83).
In September 2025, the government took steps to prevent productive agricultural land from being converted into exotic forestry plantations due to the NZ ETS. Parliament passed the “Climate Change Response (Emissions Trading Scheme Forestry Conversions) Amendment Bill”, restricting new ETS registrations for plantation forests on high and medium productivity land, while allowing registrations on low-productivity land.
In November 2025, the government announced amendments to the Climate Change Response Act 2002 aimed at reducing costs and improving the efficiency of NZ ETS governance. Most significantly, the government has removed the requirement for NZ ETS unit supply settings to accord with the country’s NDC, while retaining the requirement for these settings to align with New Zealand’s domestically legislated ‘Net Zero by 2050’ targets and associated emissions budgets. The changes also streamline climate governance by reducing the Climate Change Commission’s role in providing advice on emissions reduction plans and by making public consultation on emissions budgets discretionary rather than mandatory. Additional changes include moving to biennial (instead of annual) ETS supply settings updates. While some changes were passed under urgency at the end of 2025, the full legislative changes will be introduced to Parliament in 2026.
Emissions & Targets
76.4 tCO2e (2023)
By 2030: 50% reduction of net emissions below gross 2005 levels (NDC); 10% reduction of biogenic methane emissions below 2017 levels (Climate Change Response Act 2002, through an amendment in 2019)
By 2035: : 51-55% reduction of net emissions below gross 2005 levels (NDC 2.0)
By 2050: Reduce net emissions of all GHGs (except biogenic methane) to zero; reduce biogenic methane emissions to 14-24% below 2017 levels (Climate Change Response Act 2002, through an amendment in December 2025)
Average auction price: No auctions cleared in 2025
Average secondary market price: NZD 55.04 (USD 31.99)
Updated prices available here
Size & Phases
The NZ ETS has an absolute cap that is set in advance. It limits the number of New Zealand Units (NZUs) that may be released to the market from auctioning (including the CCR), industrial allocation, and from any international units (not currently allowed). There is no limit on NZUs generated from removal activities. The NZ ETS cap thus limits the volume of net emissions that are emitted by ETS regulated entities, without imposing a limit on gross emissions within the ETS.
In 2026, the cap is 16.3 Mt CO2e.
The Climate Change Response Act 2002 requires the government to set a cap on emissions covered by the NZ ETS, based on five-yearly emissions budgets and in line with New Zealand’s 2050 targets. Unit supply settings are announced over a rolling five-year period with annual updates. To provide a degree of regulatory certainty, settings for the upcoming two years can only be amended under special circumstances.
The government updated regulations for unit supply settings in September 2025, setting the annual cap for the years 2026 to 2030. In setting supply limits, the government also considers the stockpile of banked allowances already in circulation and projected unit supply from removal activities.
NZUs generated from removal activities are forecast to be 17 million units in 2026, of which 15 million would come from the forestry sector.
The NZ ETS was originally designed to operate without a specific domestic cap, as this accommodated carbon sequestration from forestry activities and a full link to the international Kyoto Protocol carbon markets. However, in 2015, the types of units eligible for compliance in the NZ ETS were restricted to NZUs. No decisions have been made on potential future access to and use of international units.
SECTORS: Sectors were gradually phased in between 2008 and 2013.
- Forestry (mandatory: deforesting pre-1990 forest land; voluntary: post-1989 forest land)
- Stationary energy
- Industrial processing
- Liquid fossil fuels
- Waste
- Synthetic GHGs
From 2011 until November 2024, companies carrying out certain agricultural activities had an obligation to report their emissions at the processor level, with farm-level reporting set to begin in 2026. Agricultural emissions were intended to enter the NZ ETS at the processor level in 2025, with pathways for farm-level participation at a later date. However, this legislation was repealed in 2024, removing agriculture activities from the NZ ETS.
TYPES OF FUEL COVERED: petrol, diesel, aviation gasoline, jet kerosene, light fuel oil, heavy fuel oil. Emissions from fuel used for international aviation and marine transport are exempt.
INCLUSION THRESHOLDS: Thresholds for participation are typically low (Detailed threshold information can be found in Schedule 3 of the Climate Change Response Act 2002 and in the Climate Change (General Exemptions) Order 2009).
- Forestry (as per definition of ‘forest cover’)
- mandatory: deforesting pre-1990 forest land (at least 1 hectare)
- voluntary: post-1989 forest land (at least 1 hectare)
- Stationary energy
- Mining or stockpiling at least 2,000 tonnes of coal per year or importing any amount of coal for combustion.
- Using geothermal fluid to generate electricity or for industrial heat (emitting more than 4,000 tCO2e per year).
- Combusting more than 1,500 tonnes of used/waste oil per year, or combusting waste tyres (no threshold)
- Extracting natural gas (no threshold).
- Industrial processing
- Producing iron and steel (more than 100 tonnes of process carbon added per year)
- Producing gold (emitting more than 5000 tCO2e per year)
- Producing cement inputs, aluminium, or glass (no thresholds)
- Liquid fossil fuels
- Owning more than 50,000 liters of any obligation fuel (petrol, diesel, aviation gasoline, jet kerosene, light fuel oil, and heavy fuel oil)
- Waste
- Operating a disposal facility (exemptions only for small remote landfills)
- Synthetic GHGs
- Importing hydrofluorocarbons (HFCs) or perfluorocarbons (PFCs) in bulk (no threshold).
- Operating electrical switchgear that contains at least 1 tonne of sulphur hexafluoride (SF₆).
Synthetic GHGs not covered by the NZ ETS (e.g., those embedded in imported products) are subject to an equivalent levy
Upstream (power, aviation, buildings, transport, maritime, fuel use in agriculture and/or forestry); point source (mining and extractives, industry, waste, forestry).
For all fossil fuels, the point of obligation is generally upstream. Some large businesses that purchase fossil fuels directly from mandatory NZ ETS participants can choose to opt into the NZ ETS rather than have the costs passed down from their suppliers.
As of December 2025, 5,417 entities were registered as participants in the NZ ETS for 6,037 different activities* of which:
- 178 entities have mandatory reporting and surrender obligations for 185 activities
- 5,283 entities have voluntary (opt-in) reporting and surrender obligations for 5,852 activities – 99% of these being post-1989 forestry removal activities.
*Some entities have obligations under multiple activities.
Allowance Allocation & Revenue
Proportion of allowances offered at auction in 2025: 31%
6 million units were made available at auction in 2025 (excluding units from the CCR) although none were sold.
FREE ALLOCATION:
Leakage protection/Industrial free allocation: Free allocation is provided to firms in 26 eligible industrial activities, based on emissions intensity benchmarks, production levels, and one of two rates of assistance. Activities are deemed eligible if two EITE criteria are met. For 2025, highly emissions-intensive activities (over 1,600 tCO2e per NZD 1 million [USD 581,250] of revenue) receive 85% free allocation, while moderately emissions-intensive activities (over 800 tCO2e per NZD 1 million [USD 581,250] of revenue) receive 55% free allocation. An activity is deemed to be trade-exposed if there is transoceanic trade in the good produced.
In 2024, 5 million NZUs were allocated for industrial EITE activities.
Industrial free allocation is being phased down. A minimum annual phase-down rate of 1% across all industrial activities applies from 2021 to 2030. That rate will increase to 2% for the years 2031 to 2040, and to 3% for 2041 to 2050. The phase-down rate can be increased for activities that are considered at lower risk of carbon leakage alongside other criteria as set in legislation. It can also be decreased after 2030 if carbon leakage risk remains. All adjustments first require recommendations from the independent Climate Change Commission.
AUCTIONING:
Auctioning was introduced in 2021. The volume of NZUs made available for auctioning is set on an annual basis, five years in advance (see ‘Cap’ section). The annual quantity is split between the quarterly auctions. In 2025, 6 million allowances were made available for auctioning, plus an additional 7.1 million allowances in the CCR. No NZUs were sold in 2025.
Auctions follow a sealed-bid, single-round format. The clearing price is set at the lowest successful bid and NZUs are sold to all successful bidders at this price, providing it is not below the confidential reserve price (see ‘Market Stability Provisions’ section). If the auction does not clear, all allowances on offer are rolled forward to the next auction within the same calendar year. Any units that remain unsold after the last auction of the year are permanently withdrawn from the market.
ALLOWANCES GRANTED FOR REMOVALS:
Post-1989 forestry sector and other removal activities: NZUs are granted to participants that voluntarily register in the scheme for removal activities.
Forestry removal activities: Participants are entitled to receive one NZU per tCO2 removed for registered post-1989 forest land. If the forest is harvested or the land is permanently deforested, units must be surrendered to account for the emissions. If the participant chooses to deregister from the scheme, NZUs equivalent to the number received must be returned. 11.5 million NZUs were issued for forest removal activities in 2024.
Other removal activities: 1.4 million allowances were granted in 2024 for other removal activities, such as destroying synthetic GHGs or producing and exporting a product with embedded GHGs, such as methanol.
In 2019, forest carbon accounting shifted from the short term “stock change” to the long term “averaging” method for post-1989 forests, which then became compulsory for new entrants since 2023. Under the new method, allowances are granted only up to the long-term average carbon stock of the forest and therefore do not need to be surrendered at harvest, as long as replanting occurs.
NZD 5.6 billion (USD 3.7 billion) since the beginning of the program
NZD 5.7 million (USD 3.3 million) in 2025
- General budget, including debt reduction
When NZ ETS auctioning commenced in March 2021, proceeds were allocated to the Climate Emergency Response Fund (CERF), which funded climate-related initiatives including decarbonisation, public transport, and international climate finance. In 2024, the government closed the CERF so that ETS revenue is no longer ring-fenced and climate investment proposals now go through the standard government Budget process.
Approximately NZD 2.6 billion (USD 1.5 billion) of existing CERF initiatives were retained. These include:
- Funding for nationwide low-emission transport, such as electric vehicle charging infrastructure and grants for clean heavy vehicles
- Measures to decarbonise public transport and improve access, including support for local government to purchase electric buses and providing public transport concessions for low-income citizens
- International climate finance contributions
- Support for upgrades aimed at lowering energy bills and emissions in low-income homes
Flexibility & Linking
Banking is allowed. NZUs do not expire.
Borrowing is not allowed.
The use of offset credits is not allowed.
However, NZUs granted for forestry and other removals may be considered as offsetting emissions within the scope of the NZ ETS.
Units from Kyoto Protocol flexibility mechanisms were eligible for use in the system with no restrictions until June 2015 but have since been ineligible. Access to high-integrity international carbon markets may be part of New Zealand’s strategy to meet its 2030 target. The government can decide to allow international units as part of the annual unit supply-setting process.
The NZ ETS is not linked with any other system.
Until June 2015, the NZ ETS was indirectly linked to other systems (e.g., the EU ETS) via the international Kyoto Protocol flexible mechanisms. Since then, the NZ ETS has been an exclusively domestic system.
Carbon tax: Synthetic GHG levy
Compliance
For most sectors, the NZ ETS has annual surrender obligations. For post-1989 forestry participants, annual reporting of emissions and removals is optional, with five-year mandatory reporting periods. As a result, unit allocations and surrenders for these participants occur in the year they choose to submit reports.
FRAMEWORK: The legal framework is established by the Climate Change Response Act 2002. This Act legally requires participants to monitor their activities, report emissions annually, and surrender the corresponding number of units. Specific methodologies and calculation rules for each sector are detailed in supporting regulations.
MONITORING: The thresholds for MRV are the same as for mandatory inclusion in the ETS. Formal, pre-approved monitoring plans are not generally required. Instead, participants must follow the calculation methods in the regulations, unless they apply for a Unique Emissions Factor (UEF), which requires detailed information similar to a monitoring plan.
Up until 2025, entities processing agricultural products had MRV obligations without compliance obligations. This was supposed to transition to farm-level MRV in 2026. However, there are no longer any obligations for agricultural activities.
REPORTING: Most sectors (all those with mandatory participation) are required to report annually; the deadline is the end of March of the year following the reporting year to submit an Annual Emissions Return (emissions report). There is a different reporting cycle for forestry (see Compliance Cycle). Other removal activities may be reported more frequently (quarterly).
VERIFICATION: MRV follows a system of self-reporting supplemented by a program of official government audits. Each year, a sample of NZ ETS participants are selected for compliance review. Third-party verification is not required for emissions reports. However, third-party verification is required for first establishing a UEF, which may then be used in emissions reports as opposed to the default factors supplied by the government.
An entity that fails to submit an emissions report by the due date must pay a fine equal to the number of units involved, multiplied by the current unit price and a “culpability factor”.
An entity that fails to surrender or repay emissions units when required must surrender the units and pay a cash penalty of three times the current market price for each unit that was not surrendered by the due date. Entities can be fined up to NZD 24,000 (USD 13,950) on conviction for failure to collect emissions data or other required information, calculate emissions and/or removals, keep records, register as a participant, submit an Annual Emissions Return when required, or notify the administering agency or provide information when required to do so.
Entities can also be fined up to NZD 50,000 (USD 29,062) on conviction for knowingly altering, falsifying, or providing incomplete or misleading information about any obligations under the scheme, including in the Annual Emissions Return report. This penalty and/or imprisonment of up to five years also applies to entities that deliberately lie about obligations under the NZ ETS to gain financial benefit or avoid financial loss.
Market Regulation
MARKET PARTICIPATION: Any individual or organization can own and trade NZUs, if they hold an account with the NZ ETS Registry.
MARKET TYPES:
Primary: Auctions are operated jointly by NZX (New Zealand Exchange) and the European Energy Exchange (EEX) and are held four times a year. Any NZ ETS Register Account Holder can participate in the auctions. Other transfers of allowances to participants, such as industrial allocation and allocation for removals, are also considered under the primary market.
Secondary: Most NZUs are traded on the secondary market. Trades can take place directly between companies (OTC) or via a trading platform. Trades can be on a spot basis or through forward contract.
LEGAL STATUS OF ALLOWANCES: Allowances are not financial products in New Zealand law and, as a result, there is currently no single integrated market governance framework that would manage risks of misconduct in the NZ ETS. The government is currently working on options to improve market governance.
COST CONTAINMENT RESERVE (CCR)
Instrument type: Price-based instrument
Functioning: If a predetermined trigger price is reached at auction, a specified number of allowances from the CCR are additionally released for sale. The CCR follows a two-tier system, with a specific number of allowances available for auction at each trigger. The government updates the CCR trigger prices each year, together with other auction supply settings (see ‘Cap’ section).
In 2025, the volume of the CCR was set at a total of 7.1 million allowances for both triggers. The trigger price was not reached during 2025, so none of these were released to market. Currently, the volume of the reserve is set at 6.5 million in 2026, dropping annually to 3.9 million in 2030.
At the start of 2026, the first CCR trigger price is NZD 203 (USD 117.99), with a total of 2.3 million units available. The second trigger price is NZD 254 (USD 147.64), with 4.2 million units available. These triggers will rise annually to reach NZD 248 (USD 144.15) and NZD 309 (USD 179.61) respectively in 2030.
PRICE FLOOR
Instrument type: Price-based instrument
Functioning: With the start of auctioning, the government introduced a price floor operating through a reserve price or minimum accepted bid at auction.
In addition to the hard auction reserve price floor, the government introduced a confidential reserve price. This is set by referencing prices from the secondary market and uses a confidential methodology to determine a reserve price below which units cannot be sold. If it is set higher than the hard auction reserve price, then it becomes the new reserve price floor for that auction.
The hard auction reserve price floor is NZD 71 (USD 41.27) in 2026, rising annually to NZD 87 (USD 50.57) in 2030.
Other Information
Ministry for the Environment: Responsible for establishing the regulatory framework of the NZ ETS.
Environmental Protection Authority: Responsible for the NZ ETS registry and compliance.
Ministry for Primary Industries: Responsible for the forestry sector under the NZ ETS.
Climate Change Commission: Independent body providing advice on NZ ETS settings as well as other advice that might include the NZ ETS.
The Climate Change Response Act 2002 includes provisions for reviews of the operation and effectiveness of the NZ ETS. These reviews were originally required every five years, but the timing is now discretionary. The first review took place from 2011 to 2012, and the second review took place from 2015 to 2017. A third review of the NZ ETS was opened in early 2023. Following the 2023 General Election, this was closed by the new government.
Climate Change Response Act 2002—Part 4 New Zealand greenhouse gas emissions trading scheme*
* To keep New Zealand’s key climate change legislation under one act, the Climate Change Response Act incorporates both the “Climate Change Response (Emissions Trading Reform) Amendment Act 2020”, and the “Climate Change Response (Zero Carbon) Amendment Act 2019”. The “Zero Carbon Act” details domestic targets to 2050, establishes the Climate Change Commission, and mandates a process of setting and meeting five-year national emission budgets.
EU Emissions Trading System (EU ETS)
General Information
Operational since 2005, the European Union Emissions Trading System (EU ETS 1) is the oldest cap-and-trade system in force and the largest in terms of the trading volume and value. It remains a cornerstone instrument of the EU’s policy framework to combat climate change and reduce GHG emissions cost-effectively.
Until 2023, the EU ETS 1 covered emissions from electricity and heat generation plants, manufacturing installations in Europe, and aircraft operators flying between airports in the European Economic Area (EEA) and from the EEA to Switzerland and to the UK. In January 2024, it was extended to cover emissions from maritime transport and in aviation, emissions from most flights to and from the EU’s nine outermost regions as well as departing flights from these outermost regions to Switzerland and the UK. Overall, the EU ETS 1 covers around 35%* of the bloc’s total emissions, with coverage declining compared to the previous year as a result of significant emissions reduction in the power sector in 2023.
The EU ETS 1 is currently in its fourth trading phase (2021 to 2030). Every year, covered entities must surrender allowances for their emissions under the EU ETS 1. Auctioning is the main method of distributing allowances, with free allocation, based on benchmarks, used to address the risk of carbon leakage.
The EU ETS 1 was revised in 2023 in the context of the “European Green Deal” to align the system with the EU’s 2030 climate target of at least a 55% net emissions reduction compared to 1990 levels. The revision is now in force and included:
- an increased ambition and expanded scope of the EU ETS 1, to maritime transport, and introduced a new, separate emissions trading system for buildings, road transport and additional sectors** (EU ETS 2, to start in 2028) ***;
- a strengthened the Market Stability Reserve (MSR);
- an update to the EU ETS 1 regarding aviation;
- updated rules for monitoring and reporting of emissions from maritime transport;
- the creation of the Social Climate Fund (starting in 2026) to complement the new EU ETS 2; and
- the establishment of a Carbon Border Adjustment Mechanism (CBAM) to address the risk of carbon leakage from specific sectors under the EU ETS 1 (to gradually replace free allocation).
Since June 2023, EU Member States are obliged to use all relevant ETS revenue (or an equivalent financial value) to support climate action and energy transformation. By the end of 2025, the EU ETS has raised a cumulative total of EUR 265.7 billion (USD 297.1 billion) since its inception.
* Based on 2023 data. Preliminary data for 2024 suggest a further decrease to 33%.
** Mainly industry sectors not covered under the existing EU ETS.
*** See EU ETS 2 factsheet.
The EU ETS 1 in 2024 saw a 5.7% year-on-year reduction in emissions from stationary sources. This reduction was largely driven by the power sector, where renewable electricity production (primarily from wind and solar) increased substantially, coupled with the decrease in both coal and gas. With this development, emissions from installations at the start of 2025 were around 50% below 2005 levels and well on track to achieve the 2030 target of a 62% reduction. Emissions from aviation under the EU ETS 1 continued to increase in 2024, partially due to broader geographic coverage.
In 2025, the compliance obligation for maritime transport operators commenced. Shipping companies must surrender allowances equal to 40% of their verified 2024 CO2 emissions and 70% for 2025. From 2026 onwards, the scope of covered emissions in the sector expands to include CH4 and N2O.
In aviation, free emission allowances for operators were down to 50% in 2025 and are fully phased out as of 2026. In parallel, a per-tonne financial support for sustainable aviation fuels (SAF) was introduced to incentivise uptake while free allocations are phased out.
Since 2020, the EU ETS 1 is linked with the Swiss ETS. In May 2025, the EU and the UK announced their intention to link their respective ETSs. Subsequently, the EU Council granted the Commission a negotiating mandate, authorising it to start formal talks with the UK on an ETS linking agreement.
From 2026, the definitive stage of the EU’s CBAM starts. The mechanism is introduced gradually alongside the phase-out of free allowances in CBAM-covered sectors in the EU ETS 1. By September 30, 2027, EU importers will have to surrender CBAM certificates for 2.5% of the GHG emissions embedded in relevant goods imported in 2026.
Emissions & Targets
3,105.6 MtCO2e (2023)*
* National emissions for the EU-27 reported to the UNFCCC and to the EU in May 2025 under the “EU Governance Regulation”. )
By 2030: Reduce net emissions to at least 55% below 1990 GHG levels (“European Climate Law”)
By 2040: Reduce net emissions to 90% below 1990 GHG levels (European Climate Law, amended)*
By 2050: Net zero (European Climate Law)
* Includes a contribution of high-quality international credits under Article 6 of the Paris Agreement.
EUR 73.43 (USD 82.97) (average 2025 auction price)
EUR 74.35 (USD 84.01) (average secondary market price 2025)
Size & Phases
PHASE 1: Three years (2005 to 2007)
PHASE 2: Five years (2008 to 2012)
PHASE 3: Eight years (2013 to 2020)
PHASE 4: Ten years (2021 to 2030)
An absolute cap limits the total emissions allowed in the system and is fixed ex-ante. It is set to reduce covered sectors’ emissions by 62% compared to 2005 levels by 2030.
PHASE 1 and PHASE 2: 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 with a cap of 2,049 MtCO2e in 2008.
PHASE 3:
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 to 2012 baseline emissions). This translated into a year-on-year reduction of around 38 million allowances and resulted in a cap of 1,816 MtCO2e in 2020.
Aviation: Included in the EU ETS 1 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 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 the end of 2026.
PHASE 4:
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 2024 to 2027 and 4.4% from 2028. In addition, 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 reduced annually. Following the 2023 ETS revision, the cap in 2026 is determined to be 1,185 MtCO2e. From 2021, the UK was no longer part of the EU ETS 1 (except for electricity generators in Northern Ireland).
Maritime: The 2026 cap was increased by 2.4 million allowances to reflect the inclusion of CH4 and N2O emissions into the EU ETS 1 scope.
Aviation: The aviation cap in 2026 amounted to 24.9 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 1 scope in terms of activities and GHGs is specified in Annex I and Annex II of the “ETS Directive”.
PHASE 1: 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 2: Several countries included NOx emissions from the production of nitric acid. The EU ETS 1 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 1 for aviation to flights within the EEA. Exemptions for operators with low emissions were introduced.
PHASE 3: 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 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 1 covers emissions from outgoing flights to Switzerland.
PHASE 4: Amendments introduced in view of the UK’s departure from the EU and in the 2023 revision of the EU ETS 1.
Power and industry: The scope of ETS and benchmarks used for free allocation was 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 1 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 were 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 1, 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 covers only CO2 emissions. From 2026, CH4 and N2O emissions will also be covered.
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
8,704 stationary installations, 393 aircraft operators, 3,313 shipping companies (2024)
Allowance Allocation & Revenue
Share of auctioned allowances 2021 to 2025: up to 57% of the cap
PHASE 1: 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 2:
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 3:
Auctioning: The main method of distributing allowances was via auction, 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 among 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 sector-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, monetize remaining allowances, or transfer them to the Modernisation Fund, created under the EU ETS 1 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 1 to flights within the EEA.
PHASE 4:
Auctioning: The main method of distributing allowances remains auctioning, accounting for up to 57% of the cap. Of the share of allowances to be sold, 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* and they applied for 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 one for 2021 to 2025.
The Phase 4 cap includes a buffer of more than 450 million allowances, 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).
In 2026, a second allocation period of the Phase 4 starts. 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.
Power: 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, which could have been used until the end of 2024. After this time, any leftover allowances were 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%.
The update to the benchmarks for the period from 2026 to 2030 is based on increased annual reduction rates, which are intended to stimulate further industrial transformation. As of 2026, the minimum rate increases from 0.2% to 0.3% per year, and the maximum rate from 1.6% to 2.5%.
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)
Carbon Border Adjustment Mechanism: Free allocation to specific sectors will be gradually phased out from 2026 to 2034, in parallel to the phase-in of the EU’s CBAM for third-country imports. Those sectors are iron and steel, cement, aluminum, fertilizers and hydrogen. The mechanism applies equally to imports from all countries outside the EU (except Liechtenstein, Iceland, and Norway as they are participating in the EU ETS; and Switzerland which has an ETS that is linked with the EU ETS 1).
The transitional, data-collection phase of CBAM started in October 2023, with only reporting obligations but no charges due.
The phase-out of free allocation to sectors covered by the CBAM will take place by applying a ‘CBAM factor’, which will decrease gradually from 97.5% in 2026, to 51.5% in 2030 and down to 14% in 2033.
The CBAM will also apply to electricity imports.
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 to 0% from 2026 onward
* Revised benchmark values for free allocation of emission allowances for 2021 to 2025.
EUR 265.7 billion* (USD 297.1 billion) since the beginning of the system
EUR 43.2 billion** (USD 48.9 billion) in 2024
* Includes revenues from Iceland, Liechtenstein, Norway, and the UK (until 2020), 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 1 accrues primarily to national budgets. As of June 2023, countries are required to use all ETS revenue (or an equivalent financial value) to support climate action and energy transformation.
EU Member States can also use their EU ETS 1 revenue as aid to certain electricity-intensive industries, to compensate for the additional electricity costs they face as a result of the carbon price pass through. They do so under State aid schemes that are approved by the European Commission. Every year, countries must publish the total compensation amounts paid out, including a breakdown by recipient sector and subsector. The overall spending under a scheme should not exceed 25% of collected EU ETS 1 revenue.
EU Member States report annually to the European Commission on how they used their auction revenue in a preceding year. Of the EUR 16.4 billion spent in 2024, Member States reported having supported projects in energy supply, grids and storage (20%), public transport and mobility (22%), social support and just transition (9%), energy efficiency, cooling and heating in buildings (20%), industry decarbonisation (5%), and road transport (3%) as well as other things (17%), that included international purposes and climate finance supporting climate action in vulnerable third countries.
A share of EU ETS 1 allowances is auctioned to supply the Innovation and Modernisation Funds, which were established to support decarbonization and modernization investments in ETS sectors.
Innovation Fund: One of the world’s largest funding programmes for rolling out low- and zero-carbon innovative solutions and technologies in energy, industry and net-zero mobility, funded entirely by the EU ETS 1. The fund provides grants for projects aimed at commercialising innovative low-carbon technologies and bringing industrial solutions to market to decarbonize Europe and support the transition to climate neutrality. It has an estimated budget of EUR 40 billion (USD 45.2 billion) until 2030 (dependent on the carbon price).
Modernisation Fund: A solidarity programme financed by the EU ETS 1. The fund supports lower-income Member States in financing projects that modernize energy systems, improve energy efficiency and help advance a socially just transition to climate neutrality. It has an estimated budget of EUR 56 billion (USD 63.3 billion) from 2021 to 2030 (allocated among the beneficiary Member States according to a fixed key).
Flexibility & Linking
Banking is allowed (since 2008).
Borrowing is not allowed.
PHASE 1: The use of CDM and Joint Implementation (JI) credits was allowed without limitation. In practice, no offset credits were used in Phase 1.
PHASE 2: 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 hydropower 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 3: 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 (2008 to 2012) 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 GtCO2e).
PHASE 4:
The use of offset credits is not allowed.
The EU ETS 1 and the Swiss ETS have been linked since 2020. 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. Allowances that can be used for compliance purposes in one system are recognised for compliance purposes of the other system.
In May 2025, the EU and the UK announced their intention to link their respective ETSs. Subsequently, the EU Council granted the Commission a negotiating mandate, authorising it to start formal discussions with the UK on a linking agreement.
Fuel ETS (national): in Austria and Germany, to be replaced by the EU ETS 2 [see ‘EU ETS 2 factsheet’]).
Carbon tax (national): in Denmark, Estonia, Finland, France, Hungary, Latvia, Netherlands, Norway, Poland, Slovenia, Spain, and Sweden.
Compliance
One calendar year.
FRAMEWORK: A harmonized framework of MRV and accreditation requirements underpins the EU ETS 1 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 shipping company is required to have an emission monitoring plan, approved by a national competent authority.
REPORTING: Emission reports are submitted annually by the end of March for the preceding calendar year using templates.
Installations for the incineration of municipal waste (above a threshold of 20 MW rated thermal output) must monitor and report their emissions under the EU ETS 1 since January 1, 2024, with no surrender obligation.
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. Verifiers must be accredited by national accreditation bodies of Member States in accordance with the Accreditation and Verification Regulation (EU) 2018/2067, which is based on the ISO/IEC 17029 and ISO 14065 international standards for GHG validation and verification bodies.
In addition, a dedicated MRV framework for non-CO2 aviation effects has started to apply from January 2025.
Regulated entities must pay an excess emissions penalty of EUR 100 (USD 113), adjusted for inflation with 2013 as the base year, for each tCO2e 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.
MARKET STABILITY RESERVE (MSR)
Instrument type: Quantity-based instrument
Functioning: The MSR was created in 2015 as a long-term measure to address a growing surplus of allowances in the EU ETS 1. 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 MSR started 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 million 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, 100 million allowances are released from the MSR and auctioned.
Invalidation: From 2023, allowances in the MSR above a certain threshold are invalidated annually. In 2023, the applicable threshold was the 2022 auction volume. From 2024 onward, the applicable threshold is fixed at 400 million allowances.
Other Information
European Commission: Responsible for establishing the regulatory framework of the EU ETS 1 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.*
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 1 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 of July 2026, the European Commission will assess:
- how negative emissions (removals) could be accounted for and covered under the EU ETS 1;
- the feasibility of lowering the 20 MW total rated thermal input thresholds for the activities covered under the EU ETS 1;
- effective accounting and avoidance of double counting of CCU products under the EU ETS 1;
- the feasibility of including municipal waste incineration under the EU ETS 1; and
- the functioning of the EU ETS 1 for aviation, including the functioning of CORSIA.
* The latest report was published in 2025, on the EU ETS functioning in 2024.
All other legislation and documentation can be found here.