Compare ETS
Use this function to compare the design elements and characteristics of up to three ETSs from around the world.
UK Emissions Trading Scheme
General Information
The UK Emissions Trading Scheme (UK ETS) began operating in January 2021, following the departure of the UK (excluding power operators located in Northern Ireland) from the EU ETS. Verified emissions from stationary UK ETS operators currently account for around a quarter of the UK’s territorial GHG emissions. The first phase of the UK ETS runs until 2030.
The UK ETS covers around 1,000 installations in the power and industrial sectors, as well as around 400 aircraft operators. Aviation activity covered includes flights within the UK as well as flights departing the UK to the European Economic Area (EEA) and Switzerland.
Covered installations and aircraft operators must surrender allowances for all their covered emissions. Allowances are allocated primarily through auctioning, with a portion freely allocated to mitigate the risk of carbon leakage. The system has both a cost containment mechanism (CCM) and an auction reserve price, to support market stability.
The UK ETS cap is consistent with the UK’s target of achieving net zero by 2050.
In December 2023, the UK Government published the long-term pathway for the UK ETS, outlining its continuation until at least 2050, in alignment with net-zero targets. The document includes a workplan for consultations on expanding the scheme to waste incineration and energy from waste, domestic maritime, and GHG removals, as well as a framework for potentially including more high-emitting sectors.
A package of reforms to develop the UK ETS further were implemented in 2024 as well as a number of consultations to expand its scope.
Since January 2024, the UK ETS cap was reset to be consistent with the UK’s net-zero target by 2050. The changes included a 30% reduction in the total number of allowances available between 2021 and 2030. To ensure a smooth transition to the net zero cap, 53.5 million previously unallocated allowances were released from reserve pots to auction between 2024 and 2027. The cap will reduce from 156 MtCO2e in 2021 to around 50 MtCO2e by 2030.
In May 2024, the UK ETS Authority launched two consultations related to scope expansion. The UK ETS intends to cover emissions from waste incineration and energy from waste from 2028 (preceded by a two-year MRV-only period from 2026 to 2028). The UK ETS Authority followed up on its commitment to integrate engineered greenhouse gas removals (GGRs) in the scheme by proposing policy options for how this could be done.
In October 2024, the UK Government confirmed that the UK Carbon Border Adjustment Mechanism (UK CBAM) will be introduced on 1 January 2027, in order to address the risk of carbon leakage. The CBAM will place a carbon price on some of the most emissions-intensive industrial goods imported to the UK from the aluminum, cement, fertilizer, hydrogen, and iron and steel sectors that are at risk of carbon leakage.
In November 2024, the UK ETS Authority launched two further consultations on scope expansion: to cover emissions from domestic maritime activities from 2026 and to recognize and implement non-pipeline transport for carbon capture and storage. In addition, the Authority also published an initial response to the 2023 “Free Allocation Review” consultation, confirming that operators who cease operation will have their final year’s allocation adjusted to reflect activity levels, while also allowing operators who are ceasing to decarbonize to apply to be exempted from this new rule to ensure the incentive to decarbonize is maintained.
In December 2024, the UK ETS Authority confirmed that the start of the second free allocation period will move from 2026 to 2027, to align changes to free allocation with the introduction of the UK CBAM in 2027. The UK ETS Authority also launched a consultation seeking views on how carbon leakage risk should be calculated, and the approach to adjusting free allocation levels for CBAM sectors.
Emissions & Targets
409.6 MtCO2e (2022)
By 2030: At least a 68% reduction in UK net GHG emissions from 1990 levels, including emissions from LULUCF (NDC)
By 2035: At least a 81% reduction in UK net GHG emissions from 1990 levels, including emissions from LULUCF (NDC)
Limit UK net GHG emissions to 965 MtCO2e over 2033 to 2037, representing ~77% reduction from 1990 levels, including emissions from LULUCF and international aviation and shipping (“Carbon Budget Order 2021”)
By 2050: Net-zero UK GHG emissions, including emissions from LULUCF and international aviation and shipping (“Climate Change Act 2008 [2050 Target Amendment] Order 2019”)
Current prices can be checked here
Size & Phases
PHASE 1: Ten years (2021 to 2030)
A cap limits the total emissions allowed in the system.
FIRST ALLOCATION PERIOD (2021 to 2025): 633 MtCO2e, to be adjusted to reflect the hospital and small emitter opt-outs.
SECOND ALLOCATION PERIOD (2026 to 2030)*: 303 MtCO2e, to be adjusted to reflect the hospital and small emitter opt-outs.
The cap was initially set at 5% below the UK’s notional share of the EU ETS cap for its fourth phase. The cumulative caps for the first and second allocation periods were originally 736 MtCO2e and 630 MtCO2e, respectively. However, they were reduced following a 2022 consultation on reforming the UK ETS, which included aligning the cap trajectory with the UK’s net-zero emissions target. The cap for 2025 is 86.7 MtCO2e. Allowances for the New Entrants’ Reserve (NER) are part of the overall cap.
* An Authority publication of December 2024 announced that the second allocation period would start in 2027. To effect this, a new allocation period will be created for a standalone year in 2026, however free allocations for this time will be calculated on the same basis as 2021 to 2025 free allocations.
POWER SECTOR AND INDUSTRY: The UK ETS applies to a specified list of activities of installations in the power and industrial sectors. This includes activities involving the combustion of fuels in installations with a total rated thermal input exceeding 20 MW, as well as activities in refining, heavy industry, and manufacturing. Power generators in Northern Ireland still fall under the EU ETS, as they are part of the integrated Single Electricity Market with the Republic of Ireland.
In addition to the power sector’s participation in the UK ETS, the UK’s Carbon Price Support (CPS) policy imposes an additional carbon tax of GBP 18 per tCO2 (USD 23.01) for power generators in Great Britian (excluding Northern Ireland) using fossil fuels.
Hospitals and Small Emitter (HSE) Scheme: Hospitals and small emitters with emissions below 25,000 tCO2e per year and a net-rated thermal input lower than 35 MW can opt out of the ETS and instead monitor and report their emissions and meet annual emission reduction targets. This approach is similar to the UK’s opt-out scheme in Phase 3 of the EU ETS.
Ultra-Small Emitter Exemption: For stationary installations emitting fewer than 2,500 tCO2e per year, an ultra-small emitter exemption is in place. These installations are required to monitor emissions and notify the regulator if emissions exceed the threshold.
AVIATION: UK ETS obligations arise from flights within the UK, flights from the UK to a country within the EEA (excluding outermost regions) and to Switzerland, and flights between the UK and Gibraltar. * Commercial aircraft operators with fewer than 243 full scope flights in a four-month period for three consecutive four-month periods or total full scope annual emissions of less than 10,000 tCO2 are exempt.
Non-commercial aircraft operators are not subject to UK ETS obligations if their annual full scope emissions fall below 1,000 tCO2. Full scope flights are those departing from or arriving in an aerodrome in the UK, Gibraltar, an EEA state, Switzerland, or outermost regions other than an excluded flight.
The UK is also considering how the UK ETS should interact with the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). In December 2024, the UK Department for Transport launched a consultation on implementing CORSIA in the UK, in partnership with the UK ETS Authority, which includes options for how CORSIA could interact with the UK ETS on flights in scope of both schemes.
ADDITIONAL SECTORS: In 2023, the UK ETS Authority announced its intention to expand the scheme to cover emissions from domestic maritime from 2026, and emissions from waste incineration and energy from waste from 2028.
* Aviation activities included in the UK ETS are outlined in the “Greenhouse Gas Emissions Trading Scheme Order 2020”.
Point source
A total of 1,396 entities in 2023, made up of 1,009 installations and 387 aircraft operators
Allowance Allocation & Revenue
AUCTIONING: Auctioning is the primary means of allowance allocation in the UK ETS. Auctions have a GBP 22 (USD 28.12) Auction Reserve Price (ARP), below which allowances will not be sold. Auctions clear even when not all allowances are sold. Unsold allowances are carried over to the next four auctions, up to a limit of 125% of allowances originally intended for sale at those auctions. If all four subsequent auctions reach the 125% limit, the remaining unsold allowances are transferred into the Market Stability Mechanism Account.
In 2024, ~69 million allowances were sold at auction, raising ~GBP 2.6 billion (~USD 3.3billion). As set out in the auction calendar, ~56 million UK Allowances (UKAs) will be auctioned in 2025 across 25 auctions.
FREE ALLOCATION: A number of UKAs are allocated for free to industrial participants at risk of carbon leakage. The number of free allowances that an installation is entitled to is determined using the historical activity level, an industry benchmark, and a carbon leakage exposure factor (CLEF). The benchmarks and CLEFs that have been used initially are those used in Phase 4 of the EU ETS in the most part with an exception for the lime benchmark and malt extraction’s carbon leakage status. Historical activity levels are based on data collected under the EU ETS.
There is a maximum number of allowances allocated for free (the “industry cap”). Originally, an absolute value for the industry cap was established for each year of the first phase. This approach was changed following the 2022 consultation on reforming the UK ETS. From 2024, the industry cap is now set at 40% of the total cap and reduces annually in line with the cap trajectory. If the total amount of free allocation exceeds the industry cap for a particular year, unallocated UKAs from the industry cap from the previous year, as well as allowances from a flexible reserve, can be used. As a last resort, a cross-sectoral correction factor would be applied to ensure a uniform reduction across eligible participants.
An initial allocation table, which lists the volume of free allowances for each installation for the first allocation period, was published in May 2021. Eligible installations must submit a verified Activity Level Report (see ‘Compliance’ section). If the data in the Activity Level Report shows an increase or decrease in activity of 15% or more from historical activity levels (calculated based on the previous two years’ activity levels), their free allocation will be recalculated.
The first phase of a review of free allocation started with a call for evidence in spring 2021 and continued in 2022 as part of the consultation on developing the UK ETS. The second phase of the review, starting with a consultation in December 2023, is focused on the free allocation methodology and better targeting support for those sectors most at risk of carbon leakage. In December 2024, the UK ETS Authority published a further consultation on the carbon leakage list to be used for free allocation in the next period and confirmed that changes following the free allocation review will be made from 2027, with 2026 allocations calculated on the same basis as the first allocation period. The Authority also confirmed changes to rules around free allocation for installations that cease activity.
In 2023, the UK ETS Authority announced that free allocation for aviation operators would be phased out by 2026.
Carbon Border Adjustment Mechanism: As part of the December 2024 consultation, the UK ETS Authority put forward proposals to gradually adjust free allocation in CBAM covered sectors following the introduction of the new mechanism. The UK CBAM will apply to imports of specific goods in the aluminum, cement, fertilizers, hydrogen, and iron and steel sectors. It will cover both direct emissions related to the production processes of the CBAM goods, as well as indirect emissions related to the production of electricity consumed during their production. To better align the UK CBAM launch with the domestic ETS, the UK ETS Authority has confirmed that the free allocation in 2026 will be calculated on the same basis as the first allocation period delaying the second allocation period to 2027.
NER: A reserve of free allowances is set aside for installations that become eligible for participation within Phase 1 and for covered installations that significantly increase their activity level. The number of free allowances for new entrants is determined based on their activity in the first year of operation, the industry benchmark, and CLEF.
GBP 17.2 billion (USD 21.9 billion) since the beginning of the program
GBP 2.6 billion (USD 3.3 billion) in 2024
Revenues from UK ETS auctions accrue to the general budget and are not earmarked.
Flexibility & Linking
Banking is allowed, and allowances remain valid in future years of the scheme.
Limited and implicit borrowing is allowed, i.e., the use of UKAs allocated for free in the current year for compliance in the previous year.
The use of offset credits is not allowed. The UK ETS Authority intend to include engineered GGRs in the system.
The UK ETS is not linked with any other system.
The UK government has indicated it is open to the possibility of internationally linking the scheme in the future but has not made any decision on preferred linking partners. The UK-EU Trade and Cooperation Agreement (TCA) stipulates that the jurisdictions “shall give serious consideration to linking their respective carbon pricing systems in a way that preserves the integrity of these systems and provides for the possibility to increase their effectiveness”.
Carbon tax: UK Carbon Price Support (CPS)
The CPS, introduced in 2013, is an additional GBR 18/tCO2 (USD 23/tCO2) tax on emissions from fossil fuel power generation in Great Britain (excluding Northern Ireland), on top of the UK ETS carbon price.
Domestic crediting mechanisms: UK Woodland Carbon Code and Peatland Code
Compliance
One year. Covered entities have until the end of April of the following year to surrender allowances. These provisions are the same as under the EU ETS.
REPORTING FREQUENCY: Annual self-reporting.
VERIFICATION: Verification by independent accredited verifiers is required before the end of March each year.
FRAMEWORK: The UK ETS has adopted the MRV framework of Phase 4 of the EU ETS, including discretionary changes regarding reduced frequency of improvement reporting and the simplification of monitoring plans.
Regulated entities must pay an excess emissions penalty for each tCO2e emitted not matched by a surrendered allowance. This penalty is equal to GBP 100 per tCO2e (USD 127.81) initially but is adjusted for inflation over time. Paying this penalty does not remove the obligation to surrender an allowance. A new deadline for any outstanding deficit will be set, and non-compliance with this will result in a penalty of 1.5x the relevant carbon price, and may lead to escalating daily GBP 1,000 penalties if it continues to remain unmet. The names of non-compliant operators are published.
Market Regulation
MARKET PARTICIPATION: Compliance entities, non-compliance entities (domestic and international), and individuals.
MARKET TYPES:
Primary: The majority of allowances are allocated through auctioning. Auctions are held every two weeks, with dates and allowance amounts set out in the auction calendar. Compliance entities, financial institutions, and business groupings and public bodies acting on behalf of compliance entities can participate. Auctions are managed by ICE Futures Europe.
Secondary: UKAs are traded on the ICE Futures Europe exchange. Contracts for daily futures, futures, and options on futures contracts are available. Participants may also trade allowances over the counter. Participants in the secondary market must have an account in the UK Registry. Participants trading on the exchange must meet the requirements of the ICE Futures Exchange.
LEGAL STATUS OF ALLOWANCES: The “Recognized Auction Platforms (Amendment and Miscellaneous Provisions Regulations 2021) Affirmative Statutory Instrument” establishes UKAs as financial instruments.
COST CONTAINMENT MECHANISM (CCM)
Instrument type: Price-based instrument
Functioning: The UK ETS has a CCM to avoid price spikes by auctioning additional allowances. If the CCM is triggered, regulators can decide on whether and how to intervene. The intervention can include: redistributing allowances between the current year’s auctions; bringing forward UKA supply from future years; drawing from the Market Stability Mechanism Account; auctioning up to 25% of remaining allowances in the NER; or auctioning allowances left unallocated from the industry cap in a given year. The UK ETS Authority has publicly consulted on the current design of the CCM and is currently analyzing responses to the consultation.
The CCM is triggered if, for six consecutive months, the allowance price is three times the average allowance price in effect in the UK in the two preceding years.
AUCTION RESERVE PRICE (ARP)
Instrument type: Set price
Functioning: To ensure a minimum level of ambition in the transition from the EU ETS to the UK ETS, an ARP of GBP 22 (USD 28.12) is in place. The UK ETS Authority has publicly consulted on maintaining the ARP and sought views on the level and design of the ARP.
SUPPLY ADJUSTMENT MECHANISM (SAM)
The UK ETS Authority launched a consultation in December 2023 on the potential introduction and design of a SAM. The UK Government is currently analyzing responses to the consultation.
Other Information
UK Climate Change Committee (CCC): An independent, statutory body established under the Climate Change Act 2008. Its primary role is to advise the UK government and devolved administrations on emissions targets and on the progress in their achievement. The CCC provides expert advice on the design and implementation of the UK ETS, on its effectivenessin reducing emissions and reports on its progress.
UK ETS Authority: Overall responsibility for designing and implementing the UK ETS. It is composed of the representatives of the UK Government (Department for Energy Security and Net Zero (DESNZ), HM Treasury (HMT) and Department for Transport (DfT)), Scottish Government, Welsh Government, and the Department of Agriculture, Environment and Rural Affairs of Northern Ireland.
Regulators (Environment Agency; Scottish Environment Protection Agency; Natural Resources Wales; Northern Ireland Environment Agency; Offshore Petroleum Regulator for Environment and Decommissioning): Responsible for enforcing compliance with the UK ETS Regulations. The Environment Agency serves as the registry administrator and is responsible for the management of accounts in the UK Emissions Trading Registry.
Phase 1 includes two mandatory whole-system reviews. The first review was published at the end of 2023, and the second must be published by the end of 2028.
The UK ETS evaluation programme supports the mandatory review process. The report for Phase 1 of the UK ETS evaluation was published in December 2023.*
Phase 2 of the evaluation, assessing quantitative impacts of the UK ETS, is scheduled to be published in 2026.
In addition to the whole-system reviews, the UK ETS Authority is in the process of reviewing the future of UK ETS markets policy and free allocation for stationary installations. The UK ETS Authority is also consulting on expansion of scope to the waste and maritime sectors and to recognize non-pipeline transport for CCS as well as integration of engineered GGRs. The UK ETS Authority is also considering the approach to implementing CORSIA, including options for how CORSIA and the UK ETS should interact on flights in scope of both schemes.
* The report is available online.
EU Emissions Trading System (EU ETS)
General Information
Operational since 2005, the European Union Emissions Trading System (EU ETS) 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 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, the EU ETS 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 covers around 40% of the EU’s total emissions.
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, used 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 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, to maritime transport, and introduced a new, separate emissions trading system for buildings, road transport and additional sectors* (ETS 2, to start in 2027 or 2028)**;
- a strengthened the Market Stability Reserve (MSR);
- an update to the EU ETS 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 (to gradually replace free allocation).
* Mainly industry sectors not covered under the existing EU ETS.
** See EU ETS 2 factsheet.
The EU ETS in 2023 saw a historical year-on-year reduction in emissions. This reduction was largely driven by the power sector, where renewable electricity production (primarily from wind and solar) increased substantially, and the trend of gas replacing coal in power generation was resumed. With this development, emissions from installations at the start of 2024 were around 47.6% below 2005 levels and well on track to achieve the 2030 target of a 62% reduction. Emissions from aviation under the EU ETS continued to increase in 2023. The emissions data for 2024 will be reported in 2025.
In 2023, the EU ETS raised EUR 43.6 billion (USD 47.2 billion) for the EU’s green transition. This revenue went primarily to national budgets, but also the Innovation and Modernisation Funds as well as the Resilience and Recovery Fund, which EU Member States use to advance the clean energy transition, roll out low- and zero-carbon innovative solutions and technologies in ETS sectors, and improve energy security. 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. In 2024, the EU ETS raised EUR 183.6 billion.
Important changes to the system’s ambition and scope took effect in 2024. The 2024 cap on emissions has been rebased downwards and the annual reductions in the cap from 2024 onwards have been increased. At the same time, the scope of the EU ETS was expanded:
- The scope of the EU ETS has been expanded to CO2 emissions from maritime transport, which accounted for 3-4% of EU emissions in 2023. This extension covers all emissions occurring between two European Economic Area (EEA) ports and when ships are in EEA ports, and half of emissions from voyages starting or ending outside the EEA. Maritime operators will surrender allowances under the EU ETS for the first time in 2025.
- The scope of the EU ETS for aviation has been expanded to 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. This represents an extension of carbon pricing coverage of 7%. At the same time, free allocation to aircraft operators has been reduced by 25%.
- Installations for the incineration of municipal waste must now monitor and report their emissions under the EU ETS. They are not, however, required to surrender allowances for their emissions.
Emissions & Targets
3,374.7MtCO2e (2022)*
* National emissions for the EU-27 reported to the UNFCCC and to the EU in April 2024 under the “EU Governance Regulation”.
By 2030: Reduce net emissions to at least 55% below 1990 GHG levels (“European Climate Law”)
By 2050: Net-zero (“European Climate Law”)
EUR 64.74 (USD 70.07) (average 2024 auction price)
EUR 65.23 (USD 70.60) (average secondary market price 2024)
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)
A cap limits the total emissions allowed in the system. 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 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 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 2024 amounted to 1,386 MtCO2e. From 2021, the UK was no longer part of the EU ETS (except for electricity generators in Northern Ireland).
Maritime: The 2024 cap was increased by 78.4 million allowances based on the sector’s average emissions reported for 2018 and 2019.
Aviation: The aviation cap in 2024 amounted to 27.6 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 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 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 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 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.
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 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, 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
8,554 installations, 379 aircraft operators, 2251 shipping companies (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.
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 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 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 (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 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 apply 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, 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.
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 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)
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).
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 eventually to 0% from 2026 onward.
* Revised benchmark values for free allocation of emission allowances for 2021 to 2025.
EUR 184 billion* (USD 206 billion) since the beginning of the system
EUR 38.8 billion** (USD 42 billion) in 2024
* 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 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, except for any revenue used as aid for electricity-intensive industries for indirect carbon costs.
EU Member States can use their ETS revenue to finance State 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 ETS revenue.
EU Member States report annually to the European Commission on how they used their auction revenue in a preceding year. Of the revenue spent in 2023, Member States reported having supported projects in energy supply, grids and storage (43%), public transport and mobility (23%), social support and just transition (12%), energy efficiency, cooling and heating in buildings (10%) and industry decarbonisation (3%) as well as other purposes (9%).
A share of EU ETS allowances is auctioned to supply the Innovation and Modernisation Funds – two funds established to support decarbonization and modernisation 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. 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 43.3 billion) until 2030 (dependent on the carbon price).
Modernisation Fund: A solidarity programme financed by the EU ETS. 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 60.6 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 Clean Development Mechanism (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 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 issued in one system can be surrendered for emissions generated in either of the two systems.
Fuel ETS (national): in Austria and Germany, to be replaced by the EU ETS 2 from 2027 onward.
Carbon tax (national): in Denmark, Estonia, Finland, France, Hungary, Latvia, Netherlands, Norway, Poland, Slovenia, Spain, and Sweden.
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 shipping company 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 are 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 details above, 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 108.24), adjusted for inflation, 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. 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 allowances, 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.
At the end of December 2023, the MSR contained 809 million allowances, of which 27 million were set aside for the Innovation Fund. This led to the invalidation of 382 million allowances in January 2024.
Swiss ETS allowance supply is not considered in the TNAC, and Swiss auction quotas are not
affected by the MSR.
BACKLOADING
Instrument type: Quantity-based instrument
Functioning: Implemented in Phase 3 as a short-term measure 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 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.*
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 of July 2026, the European Commission will assess:
- how negative emissions (removals) 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 covered 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; and
the functioning of the EU ETS for aviation, including the functioning of CORSIA.
* The latest report was published in 2024, on the EU ETS functioning in 2023.
All other legislation and documentation can be found here.