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 (UK ETS)
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. Domestic maritime emissions will be brought under the UK ETS from July 1, 2026.
Covered entities must surrender allowances for all their in-scope 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 (ARP), to support market stability.
The UK ETS cap trajectory and system design are consistent with the UK’s target of achieving net zero by 2050. The UK ETS Authority has announced the expansion of the system to waste incineration and energy-from-waste, domestic maritime, and GHG removals, and proposed a framework to add further high emitting sectors. Additionally, the UK government is introducing a UK CBAM to begin on January 1, 2027, applying a carbon price to emissions-intensive imports.
The European Commission and the UK government have announced their intention to pursue a link between their respective systems.
In 2025, the UK ETS Authority focused on implementing previously signaled reforms, preparing for scope expansion, and setting the stage for post 2030 design. It also progressed work to align free allocation reforms with the forthcoming UK CBAM.
In February 2025, the Authority consulted on extending the UK ETS cap beyond 2030.
In May 2025, the UK and the EU agreed to work towards establishing a link between their ETSs. The envisaged link would enable mutual recognition of allowances for compliance, allow cross-system trading, and create the conditions for mutual CBAM exemptions.
In July 2025, the Authority published interim responses to the 2024 consultations on scope expansion and greenhouse gas removals (GGRs), confirming key timelines: maritime coverage from July 2026 and a voluntary MRV-only period for waste incineration and energy from waste from January 2026 ahead of full inclusion from 2028. It also confirmed the integration of UK-based engineered removals from 2029, subject to legislation and further consultation.
In November 2025, the Authority published the main response to the maritime consultation, building on the interim response earlier in the year. This sets out the final details on the expansion to domestic maritime emissions, including cap adjustment to account for the expansion, exemptions, delay to the inclusion of offshore vessels until January 2027 and future reviews. Alongside this, the Authority also launched a consultation on bringing emissions from international maritime voyages into the UK ETS, proposing to include voyages starting or ending in the UK from 2028, covering 50% of emissions related to such journeys.
In October 2025, the UK ETS Authority launched a consultation to assess the impacts on regional air connectivity following the removal of UK ETS free allocation for aviation. The consultation sought views on the potential impact on remote domestic routes, whether government action was needed to address any negative effects, the criteria for such action, and the best way to provide support. The Authority emphasized that it was not looking to shield the aviation sector from wider market or regulatory factors. The consultation closed in December 2025.
The Authority confirmed that the second free allocation period will start in 2027, with 2026 treated as an extension of the current period, ensuring that the Free Allocation Review changes and CBAM introduction take effect together. In November 2025, the final Authority response to the Free Allocation Review also confirmed rules for the next allocation period from 2027 to 2030, maintaining carbon leakage protection for sectors most at risk, while free allocation for CBAM‑covered sectors will be gradually phased out from 2027 to enable the mechanism to serve as the primary means of mitigating carbon leakage.
As announced in December 2023, and following policy consultation in 2024 and technical consultation in 2025, the government is legislating in the Finance Bill 2025-26 to introduce a CBAM from January 1, 2027. The UK CBAM will apply to goods from the following industrial sectors: aluminum, cement, fertilizers, hydrogen, iron, and steel.
In December 2025, the Authority announced the extension of the UK ETS into a second Phase running from 2031 to the end of 2040. The Authority also announced final decisions on markets policy for a standalone scheme. The Authority decided to retain and inflation-proof the Auction Reserve Price (ARP), with changes taking effect in 2026 and maintain the existing design and operation of the Cost Containment Mechanism (CCM).
Emissions & Targets
388 MtCO2e (2023)
By 2030: At least a 68% reduction in UK net GHG emissions from 1990 levels, including emissions from LULUCF (NDC 3.0)
By 2035: At least an 81% reduction in UK net GHG emissions from 1990 levels, including emissions from LULUCF (NDC 3.0)
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)
PHASE 2: Ten years (2031 to 2040)
An absolute cap limits the total emissions allowed in the system and is fixed ex-ante.
FIRST ALLOCATION PERIOD (2021 to 2026): 712 MtCO2e, to be adjusted to reflect the hospital and small emitter opt-outs. The first allocation period was extended to include 2026, in order to ensure that changes to free allocation rules aligned with the introduction of the UK CBAM in 2027.
SECOND ALLOCATION PERIOD (2027 to 2030)[1]: 224 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 2026 is 77.4 MtCO2e. Allowances for the New Entrants’ Reserve (NER) are part of the overall cap.
[1] 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 (USD 23.70) per tCO2 for power generators in Great Britain (excluding Northern Ireland) using fossil fuels.
From 2025, the UK ETS includes CO2 venting from the upstream oil and gas sector, covering process emissions from extracted hydrocarbons that are vented or released through and/or unlit flare. No additional free allowances will be provided to impacted facilities.
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 apply for HSE status. This allows them to monitor and report their annual emissions against individual and annual emission reduction targets, rather than surrender allowances for their emissions. 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. [1] 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 ETS should interact with ICAO’s 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.
MARITIME: From July 1, 2026, the UK ETS will include domestic maritime emissions from ships of 5,000 gross tonnage or more on voyages between UK ports, including round trips. In addition, all emissions from ships of 5,000 gross tonnage or more while in a UK port will be captured by the scheme, regardless of origin or destination. Covered gases are CO2, CH4, and N2O. Operators must prepare Emissions Monitoring Plans, appoint accredited verifiers, and submit annual emissions reports under an operator-based MRV framework. Government non-commercial vessels (e.g., military and emergency services) will be exempt. The framework will use standardized factors and zero-rate sustainable fuels on a tank-to-wake basis, with scope and thresholds subject to review as international regimes evolve.
In November 2025, the Authority launched a consultation on bringing emissions from international maritime voyages into the UK ETS, proposing to include voyages starting or ending in the UK from 2028, covering 50% of emissions related to such journeys.
WASTE INCINERATION AND ENERGY FROM WASTE: Waste incineration and energy from waste facilities are planned to enter the UK ETS from 2028, following a voluntary MRV-only period from 2026 to 2028. The scope will apply to facilities processing ≥3 tonnes/hour of nonhazardous waste or ≥10 tonnes/day of hazardous waste, including clinical waste incinerators, with high-temperature hazardous waste incinerators exempted. During the MRV period, operators must monitor, report, and verify emissions annually without compliance obligations, enabling the Authority to refine factors and policy design ahead of full inclusion.
[1] Aviation activities included in the UK ETS are outlined in the “Greenhouse Gas Emissions Trading Scheme Order 2020”.
Point source
A total of 1,058 entities in 2024, made up of 688 installations and 370 aircraft operators
Allowance Allocation & Revenue
AUCTIONING: Auctioning is the primary means of allowance allocation in the UK ETS. Auctions currently have a GBP 22[1] (USD 28.97) 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 2025, ~51.5 million allowances were sold at auction, raising ~GBP 2.4 billion (~USD 3.2 billion). As set out in the auction calendar, ~52 million UK Allowances (UKAs) will be auctioned in 2026 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 Carbon Leakage List (used to determine CLEFs) that have been used for the first allocation period 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 which were temporarily amended from 2024 to 2026. Historical activity levels for the first allocation period’s free allocations 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 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 Authority completed the Free Allocation Review, launched in 2021 and run in two phases. The final Authority Response, published in November 2025, confirms that the second allocation period will begin in 2027, with 2026 treated as an extension of the first period. This ensures that free allocation reforms take effect alongside the introduction of the UK CBAM.
Key decisions include:
- Operators able to choose to have activity data for either the years 2020 only, or 2020 and 2021 excluded for the purpose of determining historical activity level for the 2027 to 2030 allocation period;
- The retention of current benchmarks for 2027, with the intent to adopt updated EU benchmark values from 2028 to 2030;
- Retaining the current carbon leakage list;
- No introduction of tiering of free allocation for sectors at risk of carbon leakage;
- No early phase out of free allocations for sectors not on the carbon leakage list;
- No additional methodologies to be introduced in 2027, which would introduce conditions on the provision of free allocation; and
- A gradual phase out of free allocations for sectors covered by the UK CBAM beginning in 2027, with an indicative phase out trajectory of nine years.
The Authority also confirmed updated rules for ceased installations.
Free allocation for aircraft operators has been fully phased out from January 1, 2026, as previously announced.
CBAM: The UK CBAM will work alongside the UK ETS to mitigate the risk of carbon leakage from imports. The government confirmed that the mechanism will apply from 2027.
The CBAM will initially cover aluminum, cement, fertilizers, hydrogen, and iron and steel, and will initially account for direct (process) emissions embedded in imported goods. Indirect (electricity-related) emissions will be delayed until 2029 at the earliest.
To ensure consistency between the domestic ETS and the border measure, free allocation for sectors covered by the CBAM will be gradually adjusted from 2027. This adjustment would reflect the introduction of a carbon price on imports, reducing the need for free allocation as a carbon leakage mitigation tool.
The revised Free Allocation framework ensures that CBAM alignment and free allocation phase-in/out schedules are synchronized.
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.
[1] The ARP will be adjusted for inflation to maintain its real value, a nominal increase from GBP 22 to GBP 28, in 2026.
GBP 19.7 billion (USD 25.9 billion) since the beginning of the program
GBP 2.4 billion (USD 3.2 billion) in 2025
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.
Engineered Greenhouse Gas Removals (GGRs) are set to integrate into the UK ETS from 2029, with legislation to be finalized by 2028. In the initial phase, credits from eligible domestic projects would replace allowances one-for-one without changing the cap level. Credits will be issued ex-post after verified sequestration and must meet a minimum 200-year permanence requirement. The Authority is considering differentiating removal allowances from regular allowances and it is assessing auction mechanisms to support market access, alongside potential future inclusion of high‑quality nature‑based removals.
The UK ETS is not linked with any other system.
The EU and UK agreed to work towards the linking of their ETSs, as set out in the Common Understanding at the May 19, 2025 EU-UK Summit. The envisaged link would enable mutual recognition of allowances for compliance, allow cross-system trading, and create the conditions for mutual CBAM exemptions.
Carbon tax: UK Carbon Price Support (CPS)
The CPS, introduced in 2013, is an additional GBR 18/tCO2 (USD 23.70/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 year following the reporting period to surrender allowances. These provisions are the same as under the EU ETS.
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. “UK ETS Order 2020” gives effect (with modifications) to the “Monitoring and Reporting Regulation (MRR) 2018” and the “Verification Regulation (VR) 2018”.
MONITORING: The UK ETS requires continuous, year‑round monitoring under approved plans, with year‑end compilation. Maritime MRV starts July 1, 2026, with operator-based EMPs and verification. Waste has a voluntary MRV-only period from 1 January 2026 ahead of 2028 inclusion.
Installations with Hospital and Small Emitter (HSE) status or Ultra-Small Emitter (USE) status are still required to monitor their emissions and notify the regulator if they exceed relevant thresholds.
REPORTING: Annual self-reporting. Annual emissions report (and activity level report where applicable) due March 31 for the prior year. USEs are required to submit verified emissions reports once every five years to apply for the status.
VERIFICATION: Verification by independent accredited verifiers is required before the end of March each year. Verifiers must be accredited by the UK Accreditation Service (UKAS) in accordance with the “Verification Regulation (EU) 2018/2067”, which is based on the ISO/IEC 17029 and ISO 14065 international standards for GHG validation and verification bodies.
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 131.67) (March 2021 value) adjusted for inflation over time. Paying this penalty does not remove the obligation to surrender an allowance. A new deadline for any outstanding deficit can be set via issuance of a ‘deficit notice’, 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 (USD 1,316) 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, the Authority 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 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.
Following public consultation, in December 2025 the UK ETS Authority announced its decision to maintain the existing design and operation of the CCM.
AUCTION RESERVE PRICE (ARP)
Instrument type: Set price
Functioning: The ARP establishes a minimum bid price at auctions. The ARP is currently set at GBP 22 (USD 28.97).
Following public consultation, in December 2025 the UK ETS Authority announced its decision to retain and inflation-proof the ARP to maintain its real value, thus implementing an inflation-based increase since its introduction (i.e., from GBP 22 [USD 28.97] to GBP 28 [USD 36.87]) in 2026 and increase the value yearly by inflation from 2027.
SUPPLY ADJUSTMENT MECHANISM (SAM)
Following public consultation, in December 2025, the UK ETS Authority announced that it would not introduce a SAM for a standalone UK ETS.
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 effectiveness in reducing emissions and reports on its progress.
UK ETS Authority: Overall responsibility for designing and implementing the UK ETS. It is composed of 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 program supports the mandatory review process. The report for Phase 1 of the UK ETS evaluation was published in December 2023.[1]
Phase 2 of the evaluation, assessing quantitative impacts of the UK ETS, is scheduled to be published in 2026.
[1] The report is available online.
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.