Chapter 2 - The EU Emission Trading System

The EU Emissions Trading System (ETS) is a cornerstone of the EU’s climate action. It puts a cap on emissions from the electricity and heat generation, industrial manufacturing, aviation in Europe and maritime transport sectors, resulting in a price on emissions in line with the ‘polluter pays’ principle. The price creates an incentive for companies in these sectors to deploy solutions and invest in reducing emissions over time. The EU ETS also raises revenue to help fund these actions. 

Cap on emissions under the EU ETS

The EU ETS is a market-based instrument. It sets a cap on emissions from the sectors covered by the scheme and every year the cap is lower, with a target of 62% reduction by 2030 compared with 2005 levels of emissions. The cap is expressed in allowances, which companies must surrender each year to cover their emissions. Companies primarily purchase allowances in auctions, which raise revenues for Member States to fund further climate action and energy transition. With the price of allowances set by the market, the EU ETS incentivises emission reductions where it costs the least to do so, in a technologically neutral way.

While auctioning is the primary method for distributing allowances in the EU ETS, a significant volume of allowances is allocated to installations for free to address the risk of carbon leakage [19]. In certain EU ETS-covered industry sectors (cement, aluminium, fertilisers, hydrogen, iron and steel), the Carbon Border Adjustment Mechanism (CBAM) will gradually replace free allocation from 2026 onwards. These sectors represent approximately 54% of total free allocation in 2021-2025.

More information on the functioning of the EU ETS in the 2025 Carbon Market Report.

Emission trends

By the end of 2024, the EU ETS had helped drive down emissions from the electricity and heat generation and industrial manufacturing by 50% compared to 2005 levels. With this progress, the system is on track to achieve the 2030 target of 62% reduction.

In 2024, emissions from the power and industry sectors continued to decrease following a record annual drop in 2023. Emissions from electricity and heat generation dropped by 10.7% [20], largely due to a substantial increase in the share of renewables and nuclear in the electricity mix, coupled with a reduced reliance of major fossil fuels such as natural gas and coal.  In 2024, renewables and biofuels were the leading source of electricity in the EU, capturing 47.2% of the share, with the overall renewable electricity output having increased by 7.6% in 2024. The drop in the power emissions in 2024 marks 30% reduction since 2021.

Emissions from industrial installations in 2024 decreased by 0.8% compared to 2023 [21]. Several trends were noted to have been at play (in addition to the decarbonisation of the power supply) – reduction of output in industrial production in some sectors, recovery of output in energy-intensive sectors such as steel, fertilisers and chemicals and improvements in energy efficiency.

Auction revenues

By mid-2025, the EU ETS had raised over EUR 245 billion through the sale of emission allowances. In 2024, ETS revenue reached nearly EUR 39 billion. This went primarily to national budgets (EUR 24.4 billion) but also funded the ETS programmes for a clean transition (i.e. the Innovation Fund and the Modernisation Fund) as well as part of the Recovery and Resilience Facility in line with RepowerEU Plan. In 2025, a portion of allowances from the EU ETS also started being auctioned to finance the Social Climate Fund (see Chapter 6).

Member States must use all their ETS revenues (or an equivalent amount) to fund climate action and energy transformation, including measures to address social aspects. The only exception from this rule is the possibility for Member States to use ETS revenue to provide aid to for electricity-intensive industries for indirect carbon costs. In 2024, 15 Member States used their revenues for this purpose. Of EUR 24.4 collected in 2024, Member States used EUR 3.2 billion for indirect-cost compensation for energy-intensive industries. The remaining EUR 21.2 billion must be used for climate action and energy transformation but it does not need to be spent in one year [22].

Every year, Member States report to the Commission on how they used their ETS revenues. Member States directed most of their 2024 ETS revenues to projects in the deployment of renewable energy sources, grids and storage (20%), the improvement of energy efficiency in industries and buildings (20%) and the development of clean public transport and mobility (22%). Examples include grants for offshore wind and biogas upgrading in Denmark, deep-retrofit projects with at least 40% reduction in heat consumption in residential buildings in Lithuania and investments in rail transport and cycle paths in Slovenia.

For more information on how each Member State used their 2024 ETS revenue, see Chapter 8 in the accompanying staff working document. For the EU27 analysis, see the Carbon Market Report 2025.

Aviation

In 2024, aviation emissions under the ETS continued to rise, reaching 61.562.6 million tonnes CO₂ [23]. This is about 15% higher than in 2023 [24].

Decarbonising the aviation sector is therefore urgently needed. The ETS carbon price already gives an incentive of around EUR 200 per tonne [25] of sustainable aviation fuel used, compared to fossil kerosene. However, in 2024 the Commission brought in an additional support mechanism under the EU ETS to promote the use of sustainable aviation fuels, the impact of which is not yet reflected in this report. A total of 20 million allowances (worth around EUR 1.5 billion) are reserved for this support and airlines can claim support of around EUR 500 up to EUR 7 000 for each tonne of eligible sustainable fuel used on an ETS route [26]. In 2025, Commission distributed around EUR 100 million between 53 aircraft operators from EU Member States and two operators from Norway.

The Commission adopted new rules to monitor, report and verify emissions for flights of EU airlines which fall outside the scope of the EU ETS [27]. Adoption of these rules underscores the EU’s commitment to apply the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). The EU is one of the first jurisdictions in the world to put CORSIA into law. The purpose of CORSIA is to offset aviation emissions from international flights above a certain level [28]. It is widely expected that this level was reached in 2024, so airlines expect to incur offsetting obligations under CORSIA for the first time for the share of 2024 emissions above the baseline.

Although the EU ETS currently covers only CO₂ emissions, the overall climate impact of aviation is currently estimated to be two to four times higher because of non-CO₂ emissions including nitrogen oxides (NOx) and sulphur oxides (SOx) [29]. The EU is the first jurisdiction to introduce a monitoring, reporting and verification (MRV) framework for non-CO₂ effects in aviation. Since 1 January 2025, aircraft operators are required to monitor and report the impacts of non-CO₂ emissions per flight annually  [30]. By 31 December 2027, based on the results under the non-CO₂ monitoring framework, the Commission will submit a report and, where appropriate, a legislative proposal to mitigate the non-CO₂ effects in aviation.

Maritime transport

Maritime transport generates around 3-4% of the EU’s CO₂ emissions. 2024 was the first year that maritime transport was included in the EU ETS system. Total maritime emissions were 148.7 MtCO₂-eq under the MRV system [31] considering all emissions from voyages involving ports in the EU, Iceland and Norway. Out of these, 89.8 MtCO₂ were covered by the ETS considering only 50% of emissions from voyages starting or ending outside the EU, Iceland and Norway [32].

Methane and nitrous oxide emissions were reported for the first year in 2024 under MRV scope, amounting to 1.6 MtCO₂-eq (for methane) and 2.2 MtCO₂-eq (for nitrous oxide) respectively [33].

When looking only at carbon dioxide, MRV emissions for 2024 are 13% higher than in 2023, mainly due to the increase in vessel activity, from rerouting following the Red Sea crisis throughout 2024.

Compliance following the first year of application of ETS to maritime transport was high, as shipping companies surrendered allowances for more than 99% their emissions within the scope.

At international level, in April 2025, the EU welcomed the approval of the Net-Zero Framework to reduce greenhouse gas emissions from international shipping at the International Maritime Organization (IMO), which includes a global standard for gradually reducing the GHG intensity of marine fuels and a pricing element for GHG emissions from international shipping. The agreement, pending its adoption, is a meaningful step towards the goal of net-zero emissions from maritime transport by or around, i.e. close to, 2050 as set in the 2023 IMO GHG strategy. Discussions on the adoption of the agreement have been postponed to October 2026.

Buildings, transport and small industry

In 2023, a new emission trading system (ETS2) was agreed to cover emissions from fuel combustion in buildings, transport and small industry, which were not covered by the current EU ETS. While it is also a ‘cap and trade’ system, it is separate from the current EU ETS. It will help Member States achieve their emission reduction targets under the Effort Sharing Regulation (see Chapter 3).

Working in conjunction with other measures for these sectors, the cap in ETS2 is set to bring emissions down by 42% by 2030 compared to 2005 levels. All allowances will be sold in auctions with revenues going to national budgets and the Social Climate Fund. The carbon price will provide an incentive to invest in energy efficiency solutions, in building renovations and in zero-emission mobility, including public transport. The Social Climate Fund will support vulnerable households, transport users and micro-enterprises, with a focus to help them to finance those investments.

The ETS2 will cover emissions upstream. This means that fuel suppliers, not consumers, must track the emissions from the fuels they place on the market and buy allowances to cover them. The monitoring and reporting of emissions started in 2025, and the system will become fully operational in the coming years.