As part of the 2023 revisions of the ETS Directive, a new emissions trading system named ETS2 was created, separate from the existing EU ETS. This new system will cover and address the CO2 emissions from fuel combustion in buildings, road transport and additional sectors (mainly small industry not covered by the existing EU ETS).
The ETS2 will complement other policies of the European Green Deal in the covered sectors, helping Member States achieve their emission reduction targets under the Effort Sharing Regulation (ESR). So far, emission reductions in those sectors have been insufficient to put the EU on a firm path towards its 2050 climate neutrality goal. The carbon price set by the ETS2 will provide a market incentive for investments in building renovations and low-emissions mobility.
The ETS2 will become fully operational in 2027. Although it will be a ‘cap and trade’ system like the existing EU ETS, the ETS2 will cover emissions upstream. It will be fuel suppliers, rather than end consumers such as households or car users, that will be required to monitor and report their emissions. These entities will be regulated under the ETS2, which means they will be required to surrender sufficient allowances to cover their emissions. Regulated entities will purchase these allowances at auctions. The ETS2 cap will be set to bring emissions down by 42% by 2030 compared to 2005 levels.
All emission allowances in the ETS2 will be auctioned, and a share of the revenues will be used to support vulnerable households and micro-enterprises through a dedicated Social Climate Fund (SCF). Member States will be required to use the remaining ETS2 revenues for climate action and social measures, and they will report on how this money is spent.
The legislative framework of the ETS2 is spelled out in the ETS Directive.
ETS2: a smooth start
The ETS2, which will become fully operational in 2027, has been designed to start in an orderly, smooth and efficient manner.
As a first step, the monitoring and reporting of emissions will begin in 2025. Over the course of 2027, a 30% higher volume of allowances will be auctioned to provide market liquidity. As in the existing EU ETS, the ETS2 will operate with a dedicated, rule-based market stability reserve to mitigate insufficient or excessive supply of allowances to the market.
During the first three years the ETS2 is operational, if the price of allowances exceeds €45 (in 2020 prices, i.e. adjusted for inflation), additional allowances may be released from the ETS2 market stability reserve to address excessive price increases. Allowances may also be released from this reserve if the price of allowances increases too rapidly. The rules and conditions for such a release are specified in the ETS Directive.
In case of exceptionally high gas or oil prices in 2026, the start of the ETS2 system could be postponed to 2028 to ensure a smooth implementation.
Annual compliance cycle
The annual procedure of monitoring, reporting and verification (MRV), together with all the associated processes, is known as the ETS compliance cycle.
Regulated entities covered by the ETS2 are required to hold a greenhouse gas emissions permit by 1 January 2025, as well as an approved monitoring plan for the monitoring and reporting of their annual emissions. Monitoring plans form part of greenhouse gas emissions permits.
Every year, regulated entities must submit an emissions report by 30 April for the emissions of the previous year. From 2026, the data for a given year will have to be verified by an accredited verifier.
From 2028, once annual verified emissions are reported, regulated entities will have to surrender the equivalent number of allowances by 31 May of that year.
The rules related to the ETS compliance cycle are set out in two regulations:
- Monitoring and Reporting Regulation (MRR)
- Accreditation and Verification Regulation (AVR) (to be adopted over the course of 2024)
Guidance and support
To ensure the requirements of the regulations are correctly understood, as well as to promote administrative efficiency and harmonisation across involved countries, the European Commission provides guidance documents and templates (see the below Documentation section).