Content updated 16 May 2023
EU Emissions Trading System (EU ETS)
A reform of the Emissions Trading System (EU ETS) was adopted in April 2023. The proposed directive increases the ambition of the ETS. GHG emissions in the ETS sectors must be cut by 62% by 2030 compared to 2005-levels.
View the press release here.
The EU Emissions Trading System (EU ETS) is the second-largest carbon market in the world (behind China) and covers around 40% of the EU's greenhouse gas emissions and operates in all EU countries, plus Iceland, Liechtenstein and Norway (EEA-EFTA states). The legislative framework is implemented by the ETS Directive, which has been revised several times to maintain the system’s alignment with the EU climate policy objectives.
The Carbon Border Mechanism System (CBAM), which regulates imports of products in carbon-intensive industries, will be phased in gradually, in parallel to a phasing out of the free allowances of the EU ETS. The aim is to prevent that the greenhouse gas emissions reduction efforts of the EU are offset by increasing emissions outside its borders.
Revisions of the ETS system
Maritime transport emissions
For the first time, emissions from shipping will be included within the scope of the EU ETS. There will be a gradual introduction of obligations for shipping companies to surrender allowances:
- 40% for verified emissions from 2024
- 70% from 2025, and
- 100% from 2026.
From 2026, non-CO2 emissions (methane and N2O) will be included in the EU ETS.
Buildings, road transport and additional sectors
The new system introduces a new, separate emissions trading system for the buildings, road transport and additional sectors (mainly small industry. It will apply to distributors that supply fuels to the buildings, road transport and additional sectors from 2027.
This may be postponed until 2028 if the price of oil and gas turn exceptionally high.
Emissions from aviation
A legal proposal will be presented in 2028 to extend the scope of the EU ETS to cover all flight emissions. It will apply for intra-European flights (including departing flights to the United Kingdom and Switzerland).
The new system will gradually phase out free emission allowances for the aviation sector. From 2026, full auctioning will be implemented.
The Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) will apply to extra-European flights to and from third countries participating in CORSIA from 2022 to 2027.
A ‘cap and trade’ system
The EU ETS works on the ‘cap and trade’ principle. A cap, which is reduced over time, is set on the total amount of certain greenhouse gases that can be emitted by the installations covered by the system.
The system operates in trading phases and enters now into its fourth trading phase (2021–2030). The framework for phase 4 was revised in 2018 to ensure emissions reductions in support of the EU's 2030 emissions reduction target and as part of the EU’s contribution to the Paris Agreement.
Within the cap, installations buy or receive emissions allowances, which they can trade with one another as needed. If the allowances of an installation do not fully cover its emissions, heavy fines are imposed. If it reduces its emissions, it can keep the spare allowances to cover its future needs or else sell them to another installation.
