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Glossary · Energy industry & energy transition

EU ETS 2, ETS2

EU ETS 2 ETS2 Emissions Trading building traffic Carbon price Climate policy EU

Definition and basic principle

EU ETS 2, ETS2 for short, is a separate European emissions trading system. It runs separately from the existing EU Emissions Trading System (EU ETS, often also called ETS1). It covers CO₂ emissions from the combustion of fuels in buildings, in road transport and in further sectors. These further sectors are mainly smaller industrial and energy installations that do not fall under ETS1. The legal basis is the Emissions Trading Directive 2003/87/EC. Its chapter on ETS2 was added by Amending Directive (EU) 2023/959. ETS2 is intended to help Member States achieve their reduction targets under the Effort Sharing Regulation.

The system applies upstream, that is, already at the point where fuels are supplied. The obligation does not lie with households, tenants or motorists, but with the regulated entities that place fuels on the market. In practice, this generally ties in with the tax liability for energy products. Therefore, not every trader or every filling station is automatically obliged itself. These entities must monitor and report their emissions. For every tonne of CO₂ that is calculated to arise from burning the fuels they supply, they must surrender an allowance. Directly covering millions of individual boilers, vehicles and small businesses would hardly be practicable. This is why the approach at the supplier level is technically the obvious route.

Quantity limit and price formation

ETS2 is a cap-and-trade system. A cap sets how many allowances there are in total, and it falls every year. According to the European Commission, the cap is designed so that emissions of the covered sectors fall by 42 percent below 2005 levels by 2030. All allowances are auctioned; there is no free allocation. The CO₂ price arises from the scarcity of allowances. It makes fossil energy sources more expensive depending on their carbon content: heating oil and diesel are affected more strongly per unit of energy than natural gas. An example: at a price of 50 euros per tonne and a fuel that releases about 2.6 kg of CO₂ per litre, this results in around 13 cents per litre before value-added tax.

For an orderly start, the rules provide several safeguards. For the year 2028, 30 percent more allowances are auctioned so that the market has sufficient liquidity. A separate, rule-based market stability reserve balances any oversupply or undersupply. In the initial phase, additional allowances can be released if the price exceeds 45 euros (in 2020 prices, i.e. adjusted for inflation) or rises very quickly. The 45 euros is therefore not a hard price ceiling, but a trigger threshold for more supply. In October 2026, the Council formally adopted a targeted amendment to the ETS2 market stability reserve. It is intended to dampen volatility and better absorb excessive price increases. It enters into force 20 days after its publication in the Official Journal.

Timeline and current status

Originally, the surrender obligation was due to begin in 2027. As part of the amendment of the European Climate Law with the 2040 target (net minus 90 percent compared with 1990), the EU postponed the full start by one year to 1 January 2028. The Council formally adopted this on 5 March 2026. The auctioning of ETS2 allowances is nevertheless still to begin in 2027 as planned. This way, Member States receive revenues even before the start, for example to relieve vulnerable households.

  • Since 1 January 2025: The regulated entities need an emissions permit with an approved monitoring plan. They report annually by 30 April on the previous year's emissions.

  • From 2026: The emissions reports must be verified by an accredited verifier.

  • 2027: The auctioning of allowances begins.

  • From 2028: Full surrender obligation. The allowances for a given year must be surrendered by 31 May of the following year, for the first time in 2029 for the emissions of 2028.

Distinction from ETS1 and the German fuel emissions trading system

In ETS1, operators of large installations surrender allowances for their direct emissions at the stack. This mainly concerns power generation, energy-intensive industry, parts of aviation and maritime transport. ETS2, by contrast, covers fuels already at the source of the supply chain. Grid electricity is not additionally burdened via ETS2, because the emissions from power generation are already covered in ETS1. The two systems have separate caps, separate allowances and their own prices.

Germany has already been pricing fuels for heat and transport since 2021 through the national emissions trading system under the Fuel Emissions Trading Act (BEHG). The fuels covered by ETS2 are to transfer into ETS2 when the European surrender obligation starts. Until then, the BEHG continues to apply. For 2026, a price corridor of 55 to 65 euros per tonne applies. Without a change, the national price in the transitional year 2027 would have been derived from the average price of the ETS1 auctions. On 15 October 2026, the Bundestag adopted an amendment to the BEHG under which the corridor of 55 to 65 euros is also to apply in 2027. The national price is then to transition into the European ETS2 price in 2028. For ETS2 itself, neither fixed prices nor a price corridor are provided for.

Revenues and the Social Climate Fund

Member States must use their ETS2 revenues for climate action and social measures and report on their use. Part of it flows into the Social Climate Fund. It supports vulnerable households and micro-enterprises affected by energy or mobility poverty. Support is provided, for example, for building renovation, clean heating and cooling technology, low-emission vehicles and active mobility. For a limited time, direct income support is also possible. The fund is financed from ETS2 auction revenues and 50 million allowances from ETS1. Together with 25 percent national co-financing, it is to mobilise at least 86.7 billion euros from 2026 to 2032. To draw on the funds, Member States submit Social Climate Plans.

The distributional question is therefore not automatically solved. Those most heavily burdened are households in poorly insulated buildings with oil or gas heating, commuters without alternatives to the car, and people with little money for investments. A well-known problem is the landlord-tenant dilemma: the owner decides on the heating system, but the tenant bears the heating costs. Whether the compensation works depends on national plans, tenancy law, funding and the availability of mobility options.

Significance for the power system and sector coupling

ETS2 does not price electricity directly. However, it changes the relative costs between fossil and electric solutions. When heating oil, natural gas, petrol and diesel become more expensive, heat pumps, electric vehicles and electric process heat become more worthwhile. This advances electrification and sector coupling. Electricity consumption may rise in the process, while total fossil energy use falls. This is not a sign of waste, since a heat pump delivers several times as much heat from one kilowatt hour of electricity.

Technically, this shift changes load profiles and the load on local grids. It also increases the need for flexibility, for example through controlled charging or heat storage. However, a CO₂ price does not decide whether grid connections, charging infrastructure or heat networks are available in time. Nor does it ensure that electricity tariffs reward grid-supportive behaviour. ETS2 can make investments more economically attractive. Implementation, however, depends on infrastructure, building standards, market rules, funding and skilled labour.

Common misconceptions

  • Not a tax: For end customers, ETS2 acts similarly to a levy. With a tax, however, the state sets the price, whereas emissions trading sets the quantity and the price forms on the market. The market stability reserve and the 45-euro threshold weaken this pure distinction in the start-up phase.

  • Not a personal carbon account: Citizens do not buy allowances. They only feel the system through prices, because suppliers pass their allowance costs on in full or in part.

  • Not a cure-all: A price signal does not replace infrastructure. Where alternatives are lacking, demand barely responds in the short term, and the burden increases.

  • Planning risk: If market participants expect policymakers to postpone further or to cap the price, the declining allowance path loses its steering effect. This applies particularly to long-lived investments in fossil heating systems or fleets.

Assessment

ETS2 ties fossil fuel use in buildings, road transport and small industry to a common European emissions cap. Used precisely, the term separates three levels: the trading system itself with cap, auctions and reserve, the resulting CO₂ price, and the technical and social prerequisites. It is these that ultimately decide whether the price signal actually leads to lower fossil energy consumption.

Sources

Related glossary entries

Edited by eCMS on 11.11.2026 19:47

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