As part of the revision of Directive 2003/87/EC, the founding law of the European ETS, a new Emissions Trading System called ETS2 has been created, separate and parallel to the current one, which will cover CO2 emissions from fuel combustion in the construction and road transport sectors and in the small-scale industry not covered by the current ETS.
ETS2 will become fully operational in 2027 and will cover the upstream emissions of the sectors to which it applies. Therefore, rather than end consumers, fuel suppliers will bear obligations to monitor and report their emissions. The Commission will set the cap for the ETS2 to reduce emissions by 42 percent by 2030 compared to 2005 levels. All ETS2 allowances will be auctioned, with member states having submitted Social Climate Plans (SCPs) in 2025. The first disbursements from the Social Climate Fund are also expected to begin in 2026, supporting vulnerable households and micro-enterprises. Member states must use ETS2 proceeds for environmental investments and social measures, and maintain transparency in using the funds.
Monitoring and reporting obligations for ETS2 began in January 2025 and are now in effect. As in the current ETS, ETS2 will operate by keeping a Market Stability Reserve (MSR) active, which will be used to artificially balance the supply of allowances in the market and control price stability by taking allowances if the supply is excessive and putting allowances in if there is insufficient or excessive supply of allowances in the market. This new system has a price stability mechanism which allows additional allowances to be released if prices exceed €45 per tonne (adjusted for inflation, currently around €55/t in 2025) during the first three years of ETS2. During the first three years of ETS2 operation, if allowances exceed 45 Euros, additional allowances can be issued from the MSR to meet an excessive price increase, specifically 20 million additional allowances. If gas or oil prices prove to be exceptionally high in 2026, the year before ETS2 comes into effect, the system could be postponed to 2028 to provide more flexibility.
The first annual emissions reports under ETS2 were due by April 30, 2025. From 2026 onward, all reported data must be verified by an accredited body. From 2028, after verifying and reporting annual emissions, administrative entities must surrender the equivalent number of allowances by May 31st of the same year. Since 2024, emissions from municipal waste incineration plants must be monitored and reported. While not yet included in ETS2, their future inclusion is under active consideration for 2028 or 2030.
In this context, it is necessary to add that the European Union is now exploring the possibility of creating a new ETS for the agricultural sector as well in an attempt to manage emissions from a critical sector governed by a stringent bureaucracy, which is making many protests among farmers. Agriculture was largely excluded from the European Commission’s February 6th recommendation for a 2040 climate target to reduce emissions by 90 percent, yet according to 2023 figures, it is responsible for about 13 percent of European emissions. There are several positions in the Commission:
At the moment, however, applying the “Polluter Pays” principle might offer farmers a viable and perhaps more accepted policy approach to guide the transition to a sustainable agrifood system, with farming practices that reduce emissions and protect soils. Now, these ideas are still under discussion, but applying ETS2 will have a significant impact on the entire European agriculture sector and many production chains.