Log in
Search
EU emissions trading system (EU ETS)
The EU emissions trading system (EU ETS) is one of the EU’s key policy tools for reducing greenhouse gas emissions in the single market. It applies to all EU countries plus Iceland, Liechtenstein and Norway and until now covered energy intensive installations (power stations & industrial plants) and airlines operating between these countries. In terms of emissions of CO2, the system already covered the following sectors:
- power and heat generation;
- energy-intensive industry sectors including oil refineries, steel works and production of iron, aluminium, metals, cement, lime, glass, ceramics, pulp, paper, cardboard, acids and bulk organic chemicals, and from now on with the inclusion of hydrogen producers above a 5 tonne/day threshold, and
- commercial aviation.
Under the Fit for 55 regulatory package, the ETS has been revised to accommodate the EU’s ambition towards decarbonisation. With the revision, the list of covered sectors is extended to the maritime sector, with a gradual phase-in for large vessels (above 5000 gross tonnage) and pending a review, later for smaller vessels too (between 400-5000 gross tonnage). In addition, a separate ETS is set up for buildings and road transport (ETS II), originally set to start in 2027, but delayed to 2028 in the EU Climate Law revision in 2025.
The ETS is a cap-and-trade system, where a cap is set on the total amount of CO2 that can be emitted by installations covered by the ETS. Within the cap, companies receive for free or buy emission allowances which they can trade with one another as needed. The cap is reduced over time, following a linear reduction factor (LRF). The revised ETS means that in expanding the ETS’s previous ambition of 43% emission reduction until 2030 (compared to 2005 levels) and raising the LRF from 2.2% to 4.4%, the revised ETS will aim to achieve a 62% reduction by 2030.
The ETS drives decarbonisation in sectors like industry, maritime transport, and road mobility. It supports clean hydrogen development and funds the Innovation Fund, which is crucial for Europe’s hydrogen industry.
On top of the extension of the ETS to more applications and the raised ambition, the Carbon Border Adjustment Mechanism (CBAM) introduced a carbon pricing system parallel to the ETS for imported products. The scheme, initially covering a limited set of sectors (including hydrogen), is necessary for the progressive phasing out of free allowances for those sectors. (See separate section covering the CBAM).
What's in it for hydrogen?
The EU ETS includes many GHG-emitting sectors where hydrogen can be a cost-effective clean energy alternative. With upcoming system revisions, fewer allowances will increase prices and drive decarbonisation. The revised ETS now covers all hydrogen production over 5 tonnes per day, including electrolysis, making renewable and low-carbon hydrogen facilities eligible for free allowances.
The allocation of free allowances is based on sector specific benchmarks, which are updated regularly. The Commission, working together with an Expert Group is currently finishing the readjustment of these benchmarks (by the first months of 2026) and adapt technical criteria to enable clean hydrogen production facilities to get rewarded for their decarbonisation efforts.
The revised ETS Directive set up another, distinct emissions trading system (coined ‘ETS II’), which covers emissions of the road transport sector, together with those of buildings. A new self-standing cap-and-trade scheme is designed to avoid price spikes through emergency mechanisms.
The ETS II is aimed to place obligations on the fuel suppliers, not on the final consumers of the fuels. Surrendering of the allowances will come into effect in 2028, with monitoring, verification and reporting obligations having started in 2025. To alleviate pressure on certain regions caused by the introduction of the ETS II scheme, an updated Social Climate Fund of €65 billion was set up. In addition, a top-up mechanism of 80 million allowances/year can be triggered if prices exceed €45/tCO2. Nevertheless, slow implementation in the vast majority of Member States is currently jeopardising the effectiveness of the scheme.
The inclusion of the maritime sector under the ETS will also bring about substantial changes in the industry. Since 2025, 70% of intra-EU emissions of 5000+ tonne vessels are considered, which will rise to 100% from 2026, with 50% of EU-to-non-EU routes. In addition, non-CO2 emissions (methane and nitrous oxide) will also come under the ETS scope in 2026 in these sectors. The Commission will in 2026 evaluate the inclusion of smaller, 400-5000 tonne vessels under the ETS’s allowance surrendering scheme. This ambitious inclusion of the maritime sector under the ETS will give a substantial incentive to shipping companies to invest in alternative fuels, such as hydrogen or ammonia.
Intra-EU flights have been included in the ETS since 2012. Aviation under the ETS is governed by a different type of emission allowance than that of the rest of ETS-covered sectors, using EU Aviation Allowances (EUAA). As part of the revision of the EU ETS Directive regarding aviation, there has been a consolidation of the total quantity of aviation allowances at current levels and application of an LRF; increased auctioning of allowances; application of the CORSIA system to extra-European flights and measures to ensure equal treatment of airlines.
Links to Legislation and additional information:
Directive (EU) 2023/959 of the European Parliament and of the Council of 10 May 2023 amending Directive 2003/87/EC establishing a system for greenhouse gas emission allowance trading within the Union and Decision (EU) 015/1814 concerning the establishment and operation of a market stability reserve for the Union greenhouse gas emission trading system
