EU Emissions Trading System

The EU Emissions Trading System was established by Directive 2003/87/EC and was substantially tightened by Directive (EU) 2023/959 as part of the Fit for 55 package. It works on the cap-and-trade principle: the EU sets an absolute ceiling on the emissions of the installations it covers, issues allowances up to that ceiling (mostly through auctions, with a shrinking share still allocated for free) and allows those allowances to be traded. Whoever can abate more cheaply than the market price sells; whoever would have to abate at a higher cost buys instead. The system covers power and heat generation, energy-intensive industries such as steel, cement, chemicals, glass, paper and aluminium, intra-European aviation and, since 2024, maritime transport. The cap declines every year through the linear reduction factor – set at 4.3 per cent up to 2027 and 4.4 per cent from 2028 after the 2023 reform – and is intended to cut emissions in the covered sectors by 62 per cent by 2030 compared with 2005. Free allocation to sectors covered by the CBAM carbon border adjustment mechanism is phased out entirely between 2026 and 2034. In Germany the directive is implemented by the Greenhouse Gas Emissions Trading Act (TEHG), with the German Emissions Trading Authority (DEHSt) at the Federal Environment Agency as the competent authority. Operators follow a fixed compliance cycle: an approved monitoring plan, a verified emissions report by 31 March, and surrender of allowances for the previous year by 30 September.

Chapter IVa of the ETS Directive created a second, legally separate trading system: ETS 2, covering fuels burned in buildings, road transport and smaller industrial and commercial installations that fall outside ETS 1. Unlike ETS 1, the obligation does not sit with the combustion installation but upstream with the entity that releases the fuel for consumption – fuel wholesalers and suppliers of heating oil, natural gas, petrol and diesel. Those regulated entities have needed a greenhouse gas permit since 2025 and must monitor and report the volumes they place on the market. Trading itself was originally scheduled to begin in 2027, and the directive additionally contains a mechanism allowing a one-year postponement in the event of exceptionally high energy prices. During the negotiations on the EU 2040 climate target and the simplification (Omnibus) debate, a delay of the start to 2028 was agreed politically and carried into law – so the timetable remains in motion and should be checked against the current legal text before any planning decision is taken. A price stability mechanism releases additional allowances if a price threshold is exceeded, and the Social Climate Fund is designed to cushion social hardship. For most companies ETS 2 creates no direct surrender obligation, but it does add a noticeable cost to heating oil, gas, petrol and diesel. In Germany, ETS 2 replaces the national fuel emissions trading scheme under the Fuel Emissions Trading Act (BEHG), which so far operated with fixed prices and a price corridor.

For greenhouse gas accounting and sustainability reporting, emissions trading matters from two directions. First, verified ETS emissions are the most robust data source available: they are collected under an officially approved methodology, assured by an accredited verifier, and can be transferred directly into a Scope 1 inventory under the GHG Protocol. The system boundaries differ, however – the ETS accounts installation by installation, whereas a corporate inventory is organisational. Sites without an ETS obligation, refrigerant losses and the vehicle fleet therefore have to be added. Second, the reporting standards explicitly ask for the link to emissions trading: ESRS E1-6 requires disclosure of the share of Scope 1 emissions arising from regulated emission trading schemes, ESRS E1-8 the disclosure of internal carbon prices, and ESRS E1-9 the anticipated financial effects of physical and transition climate risks. Rising allowance prices, the phase-out of free allocation and the ETS 2 surcharge on fuels are thus a transition risk that belongs in the transition plan under ESRS E1-1 and in the double materiality assessment. In practice it pays to keep ETS data, energy data management and the greenhouse gas inventory in one shared data model rather than maintaining them separately.