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“Making polluters pay” through the EU ETS

Published on
October 29, 2024
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Policy
“Making polluters pay” through the EU ETS

Europe’s green transition is being fueled by the EU Emissions Trading System (ETS), which compels companies to pay for the carbon they emit. By requiring polluters to pay for their carbon impact, the EU ETS aims to rapidly accelerate industrial decarbonization.

With the price of carbon rising annually, staying dependent on fossil fuels is increasingly costly for EU companies — making it urgent for businesses to align with decarbonization goals or face expensive penalties.

What is the EU ETS?

The European Union Emissions Trading System (EU ETS) is a carbon emissions trading scheme intended to lower greenhouse gas (GHG) emissions in the EU by requiring companies to pay for their carbon emissions.

The EU ETS covers emissions from electricity and heat generation as well as the aviation and industrial manufacturing sectors, which account for around 40% of EU GHG emissions. Since 2024, the EU ETS has also covered emissions from the maritime sector. 

Launched in 2005, the EU ETS was the world’s first carbon market and remains one of the largest worldwide. It has undergone several revisions to align with evolving EU climate targets. Recent EU ETS reforms have driven up the price of carbon, giving European companies more incentives to speed up decarbonization. Currently, one tonne of carbon dioxide (CO2) costs around €70, and the price is expected to reach above €150/tonne by 2030.

Operating in trading phases, the EU ETS is now in its fourth trading phase (2021-2030).  Revenue from EU ETS is funneled to national budgets, and EU member states must invest it in areas such as energy efficiency improvements, renewable energy and low-carbon technologies. 

Which countries are affected by EU ETS?

The EU ETS operates in all 27 EU member states, as well as Norway, Liechtenstein and Iceland. While Switzerland has a separate Swiss ETS, it has been linked to the EU ETS since 2020.

Is the UK part of the EU ETS?

As the UK left the EU in 2020, the UK’s Emissions Trading Scheme replaced its participation in the EU ETS. However, under the Ireland/Northern Ireland Protocol, electricity generators in Northern Ireland remain within the EU ETS remit.

How must companies adhere to the EU ETS?

Based on a ‘cap and trade’ system, the ‘cap’ of the EU ETS refers to the limit set on the total amount of GHG emissions that can be released by operators and installations — which is reduced every year, in line with EU climate targets

Companies buy EU Allowances (EUAs), whereby one EUA permits the holder to emit one tonne of CO2 equivalent (CO2 eq).  EUAs may be traded between companies, and if an operator or installation successfully reduces emissions, a company can sell spare EUAs or keep them to use in the future. 

Under EU ETS, companies must measure and report their GHG emissions on a yearly basis, and surrender enough allowances to account for their annual emissions. If this requirement is not met, fines will be imposed. An initial fine of €100/tonne was set in 2012 — however, this penalty has increased annually in line with the European index of consumer prices.

With the EU ETS driving the world towards markets where the cost of carbon is priced into products, it is increasingly important for companies to understand their supply chain carbon risk, or risk costs being passed onto you — especially in high-emitting and hard-to-decarbonize sectors. 

Don’t let carbon costs surprise you. With CarbonChain’s carbon accounting software, you can accurately measure your supply chain's emissions and mitigate the risk of rising carbon prices. Calculate your Product Carbon Footprints (PCFs) now to understand your carbon hotspots and take control of your emissions strategy.

What is not covered by EU ETS?

Flights coming from outside the EU or to airports outside the union are not included in the EU ETS.

Free emissions allowances are also given in certain circumstances to help companies compete with businesses outside of the EU with less stringent carbon pricing legislation, e.g. industrial installations perceived to be at risk of carbon leakage or to aircraft operators verified by an efficiency benchmark

How does EU ETS relate to other carbon pricing mechanisms?

The EU's Carbon Border Adjustment Mechanism (CBAM) complements the EU ETS, as it focuses on goods produced outside of the EU which are then imported inside the union. CBAM non-compliance will also result in fines — during the CBAM transition period (until 1 January 2026), importers will face penalties for under-declaring or not declaring emissions. These have not yet been determined, but will be between €10-€50/tonne CO2 eq.

However, unlike the EU ETS’ cap-and-trade approach, the CBAM will not set caps on emissions or imports — and carbon permit trading is not permitted.

If you’re looking to decarbonize your supply chain, our trusted carbon accounting software makes CBAM reporting and supplier engagement simple. Measure CBAM emissions with confidence and report them with ease thanks to CarbonChain’s CBAM Reporting Software.

How does EU ETS impact shipping?

In 2024, the EU ETS was expanded to include emissions from maritime transport, as this sector is a substantial and growing source of greenhouse gas emissions in Europe. This change aligns with recent developments from the International Maritime Organisation (IMO), which adopted a new global strategy aimed at making the shipping sector climate-neutral by 2050.

All large ships (5,000 tonnes and above) entering EU ports — regardless of their country of registration — will be impacted. EU ETS will cover 50% of emissions from trips starting or ending outside of the EU and 100% of emissions that occur between two EU ports, as well as from ships within EU ports.

Estimate your maritime ETS exposure in minutes with CarbonChain’s free calculator.

How does the EU ETS work?

The EU ETS is a European cap-and-trade system aiming to reduce GHG emissions by setting a limit on carbon emissions released by certain sectors of the economy. Its aim is to lower emissions in the EU, while generating revenue from polluters to finance a green industrial transition.

Since 2013, the EU ETS has raised over €175 billion. The EU ETS has been estimated to have lowered emissions from European power and industry plants by approximately 47% compared to 2005 levels. 

Each year, a limited number of EUAs are made available for market trading, and these are reduced every year in order for the EU to meet its targets to reduce GHG emissions 55% by 2030 and to become a carbon-neutral continent by 2050. Each EUA gives companies a right to emit GHG emissions equivalent to the global warming potential of one tonne of CO2 eq.

What are the penalties for not adhering to EU ETS?

To align with EU ETS, companies must measure and report on their GHG emissions annually and ensure enough EUAs have been purchased to account for their yearly emissions. If this process is not followed, companies will be penalized — initially, a fine of €100/tonne was set in 2012 and this sum has increased every year to correspond with the harmonized index of consumer prices in Europe.

How does the EU ETS relate to EU CBAM?

While the EU ETS focuses on carbon emissions in the European Union, the EU CBAM applies to GHG emissions from goods produced outside of the EU. The CBAM aims to address the issue of carbon leakage, i.e. when companies move production of goods to countries with less stringent emissions policies, to avoid the costs associated with carbon pricing. Unlike the EU ETS, the CBAM will not set caps on imports or emissions, and there will be no trading of carbon permits.

Importers should already prepare their supply chain carbon accounting before the permanent CBAM system begins on 1 January 2026, and keep pace with the phase out of free EU ETS allowances. Manage the upcoming CBAM certificate costs and identify lower-carbon suppliers with CarbonChain’s support.

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