Overview

Description

Operational since 2005, the European Union Emissions Trading System (EU ETS) is the oldest cap-and-trade system in force. It is a cornerstone instrument of the EU’s policy framework to combat climate change under the “European Green Deal” and reduce GHG emissions cost-effectively. The EU ETS is currently in its fourth trading phase (2021 to 2030). Every year, covered entities must surrender allowances for their emissions under the EU ETS. Auctioning is the main method of distributing allowances, with free allocation, based on benchmarks, used to address carbon leakage.

Recent Developments

The definitive phase of EU CBAM commenced in January 2026. The first payments from CBAM are due by September 30,2027. In July 2026 the European Commission will discuss potential reforms to the EU ETS, including potential changes to the Market Stability Reserve and measures to preserve competitiveness.

Coverage

The EU ETS applies to direct (scope 1) emissions from activities in the power sector, manufacturing, industry, and intra-EU aviation (including flights from the EEA to the United Kingdom). The EU ETS covers CO2 emissions, and emissions of other gases from certain activities. Each sector or activity has a specific threshold for participation. Recent reforms to the scheme expanded its scope to maritime transport, and introduced a new, separate emissions trading system for buildings, road transport and additional sectors (EU ETS 2)

Pricing and Allocation Approaches

Free allocation (Intensity-based), Auctioning

Compliance Approaches

Annual

Relation to Other Compliance CPIs

The EU ETS has been linked with the Switzerland ETS since 2020. Several countries that participate in the EU ETS also have domestic mechanisms.

Covered Sectors

Electricity and heat

Industry

Mining and extractives

Transport

Aviation