What is behind the EU ETS II?

The European Emissions Trading System II (EU ETS II) is currently the subject of heated debate on the European stage. Together with accompanying measures, such as the Climate Social Fund and other instruments, the EU ETS II is intended to lead Europe into a climate-neutral future. This series of articles examines the fundamentals and background of the EU ETS II and addresses the issue of the use and distribution of revenues. It also summarises the reform proposals that have been put forward and evaluates their impact on individual households. This first article deals with the fundamental question of what lies behind the EU ETS II.

According to European Union (EU) legislation (Regulation (EU) 2021/1119), climate neutrality is to be achieved by 2050 at the latest. An interim target on this path is the reduction of net greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels [1]. This interim target is distributed across three areas:

1. Emissions covered by the European Emissions Trading System I (EU ETS I): Emissions from large parts of power generation, energy-intensive industries, aviation, and maritime transport must be reduced by 62% by 2030 compared to 2005 (Directive (EU) 2023/959) [2].
2. Land Use, Land Use Change, and Forestry (LULUCF): The sector must achieve a net removal of 310 million tonnes of CO₂-equivalent across the EU by 2030 (Regulation (EU) 2023/839) [3]. This can be achieved through carbon sinks such as forests or soils.
3. Emissions covered by the Effort Sharing Regulation (ESR): Emissions from transport (excluding aviation and maritime), buildings, agriculture (excluding LULUCF), waste management, and smaller industrial installations must be reduced by 40% by 2030 compared to 2005 across the EU (Regulation (EU) 2023/857). Each member state is assigned individual targets based on GDP per capita and cost-effectiveness, as shown in Figure 1. For Germany, the required reduction is 50%, which represents the highest target [4].

In addition to the 2030 target, annual reduction goals apply for the period leading up to that year [4]. According to the 2025 projection report, Germany is expected to exceed its ESR-related sector targets by 226 million tonnes of CO₂-equivalent between 2021 and 2030 if the current level of ambition in the transition remains unchanged. This shortfall is primarily driven by underperformance in the building and transport sectors [5].

As an incentive for emission reductions, Germany introduced a national CO₂ price in 2021 under the Fuel Emissions Trading Act (BEHG). This system applies a gradually increasing fixed price, for example €55 per tonne of CO₂ in 2025 [6]. Starting in 2027, this national instrument will be replaced by the European Emissions Trading System II (EU ETS II), which will include emissions from buildings, road transport, and small industries. The accounting framework of the EU ETS II is shown in Figure 2, structured according to CRF categories (CRF = Common Reporting Format) [7]. In 2019, emissions from buildings and road transport accounted for 88% of EU ETS II emissions across Europe, whereas in Germany their share was significantly lower at around 60% [8].

Fo the buildings and road transport sectors, EU ETS II sets a Europe-wide emission reduction target of 43% by 2030 compared to 2005 levels. The other sectors covered by the system are expected to achieve a 42% reduction over the same period [2]. Overall, emissions covered by EU ETS II account for approximately 60% of ESR-relevant emissions. One subsector that remains part of the ESR but is not included in the EU ETS II is, for example, waste management [7]. Despite the introduction of EU ETS II, the ESR targets remain in place for the entire scope of the ESR [9].

How the EU ETS II works

The EU ETS II is a cross-border market mechanism valid throughout the European Union [9], scheduled to launch in 2027. However, its start may be postponed to 2028 if the average prices for natural gas and crude oil in 2026 exceed the thresholds defined in Directive (EU) 2023/959, Article 30k [2]. On November 5, 2025, the Council of the European Union decided to postpone the start of the EU ETS II by one year to 2028 [24]. The European Parliament also agreed to this decision a week later, on November 13, 2025 [25]. The extent to which the following provisions are affected can only be assessed after the final amendment to Directive (EU) 2023/959 has been published. According to this, the EU ETS II has so far followed a cap-and-trade approach, combining a fixed upper limit (“cap”) on emissions with a tradable certificate system (“trade”). Specifically, the EU sets a cap on the total greenhouse gas emissions permitted within a given period and issues this amount in the form of emission allowances. This total volume decreases annually. The annual reduction factor is set at 5.1% in the first year, increasing to 5.38% from 2028 onward. If it becomes evident that this higher reduction rate is insufficient to meet the 2030 emission reduction targets, it may be adjusted accordingly [2], [9].

According to Directive (EU) 2023/959, the total quantity of allowances will be determined for the first time in 2027, following a reduction trajectory that begins with the emissions cap for 2024. This trajectory is calculated based on reference emissions for the covered sectors in 2005 and the period 2016 to 2018, as defined in Article 4(3) of Regulation (EU) 2028/842 [2]. At the time of its introduction, the volume of allowances issued under EU ETS II is intended to ensure a stable price level of €2020 45 per tonne of CO₂. Due to the large number of actors burning fossil fuels in EU ETS II-relevant subsectors, the acquisition of allowances is carried out by companies that supply fuels for combustion processes in these sectors [9]. This includes approximately 11,400 companies across the EU, specifically around 7,000 tax warehouses for liquid fuels, 1,400 regional and local gas suppliers, and roughly 3,000 coal suppliers [9], [10].

The allowances under EU ETS II will be sold exclusively via auctions. At the start of the auctioning process in 2027, the volume of allowances will be 30% above the quantity calculated based on the annual reduction factors. The additional allowances will be brought forward from later years. This measure is intended to prevent sharp price spikes and is referred to as the “frontloading” mechanism. The additional volume will be offset between 2029 and 2031 through a corresponding reduction in the number of allowances issued. The allocation of allowances is carried out by the EU Member States [2], [9].

To manage both the volume and price of allowances, a Market Stability Reserve (MSR) will be introduced [2], [11]. Initially, the MSR will be equipped with 600 million allowances [9]. The MSR operates through two mechanisms. The first is volume-based and regulates the number of allowances in circulation. If the number of allowances in circulation exceeds 440 million, 100 million allowances will be withdrawn within 12 months. If the number falls below 210 million, 100 million allowances will be released from the MSR. If the number drops below 100 million, all allowances in the MSR will be released [11]. The second mechanism is price-based and addresses extreme price increases. If the average price over the past three months is more than twice the average of the preceding six months, 50 million allowances will be released from the MSR. If the price is three times higher, 150 million allowances will be released. Additionally, as previously mentioned, the target price for allowances is set at €2020 45 per tonne of CO₂ until the end of 2029. To secure this price level as far as possible, up to 20 million allowances may be released from the MSR [11].

Transition of Germany’s national emissions trading scheme to the EU ETS II

As previously mentioned, EU ETS II covers a subset of the sectors currently regulated under the national emissions trading system introduced in 2021. This overlap necessitates a transition from the national system to EU ETS II. Until the end of 2025, the national emissions trading scheme operates under a fixed-price model, with the price set at €55 per tonne of CO₂ in 2025. Starting in 2026, allowances will be auctioned within a price corridor ranging from €55 to €65 per tonne of CO₂. Possible configurations of these price corridors are outlined in [12]. The implementation is carried out by the European Energy Exchange (EEX). From July 2026—potentially earlier—until October 2026, auctions will be held via the EEX. From November to early December 2026, allowances can be purchased in unlimited quantities at a price of €68 per tonne of CO₂. Subsequently, until August 2027, allowances will be available at €70 per tonne. However, purchases at this latter price are limited to 10% of the quantity held in the compliance account as of December 31 of the previous year [13]. From 2027 onward, the national emissions trading system will be partially integrated into EU ETS II. If the launch of EU ETS II is postponed to 2028, the national system will continue to operate in 2027 under a fixed-price model. In this case, prices would be determined quarterly and based on the volume-weighted average price of EU ETS I auctions from the respective penultimate quarter. Subsectors currently covered by the national emissions trading system but not included in EU ETS II—such as the waste management sector—will continue to be priced nationally. Initially, these prices will be aligned with EU ETS I, but from July 2027 onward, they may be adjusted to reflect the price levels of EU ETS II from the penultimate quarter [6], [12].

Price scenarios

Since EU ETS II follows a cap-and-trade approach, certificate prices are determined during the auction process itself. Nevertheless, various studies—based on differing modelling approaches—have projected price scenarios for future allowance prices. In 2021, the European Commission provided reference values for 2030 ranging from €48 to €80 per tonne of CO₂ [14].

Modelling by Kalkuhl et al. yielded significantly higher marginal abatement costs for 2030, ranging from €200 to €300 per tonne of CO₂ [15]. These scenarios, calculated using the REMIND-EU model, represent optimal abatement costs for achieving climate neutrality in Europe by 2050. Other climate policy instruments within the sectors covered by EU ETS II were not explicitly modelled [15]. Based on simulations using the general equilibrium model DART, Rickels et al. proposed a CO₂ price of €300 per tonne for 2030, aligning with the upper range suggested by Kalkuhl et al. [16]. To assess the influence of individual models, Abrell et al. conducted simulations using four different models (REMIND-EU, TIMES-PanEU, NEWAGE, ZEW CGE), each considering CO₂ pricing as the sole climate policy instrument. The resulting price range for 2030 spans from €175 to €360 per tonne of CO₂ (2021 value) [17]. The impact of implementing additional climate measures in parallel was analyzed by Günther et al., using the PRIMES energy system model [18]. In three scenarios for 2030, which included energy efficiency requirements, CO₂ prices ranged from €71 to €261 per tonne (2022 value), with prices decreasing as policy stringency increased. For 2045, certificate prices were projected between €404 and €464 per tonne of CO₂ [18]. The EWI estimated CO₂ prices based on an equilibrium price path, arriving at approximately €150 per tonne for 2030 [8]. These calculations included marginal investment abatement costs for EU ETS II-relevant subsectors, excluding the industrial and energy sectors affected by the transition. None of the considered price paths—some reaching up to €250 per tonne—were sufficient to meet the EU-wide reduction target for 2030. The achievement of individual ESR  varied significantly across Member States. Germany, for example, failed to meet its ESR target of -50% under any of the modeled price paths (compare to Figure 1)  [8]. In addition to academic studies, consulting firms also produce price forecasts for future CO₂ certificate prices under EU ETS II, though their methodologies are often not disclosed [11]. Bloomberg projects a price of €149 per tonne for 2030 [19], while Clear Blue Markets estimates €105 per tonne [20]. Vertis differentiates between three scenarios: a baseline scenario with a price of €222.2 per tonne, a low-emission scenario at €111.7, and a high-emission scenario at €259.4 per tonne of CO₂ [21].

Figure 3 summarizes the projected price levels for the year 2030 as presented in the various studies discussed above. The studies are largely arranged by publication date. A notable trend is that the maximum prices projected in more recent studies tend to be lower. One key factor contributing to this price reduction is the implementation of additional climate policy instruments within the sectors covered by EU ETS II, namely buildings, road transport and small industrie

In addition to the calculated price scenarios, initial auctions for EU ETS II emission allowances have been conducted since May 6, 2025, on the ICE exchange. According to data available at the end of September 2025, the prices of products offered under EUA 2 futures ranged between €70 and €100 per tonne of CO₂ [22]. Since July 7, 2025, EU ETS II futures contracts have also been listed on the EEX [23].
Despite the initial trading of certificates, EU ETS II continues to face resistance, and reform proposals are being published on an ongoing basis. These proposals will be discussed in Part 3 of this article series.

Literature

[1] EU Parlament. VERORDNUNG (EU) 2021/1119 DES EUROPÄISCHEN PARLAMENTS UND DES RATES vom 30.Juni 2021 zur Schaffung des Rahmens für die Verwirklichung der Klimaneutralität und zur Änderung der Verordnungen (EG) Nr. 401/2009 und (EU) 2018/1999 („Europäisches Klimagesetz“): 2021/1119, 2021.

[2] EU Parlament. RICHTLINIE (EU) 2023/959 DES EUROPÄISCHEN PARLAMENTS UND DES RATES vom 10.Mai 2023 zur Änderung der Richtlinie 2003/87/EG über ein System für den Handel mit Treibhausgasemissionszertifikaten in der Union und des Beschlusses (EU) 2015/1814 über die Einrichtung und Anwendung einer Marktstabilitätsreserve für das System für den Handel mit Treibhausgasemissionszertifikaten in der Union: 2023/959, 2023.

[3] EU Parlament. VERORDNUNG (EU) 2023/839 DES EUROPÄISCHEN PARALMENTS UND DES RATES vom 19.April 2023 zur Änderung der Verordnung (EU) 2018/841 hinsichtlich des Geltungsbereichs, der Vereinfachung der Berichterstattungs- und Compliance-Vorschriften und der Festlegung der Zielvorgaben der Mitgliedstaaten für 2030 sowie zur Änderung der Verordnung (EU) 2018/1999 hinsichtlich der Verbesserung der Überwachung, der Berichterstattung, der Verfolgung der Fortschritte und der Überprüfung: 2023/839, 2023.

[4] EU Parlament. VERORDNUNG (EU) 2023/857 DES EUROPÄISCHEN PARALMENTS UND DES RATES vom 19.April 2023 zur Änderung der Verordnung (EU) 2018/842 zur Festlegung verbindlicher nationaler Jahresziele für die Reduzierung der Treibhausgasemissionen im Zeitraum 2021 bis 2030 als Beitrag zu Klimaschutzmaßnahmen zwecks Erfüllung der Verpflichtungen aus dem Übereinkommen von Paris sowie zur Änderung der Verordnung (EU) 2018/1999: 2023/857, 2023.

[5] Umweltbundesamt. Treibhausgas-Projektionen 2025 – Ergebnisse kompakt, Dessau-Roßlau, 2025.

[6] Bundestag. Gesetz über einen nationalen Zertifikatehandel für Brennstoffemissionen (Brennstoffemissionshandelsgesetz – BEHG). Ausfertigungsdatum: 12.12.2019. Stand: 27.Februar 2025.

[7] Agora Energiewende und Agora Verkehrswende. Der CO2-Preis für Gebäude und Verkehr. Ein Konzept für den Übergang vom nationalen zum EU-Emissionshandel, 2023.

[8] EWI. Auswirkungen und Preispfade des EU ETS2, 2025.

[9] Adolf und Linnemann. Der Europäische Emissionshandel. Ein Klimainstrument schreibt Industriegeschichte – Überblick, Zusammenhänge & Ausblick, Springer Vieweg, 2025.

[10] Umweltbundesamt. Einführung eines Emissionshandelssystems für Gebäude, Straßenverkehr und zusätzliche Sektoren in der EU, Dessau-Roßlau, 2023.

[11] EPICO KlimaInnovation and Frontier Economics, The EU ETS 2 at the Crossroads. Evaluating Reform Options, Policy Report, Berlin, 2025.

[12] Umweltbundesamt. Umsetzung des Preiskorridors im nationalen Emissionshandel (nEHS) im Jahr 2026. Teilbericht, Dessau Roßlau, 2025.

[13] EEX. Nationales Emissionshandelssystem (Deutschland) – nEHS. 2025. https://www.eex.com/de/maerkte/umweltprodukte/nehs. Accessed 19 Oct 2025.

[14] European Commission. COMMISSION STAFF WORKING DOCUMENT. IMPACT ASSESSMENT REPORT. Accompanying the document DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive 2003/87/EC establishing a system for greenhouse gas emission allowance trading within the Union, Decision (EU) 2015/1814 concerning the establishment and operation of a market stability reserve for the Union greenhouse gas emission trading scheme and Regulation (EU) 2015/757, 2021.

[15] Kalkuhl et al. CO₂-Bepreisung zur Erreichung der Klimaneutralität im Verkehrs- und Gebäudesektor. Investitionsanreize und Verteilungswirkungen. Mercator Research Institute on Global Commons and Climate Change (MCC) gGmbH, Berlin, 2023.

[16] Rickels et al. Potential efficiency gains from the introduction of an emissions trading system for the buildings and road transport sectors in the European Union, Kiel Working Paper, No. 2249, Kiel, Institute for the World Economy (IfW Kiel), Kiel, 2023.

[17] Abrell et al. Optimal allocation of the EU carbon budget. A multi-model assessment. In Energy Strategy Reviews, 2024.

[18] Günther et al. Carbon prices on the rise? Shedding light on the emerging second EU Emissions Trading System (EU ETS 2). In Climate Policy, 2025.

[19] BloombergNEF. Europe’s New Emissions Trading System Expected to Have World’s Highest Carbon Price in 2030 at €149, BloombergNEF Forecast Reveals. https://about.bnef.com/insights/commodities/europes-new-emissions-trading-system-expected-to-have-worlds-highest-carbon-price-in-2030-at-e149-bloombergnef-forecast-reveals/. Accessed 19 Oct 2025.

[20] Clear Blue Markets. Montel News Covers ClearBlue’s Special Report on EU ETS 2. https://www.clearbluemarkets.com/news/montel-news-covers-clearblues-special-report-on-eu-ets-2. Accessed 19 Oct 2025.

[21] Homaio. What is the EU ETS 2 Price Forecast for 2030?. https://www.homaio.com/post/what-is-the-eu-ets-2-price-forecast-for-2030. Accessed 19 Oct 2025.

[22] ICE. ICE Endex. EUA 2 Futures. https://www.ice.com/products/83048353/EUA-2-Futures/data?marketId=8322696&span=1. Accessed 19 Oct 2025.

[23] EEX. EEX Press Release – EEX to list EU ETS2 Futures in July. https://www.eex.com/en/newsroom/detail?tx_news_pi1%5Baction%5D=detail&tx_news_pi1%5Bcontroller%5D=News&tx_news_pi1%5Bnews%5D=13892&cHash=8642af028b9459e731948ed6b0e88227. Accessed 19 Oct 2025.

[24] European Council, Council of the European Union. Environment Council, 4-5 November 2025 – Main results. https://www.consilium.europa.eu/en/meetings/env/2025/11/04-05/. Accessed 16 Nov 2025.

[25] European Parliament. Press release 13-11-2025. EU 2040 climate target: MEPs want 90% emissions reduction in EU climate law. https://www.europarl.europa.eu/pdfs/news/expert/2025/11/press_release/20251110IPR31334/20251110IPR31334_en.pdf. Accessed 16 Nov 2025.