Most companies that ask us about the EU ETS are not covered by it. They want to know why their energy contract mentions CO2 costs, whether their flights and freight are getting more expensive, and whether they can use the ETS instead of voluntary carbon credits. All three have clear answers, and none requires you to become an ETS expert.
The EU Emissions Trading System (EU ETS) is the EU’s carbon market: a falling cap on the emissions of power plants, heavy industry, aviation and shipping, with one tradable allowance required for every tonne of CO2 equivalent emitted. It covers about a third of EU greenhouse gas emissions and puts a price on them that runs through the whole economy. This article explains how it works, who it covers, what ETS2 and CBAM add, what the EU proposed in July 2026, and what it means for a company outside it.
How the EU ETS works
The EU ETS is a cap-and-trade system, running since 2005 and now in its fourth phase (2021-2030).
A cap. The EU sets the total number of allowances (EUAs) each year. The cap falls every year by a fixed percentage, the linear reduction factor: 4.3% a year for 2024-2027 and 4.4% from 2028. For the covered sectors, it adds up to a 62% reduction by 2030 compared with 2005 (ICAP).
Allocation. Most allowances are auctioned. Industries at risk of moving production abroad receive part of theirs free, a share that is being phased out.
Surrender. Each year, covered companies report verified emissions and surrender one allowance per tonne. Missing allowances lead to fines and still have to be surrendered.
Trade. Companies that emit less than their allowances can sell the surplus; those that emit more buy. That trading sets the price.
Stability. A Market Stability Reserve takes allowances off the market when there is a large surplus and releases them when supply is tight.
Because the cap falls each year, allowances become scarcer. In September 2026, allowances traded in the mid-€80s per tonne. For current prices and how they compare with voluntary credits, see carbon credit prices in 2026.
Who the EU ETS covers
Sector | What is covered | Notes |
|---|---|---|
Power and heat | Combustion installations above 20 MW thermal input | largest share of covered emissions |
Energy-intensive industry | Steel, cement, lime, glass, ceramics, paper, chemicals, refineries, aluminium, fertilisers | part of allowances free, phasing out alongside CBAM |
Aviation | Flights within the EEA and to Switzerland and the UK | no free allocation from 2026 |
Maritime | Ships of 5,000 gross tonnage and above calling at EU ports | phased in from 2024; 100% of 2026 emissions; methane and nitrous oxide added from 2026 |
In 2024 that meant 8,704 stationary installations, 393 aircraft operators and 3,313 shipping companies, covering about a third of EU greenhouse gas emissions (ICAP). In the Netherlands, the Dutch Emissions Authority (NEa) runs the system.
What the EU ETS means for companies outside it
This is the question most companies actually have. If you run offices, retail, services or light manufacturing, you are almost certainly not covered. You still pay the carbon price, through four channels:
Electricity and heat. Generators pass their allowance costs into wholesale power prices. That cost sits in your energy bill whether or not it is shown separately.
Business travel. Airlines surrender allowances for flights within Europe and pass the cost on in fares. Flights outside Europe fall mostly under CORSIA instead (buying CORSIA credits).
Freight and shipping. Since 2024, shipping companies pay for a growing share of their emissions, now all of them, and surcharge their customers.
Materials. Steel, cement, aluminium, chemicals and paper carry the carbon cost of their production, increasingly so as free allocation is phased out.
For a company planning its climate budget, this has two consequences. First, part of your scope 2 and scope 3 emissions already carries a carbon price, which is one reason reductions in energy and travel often pay back faster than expected. Second, these costs rise as the cap tightens, so they belong in an internal carbon price or budget scenario.
Tip from Bernard de Wit, Founder of Regreener: “Ask your energy supplier, travel agency and freight forwarders what carbon cost they pass on today and what they expect for 2028. Most can answer. It gives you a carbon price you already pay, which is the best argument for reduction projects internally, and it shows which suppliers will get more expensive first.”
ETS2: fuels for buildings and road transport from 2028
A second, separate system, ETS2, puts a carbon price on fuels used in buildings, road transport and some smaller industry. It does not cover end users directly. The obligation sits with fuel suppliers, who have been monitoring and reporting emissions since 2025 and will pass the cost on in the price of petrol, diesel, heating oil and gas.
ETS2 was due to start in 2027. With the adoption of the EU’s 2040 climate target, finalised by the Council on 5 March 2026, the start was moved to 2028 (Council of the EU). The system includes measures to limit sharp price increases.
For a company with a vehicle fleet or gas-heated buildings, ETS2 is the part of EU carbon pricing that lands most directly in the cost base. It is also a reason to bring electrification of fleets and heating forward.
CBAM: the carbon price at the border
The Carbon Border Adjustment Mechanism (CBAM) charges importers for the embedded emissions of certain goods: iron and steel, aluminium, cement, fertilisers, hydrogen and electricity. Its definitive phase started on 1 January 2026, and certificates for 2026 imports will be sold from early 2027. Importers of no more than 50 tonnes of these goods a year are exempt since the 2025 simplification.
CBAM exists because free allocation in the ETS is being phased out: as EU producers pay for more of their emissions, importers pay a matching price. The free-allocation factor for the CBAM sectors falls from 97.5% in 2026 to 14% in 2033. If you import steel or aluminium products, check whether your volumes exceed the threshold.
The July 2026 reform proposal: what may change after 2030
On 17 July 2026, the European Commission proposed a revision of the ETS for the period after 2030 (ICAP). It is a proposal, with agreement between Parliament and Council targeted for early 2027. The elements most relevant for companies:
Phase 5 (2031-2040) aligned with the 90% target for 2040, with a linear reduction factor of 3.7% for 2031-2035 and 1.7% from 2036.
Carbon removals. The cap would rise by 250 million allowances, auctioned from 2031 to 2040, with the revenue used to buy permanent removals (BioCCS and DACCS) certified under the EU’s CRCF. Nature-based removals would be reviewed by the end of 2034.
International credits. From 2036, up to 260 million allowances would be used to buy high-quality international credits under Article 6 of the Paris Agreement, in line with the 2040 climate law (Article 6 explained).
Free allocation extended to 2040, but conditional on decarbonisation plans from 2031.
For the voluntary market, the removals and Article 6 elements matter most: they would make the EU a large buyer of the same durable removals and authorised credits that companies compete for (carbon dioxide removal explained).
EU ETS and voluntary carbon credits: how they relate
The two markets are often confused, so to be precise:
Voluntary credits cannot be used for ETS compliance. A covered company has to surrender EU allowances. A verified carbon credit from a forest or biochar project does not count.
EU allowances are not offsets. An allowance is a permit to emit, not a certified reduction or removal from a project. Some organisations buy allowances and cancel them to shrink the cap. That has an effect, but it is not a carbon credit, and how to report or claim it is a separate question.
The voluntary market fills the gap outside the ETS. A company that wants to take responsibility for emissions it has not yet cut uses voluntary credits, retired in its name, as a contribution. EU consumer rules that apply from 27 September 2026 restrict how that may be communicated (EmpCo carbon neutral claim ban).
The full comparison is in voluntary and compliance carbon markets.
“The ETS and the voluntary market answer different questions. The ETS makes polluting sectors pay for every tonne. Voluntary credits let a company take responsibility for the tonnes no law makes it pay for. A good climate strategy accounts for both, and does not count the same tonne twice.”
Bernard de Wit, Founder of Regreener
What to do as a company outside the ETS
Map your exposure: energy, business travel, freight, carbon-intensive materials, imports under CBAM, fleet and heating fuels under ETS2.
Put a price on it: use the current allowance price and a rising scenario in your budget or internal carbon price.
Prioritise reductions where the carbon price already pays you back: energy efficiency, electrification, travel policy.
Address residual emissions with voluntary credits, selected for quality and communicated as a contribution. Our budget and strategy planner helps size that budget.
Working out your carbon cost exposure?
We help companies map where carbon pricing already reaches their costs, prioritise reductions, and handle residual emissions with credits they can defend.
