EU ETS 2

The EU ETS 2, or the second European Union Emissions Trading System, represents a significant expansion of the EU's climate policy under the "Fit for 55" package. It establishes a new, distinct carbon market designed to tackle emissions from two critical areas that were previously outside the scope of the original ETS: fuel combustion in buildings and road transport. Its primary purpose is to create a direct financial incentive for fuel suppliers and, consequently, consumers to reduce their reliance on fossil fuels.

This new system operates "upstream," meaning it regulates the entities that supply fuels (like petrol, diesel, and natural gas) to the market, rather than individual drivers or households. These suppliers will be required to purchase and surrender allowances for the emissions generated by the fuels they sell. This creates a carbon price that is expected to be passed on to the end consumer, making polluting activities more expensive and clean technologies more competitive.

How the EU ETS 2 Works

The mechanism follows the proven 'cap-and-trade' principle, but it is entirely separate from the existing EU ETS market for industry and power generation.

• Setting the Cap: The EU will set a gradually decreasing cap on the total emissions allowed from these sectors each year, ensuring a clear path toward reduction targets.
• Allowance Obligation: Fuel suppliers must monitor the quantity of fuel they place on the market.
• Auctioning & Trading: Suppliers will need to buy allowances, likely designated as "EUA2s," to cover their emissions. These will primarily be auctioned by the EU, creating a new market for these carbon assets.
• Compliance: Annually, suppliers must surrender one allowance for every tonne of CO₂ equivalent their sold fuel will emit. A failure to do so results in heavy penalties.

Concrete Examples

• For Road Transport: A major fuel distributor that sells petrol and diesel to gas stations across Europe will have to buy EU ETS 2 allowances for the total expected emissions from that fuel. This added cost will be reflected in the price at the pump, encouraging consumers to consider electric vehicles or public transport.
• For Buildings: A company supplying natural gas for residential heating must purchase allowances to cover the emissions from the gas it delivers. This increases heating costs for households using gas boilers, creating a strong incentive to invest in better insulation or switch to low-carbon solutions like heat pumps.

To mitigate the social impact of these rising costs, the EU has also created a Social Climate Fund, financed partly by revenues from the ETS 2 auctions, to support vulnerable households through the transition.

For more information on the original system, learn more about the EU Emissions Trading System (EU ETS). To see the official framework, visit the European Commission's page on the EU ETS 2.