What is the EU ETS?
The EU ETS, sometimes called the EU emissions trading scheme, works on a cap and trade principle. The EU sets a cap on the total greenhouse gases that covered installations and operators can emit, and the cap falls every year. The cap is divided into allowances, each giving the right to emit one tonne of CO2 equivalent (tCO2e).
Allowances are auctioned or given free to some companies, and can then be traded. Each year a company must surrender enough allowances to cover its emissions. One that cuts its emissions can sell spare allowances; one that emits more must buy them. The falling cap makes allowances scarcer over time, and the resulting carbon price gives companies an incentive to cut emissions at the lowest cost.
The European Commission calls the EU ETS the world's first carbon market. It operates in all EU member states plus Iceland, Liechtenstein and Norway, covers electricity generation in Northern Ireland, and has been linked to the Swiss ETS since 2020.
According to the Commission, by 2023 the EU ETS had helped bring emissions from European power and industry plants down by about 47% compared with 2005.
| Phase | Years | Main features |
|---|---|---|
| Phase 1 | 2005 to 2007 | Three-year pilot of 'learning by doing' |
| Phase 2 | 2008 to 2012 | Ran alongside the Kyoto Protocol's first commitment period; nitrous oxide from nitric acid production included |
| Phase 3 | 2013 to 2020 | Auctioning became the default way to allocate allowances |
| Phase 4 | 2021 to 2030 | Faster cap reduction; shipping added from 2024; free allocation tied to decarbonisation efforts |
Which sectors does the EU ETS cover?
- Power and heat: electricity and heat generation, and any installation burning fuel in units with a total rated thermal input above 20MW.
- Energy-intensive industry: oil refineries, steel works, and production of iron, aluminium, metals, cement, lime, glass, ceramics, pulp, paper, cardboard, acids and bulk organic chemicals.
- Aviation: flights within the European Economic Area, and departing flights to Switzerland and the United Kingdom.
- Maritime transport, since 2024: cargo and passenger ships of 5,000 gross tonnage and above. It covers 100% of emissions on voyages between EU ports and while in EU ports, and 50% of emissions on voyages that start or end outside the EU. Offshore ships of 5,000 gross tonnage and above join in 2027.
- Municipal waste incineration: installations above a size threshold have had to monitor and report their emissions since 2024.
The gases covered are carbon dioxide, nitrous oxide from the production of nitric, adipic and glyoxylic acids and glyoxal, and perfluorocarbons from aluminium production. For shipping, methane and nitrous oxide were added from 1 January 2026.
Shipping is being phased in. Shipping companies surrender allowances for 40% of their verified 2024 emissions, 70% of their 2025 emissions, and 100% from 2026 onwards.
The cap and how fast it falls
The cap shrinks each year by a fixed amount set by the linear reduction factor. After the 2023 reform, the cap is set to bring emissions in the EU ETS sectors down by 62% by 2030 compared with 2005.
| Period | Linear reduction factor |
|---|---|
| Until 2020 | 1.74% a year |
| 2021 to 2023 | 2.2% a year |
| 2024 to 2027 | 4.3% a year |
| From 2028 | 4.4% a year |
There were also two one-off cuts, known as rebasing: 90 million allowances in 2024 and 27 million in 2026. The cap was raised by 78.4 million allowances in 2024 to bring in shipping. The Commission put the 2024 cap at 1,386,051,745 allowances.
The EU has since set a binding 2040 climate target. Regulation (EU) 2026/667 of 11 March 2026 requires net greenhouse gas emissions to fall by 90% by 2040 compared with 1990.
Proposed, not yet law: a new path after 2030
On 17 July 2026 the Commission proposed changes to the ETS Directive and the Market Stability Reserve, in COM(2026) 616. They would adjust the cap trajectory from 2031, allowing a slower annual decline and continued issuance of allowances into the 2040s, and would bring in permanent carbon removals. The proposal needs agreement from the European Parliament and the Council.
Auctions and free allocation
In phase 4, 57% of allowances are in principle auctioned. Most auctions are held on the European Energy Exchange (EEX) in Leipzig, the common auction platform for 25 member states plus Iceland, Liechtenstein and Norway. Germany and Poland run their own auctions, also on EEX, and auctions for Northern Ireland are held there too.
Member states must spend their auction revenues, or an equivalent amount, on the climate and energy purposes listed in the ETS Directive, apart from money used to compensate industry for indirect carbon costs. Auctioned allowances also fund the EU's Innovation Fund and Modernisation Fund.
Electricity producers have had to buy all the allowances they need since 2013. The ETS Directive let member states whose GDP per head was below 60% of the EU average in 2013 give power plants transitional free allocation to modernise their energy sector, for investments carried out until the end of 2024.
Industry still receives some allowances free, based on benchmarks, to limit the risk of carbon leakage. The carbon leakage list for 2021 to 2030 covers 63 sectors and subsectors, about 94% of industrial emissions in the EU ETS. The 2023 revision scaled free allocation down in line with the tighter cap and made it conditional on companies' decarbonisation efforts.
- Aviation: free allocation was cut by 25% in 2024 and 50% in 2025, with full auctioning from 2026. 20 million allowances are reserved to cover some or all of the price gap between fossil jet fuel and eligible alternative aviation fuels.
- CBAM goods: free allocation for cement, iron and steel, aluminium, fertilisers and hydrogen is being phased out as the EU CBAM phases in. The section on CBAM below gives the yearly factors.
The Market Stability Reserve
The Market Stability Reserve (MSR), set up by Decision (EU) 2015/1814, has operated since 2019. It adjusts the number of allowances auctioned according to the total number of allowances in circulation (TNAC), which the Commission publishes each year.
- TNAC above 1,096 million: allowances equal to 24% of the TNAC are withdrawn from auctions and placed in the reserve.
- TNAC between 833 million and 1,096 million: since 2024, the amount withdrawn equals the TNAC minus 833 million.
- TNAC below 400 million: 100 million allowances are released from the reserve for auction.
- Since 2023, allowances held in the reserve above a threshold are invalidated each year. From 2024 the threshold is fixed at 400 million.
| TNAC year | Allowances in circulation | Placed in the reserve | Period |
|---|---|---|---|
| 2024 | 1,148,049,585 | 275,531,900 | 1 September 2025 to 31 August 2026 |
| 2025 | 1,023,494,202 | 190,494,202 | 1 September 2026 to 31 August 2027 |
Proposed, not yet law: changes to the reserve
On 1 April 2026 the Commission proposed ending the invalidation of allowances in the reserve (COM(2026) 153). Its July 2026 proposal (COM(2026) 616) would also cut the intake rate from 24% to 12% from 2028. Both need agreement from the European Parliament and the Council.
EU ETS prices: how they have moved
The table shows the volume-weighted average clearing price of EU Allowances at EEX primary auctions each year, with the lowest and highest single auction. Aviation allowances are excluded. For today's prices, see our EU carbon price page, updated from EEX auction results.
| Year | Average | Lowest auction | Highest auction |
|---|---|---|---|
| 2017 | €5.78 | €4.26 | €7.91 |
| 2018 | €15.32 | €7.68 | €24.85 |
| 2019 | €24.64 | €18.35 | €29.46 |
| 2020 | €24.52 | €14.60 | €30.92 |
| 2021 | €52.92 | €32.66 | €87.45 |
| 2022 | €79.75 | €57.91 | €97.51 |
| 2023 | €83.25 | €66.49 | €96.33 |
| 2024 | €64.75 | €49.50 | €75.35 |
| 2025 | €73.43 | €59.76 | €84.60 |
| 2026 (to 9 October) | €77.94 | €62.19 | €91.34 |
From 2013 to 2017 the yearly average stayed between €4.38 and €7.62, and the lowest EEX auction price since 2012 was €2.65 on 23 April 2013. The average rose to €24.64 in 2019, the year the Market Stability Reserve began operating, and passed €50 in 2021.
The highest single auction price was €97.51 on 8 February 2022. The yearly average peaked at €83.25 in 2023, fell to €64.75 in 2024, then recovered to €73.43 in 2025 and €77.94 in 2026 so far.
Allowances are auctioned as two-day spot contracts. The auction clearing price is expected to stay close to the secondary market price, and an auction is cancelled if its clearing price would be significantly below it.
Reporting, surrender and penalties
- Emissions for each year must be independently verified. An operator whose report has not been verified as satisfactory by 31 March cannot transfer allowances until it is.
- By 30 September each year, operators, aircraft operators and shipping companies surrender allowances covering the previous year's emissions.
- Anyone who does not surrender enough pays an excess emissions penalty of €100 per tonne of CO2 equivalent, rising with European consumer prices, and must still surrender the missing allowances.
ETS2: buildings, road transport and small industry
ETS2 is a second, separate emissions trading system for CO2 from fuel burned in buildings, road transport and additional sectors, mainly small industry not covered by the existing EU ETS. It was created by Directive (EU) 2023/959.
It works upstream. Fuel suppliers, not households or drivers, monitor and report emissions and will surrender allowances. Monitoring and reporting began in 2025. The ETS2 cap is set to cut emissions from these sectors by 42% by 2030 compared with 2005.
ETS2 now starts in 2028
The ETS Directive set ETS2 auctions to start in 2027. Article 2 of Regulation (EU) 2026/667 of 11 March 2026 postponed the operation of ETS2 until 2028 and applied the postponement rules in Article 30k(2) of the Directive, which move the first surrender deadline to 31 May 2029. The Commission says ETS2 will become fully operational in 2028, with early ETS2 auctions starting in 2027.
- First surrender: allowances for 2028 emissions are due by 31 May 2029, and after that by 31 May each year for the previous year's verified emissions.
- Extra volume: 30% more allowances will be auctioned for 2028 to give the market liquidity.
- Price safeguards: if the ETS2 price rises above €45 in 2020 prices, extra allowances can be released from a dedicated ETS2 market stability reserve.
- Social Climate Fund: set up alongside ETS2 to support vulnerable households and micro-enterprises facing energy or transport poverty.
On 11 June 2026 the European Parliament and Council reached a provisional agreement to strengthen the ETS2 reserve, including doubling, from 20 million to 40 million, the allowances released when the average price stays above €45 (in 2020 prices) for two consecutive months. Parliament approved the text on 15 September 2026 and the Council adopted it on 9 October 2026. It enters into force 20 days after its publication in the Official Journal.
How the EU ETS connects to CBAM
The EU Carbon Border Adjustment Mechanism (CBAM) makes carbon-intensive imports subject to a carbon price equivalent to the one EU producers face under the EU ETS. It covers cement, iron and steel, aluminium, fertilisers, hydrogen and electricity.
- Price: the CBAM certificate price comes from EU ETS auctions. For 2026 imports it is a quarterly average; the latest is €82.32 for Q3 2026, published on 5 October 2026. From 2027 it is set weekly.
- Free allocation: as CBAM phases in, free allowances for producers of CBAM goods are phased out. The CBAM factor is 97.5% in 2026, falling to 51.5% in 2030 and 14% in 2033, with no free allocation for these goods from 2034 under current law.
- Proposal: the Commission's July 2026 proposal would slow this, keeping the factor at 15% from 2034 to 2037 and reaching zero in 2038.
Read CBAM explained for the EU and UK schemes side by side, our EU CBAM guide, and the latest CBAM certificate price.
The UK ETS and the linking talks
The UK stopped taking part in the EU ETS when its own UK Emissions Trading Scheme (UK ETS) began on 1 January 2021. Northern Ireland's electricity generators stayed in the EU ETS under the Windsor Framework (formerly the Northern Ireland Protocol).
The two systems are separate markets with different prices. UK Allowances are auctioned on ICE Futures Europe and EU Allowances on EEX. Flights from the EEA to the UK fall under the EU ETS, while flights from the UK to the EEA fall under the UK ETS. Compare the two prices on our UK vs EU carbon price page.
At the UK-EU summit on 19 May 2025 both sides agreed to work towards linking the two systems, and the Council of the EU authorised negotiations on 13 November 2025 (Decision (EU) 2025/2468). Under the Commission's negotiating recommendation, once a linking agreement is in force the EU CBAM would not apply to UK-origin goods, and vice versa.
Press reports on 7 October 2026 said a linking deal had been reached. As of 10 October 2026, neither the UK government nor the European Commission had confirmed it. See our UK ETS guide and UK-EU ETS linking guide.
Questions
What is the EU ETS?
The EU Emissions Trading System is the EU's carbon market. It caps the greenhouse gases that power stations, industry, airlines and ships can emit, and companies must surrender one allowance for each tonne of CO2 equivalent they emit. It started in 2005.
What is the EU ETS price today?
Prices change with each auction, so see our EU carbon price page for the latest EEX results. From 1 January to 9 October 2026, EU auction prices averaged €77.94 per allowance (one tonne of CO2 equivalent), ranging from €62.19 to €91.34.
What is an EU Allowance (EUA)?
An EU Allowance is the unit traded in the EU ETS. Each one gives the right to emit one tonne of CO2 equivalent. Allowances are auctioned or allocated free, then traded, and must be surrendered to cover emissions.
Which sectors are covered by the EU ETS?
Electricity and heat generation, energy-intensive industry such as steel, cement, aluminium, chemicals, glass and paper, aviation within the European Economic Area, and, since 2024, shipping companies with ships of 5,000 gross tonnage and above.
What is ETS2 and when does it start?
ETS2 is a separate EU emissions trading system for fuel used in buildings, road transport and small industry. Fuel suppliers, not households, take part. Regulation (EU) 2026/667 postponed it from 2027, and it becomes fully operational in 2028, although the Commission says early ETS2 auctions will start in 2027.
What is the Market Stability Reserve?
A mechanism, in operation since 2019, that adjusts how many allowances are auctioned. When too many are in circulation it withdraws allowances from auctions; when too few are, it releases them. 190,494,202 allowances are being placed in it from September 2026 to August 2027.
Does the EU ETS cover shipping?
Yes, since 2024. It covers cargo and passenger ships of 5,000 gross tonnage and above: all emissions on voyages between EU ports and half of those on voyages to or from outside the EU. Companies surrender allowances for 40% of 2024 emissions, 70% of 2025 emissions and 100% from 2026.
Is the UK part of the EU ETS?
No. The UK has had its own UK Emissions Trading Scheme since 1 January 2021, though Northern Ireland's electricity generators remain in the EU ETS. The UK and EU are negotiating a link, which had not been officially confirmed as of 10 October 2026.
How is the EU ETS linked to CBAM?
The EU CBAM certificate price is based on EU ETS auction prices, and free EU ETS allowances for CBAM goods are phased out as CBAM phases in. Under current law, free allocation for those goods ends in 2034.
What is the penalty for not surrendering EU ETS allowances?
An excess emissions penalty of €100 per tonne of CO2 equivalent, rising with European consumer prices. Paying it does not remove the duty to surrender the missing allowances.
Sources
- European Commission: About the EU ETS (checked 10 October 2026)
- European Commission: What is the EU ETS? (updated 13 May 2026) (checked 10 October 2026)
- European Commission: Scope of the EU ETS (checked 10 October 2026)
- European Commission: EU ETS emissions cap (updated 11 December 2025) (checked 10 October 2026)
- European Commission: Auctioning of allowances (checked 10 October 2026)
- European Commission: Free allocation (checked 10 October 2026)
- European Commission: Carbon leakage (checked 10 October 2026)
- European Commission: Market Stability Reserve (updated 8 June 2026) (checked 10 October 2026)
- European Commission: 190 million EU ETS allowances to be placed into the Market Stability Reserve (29 May 2026) (checked 10 October 2026)
- European Commission: MSR to reduce auction volume by 276 million allowances (28 May 2025) (checked 10 October 2026)
- European Commission: FAQ, maritime transport in the EU ETS (checked 10 October 2026)
- European Commission: Reducing emissions from aviation (checked 10 October 2026)
- European Commission: ETS2, buildings, road transport and additional sectors (updated 2 September 2026) (checked 10 October 2026)
- European Commission: Commission welcomes agreement on key safeguards for the new emissions trading system (11 June 2026) (checked 10 October 2026)
- Council of the EU: PE-CONS 47/26, Decision amending Decision (EU) 2015/1814 as regards the ETS2 market stability reserve (adopted text) (checked 10 October 2026)
- Council of the EU: ST 14296/26, voting result on the ETS2 market stability reserve Decision (9 October 2026) (checked 10 October 2026)
- EUR-Lex: Directive 2003/87/EC (EU ETS Directive), consolidated text of 1 March 2024 (checked 10 October 2026)
- EUR-Lex: Regulation (EU) 2026/667 amending the European Climate Law (2040 target and ETS2 postponement) (checked 10 October 2026)
- EUR-Lex: COM(2026) 153 proposal on ceasing the invalidation of allowances in the MSR, 1 April 2026 (checked 10 October 2026)
- EUR-Lex: COM(2026) 616 proposal amending the ETS Directive and the MSR Decision, 17 July 2026 (checked 10 October 2026)
- EEX: EU ETS primary market auction report, 2026 data (checked 10 October 2026)
- EEX: EU ETS primary market auction reports, 2012 to 2025 archive (checked 10 October 2026)
- EEX: EU ETS 1 auctions (checked 10 October 2026)
- EUR-Lex: Commission Delegated Regulation (EU) 2023/2830 on auctioning, Articles 4 and 7(6) (checked 10 October 2026)
- European Commission: Carbon Border Adjustment Mechanism (checked 10 October 2026)
- Council of the EU: ST 16973/25, Commission proposal COM(2025) 989 amending the CBAM Regulation (17 December 2025) (checked 10 October 2026)
- European Commission: Price of CBAM certificates (checked 10 October 2026)
- UK ETS Authority: Participating in the UK ETS (updated 1 July 2026) (checked 10 October 2026)
- EUR-Lex: Council Decision (EU) 2025/2468 authorising negotiations on linking the EU and UK emissions trading systems (checked 10 October 2026)
- Council of the EU: ST 11663/25, Commission recommendation COM(2025) 408 on UK linking negotiations (checked 10 October 2026)
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