- A new EU carbon trading scheme is being created for heating and transport fuel supply
- Fuel providers must acquire and surrender allowances by 31 May annually for carbon emissions from burning fuel that they supply
- Auctions of allowances to start in 2027 (unless delayed a year for exceptional energy prices in 2026)
The EU is establishing a stand-alone emissions trading system (which, for want of a better name, is currently known as ‘EU ETS 2’1). It will target reductions of carbon dioxide emissions from the combustion of fuel used in sectors that are not currently required to comply with the existing EU emissions trading system, with the objective being to extend the success of the existing EU ETS scheme (in this alert, EU ETS 1) to 75 per cent of EU industry and thereby contribute to the achievement of the EU’s 2050 net zero target.
The amending directive creating the new scheme came into force on 8 June 2023. The activities that will fall within EU ETS 2 are the release of numerous types of fuel destined for combustion in the road transport sector, buildings, energy, manufacturing and construction industries.
Trading in allowances under the new scheme will be possible after the first auctions begin in 2027. This is unless the Commission uses its right to delay the start of auctions by a year if there are exceptionally high energy prices (mindful of the energy price impacts of the war in Ukraine). This brake on launch has been included because the new scheme will increase costs for fuel suppliers, and those costs will likely be passed on to fuel users.
- “Regulated entities” will be required to obtain a permit by 1 January 2025 and to monitor, report and verify emissions from fuel supplied to users within the in-scope sectors.
- Auctions of allowances by Member States will commence in 2027.
- Permit holders will be required to surrender sufficient allowances to match the associated emissions by 31 May each year.
- Allowances will be fully tradable and held at the EU Registry in the same manner as allowances issued under EU ETS 1.
- The two schemes (1 and 2) are initially separate, though they may later be amalgamated.
- Permit holders must report how much of the cost they have passed on to their customers in fuel prices, and the Commission reserves the right to take action if there is evidence of profiteering.
- Since EU ETS 2 is created as a new chapter of the existing Emissions Trading Directive, under the Markets in Financial Instruments Directive, allowances would constitute financial instruments on the same basis as allowances under EU ETS 1.
EU ETS 2 will apply to the following activities:
Release of fuel for consumption in any of the following sectors:
- Road transportation, excluding the use of agricultural vehicles on paved roads
- Commercial/institutional buildings
- Residential buildings
- Combined Heat and Power Generation and Heat Plants, providing heat to buildings in 2 and 3 above
- Energy Industries2
- Manufacturing Industries and construction3
Member States have the option to bring further sectors into the scheme within their own jurisdictions, subject to the Commission’s approval.