EU Emissions Trading System (ETS) – Driving Emissions Reductions
Introduction to EU Emissions Trading System (ETS)
The EU Emissions Trading System (ETS) is the world’s largest and most established carbon market, serving as the cornerstone of the EU’s strategy to reduce greenhouse gas emissions. Launched in 2005, the ETS operates on a “cap-and-trade” system, where a limit (cap) is set on the total amount of emissions that can be emitted by industries under the scheme. Companies can trade emissions allowances, incentivizing them to reduce their emissions and invest in cleaner technologies.
The ETS currently covers sectors such as power generation, heavy industry, and aviation, with plans to expand to maritime transport and additional sectors. Companies that emit more than their allocated allowance must purchase additional permits, which can result in significant costs, while companies that reduce their emissions can sell their surplus allowances, creating a financial incentive for greener practices.
For businesses, navigating the complexities of ETS compliance is essential to avoid penalties and control costs. Carbmee provides real-time emissions tracking and optimization solutions, helping businesses stay within their emissions cap, manage allowances, and make data-driven decisions to lower their carbon footprint.
Update July 2026: European Commission Proposes Changes to the EU ETS
On 17 July 2026, the European Commission presented a targeted review of the EU Emissions Trading System alongside a new Electrification Action Plan. The proposals are intended to preserve the ETS’s role in reducing emissions while strengthening industrial competitiveness, investment, and energy independence.
The proposed ETS review includes a more gradual reduction in the allowance cap after 2030, limited access to high-quality international credits, the integration of permanent carbon removals, changes to the Market Stability Reserve, and continued free allocation beyond 2030. For sectors covered by the Carbon Border Adjustment Mechanism, the Commission proposes slowing the reduction of free allowances and extending their phase-out until 2038. It also proposes strengthening ETS coverage for aviation and maritime transport and extending the system to waste incineration.
The Commission has proposed the following Linear Reduction Factors for the period after 2030:
- 3.7% from 2031 to 2035
- 1.7% from 2036 to 2040
The review also includes a proposed €100 billion Industrial Decarbonisation Bank and additional measures intended to direct ETS revenues toward industrial decarbonization. These proposals are not yet final law and must proceed through the EU legislative process. Businesses should continue complying with the existing framework while monitoring how the proposals develop.
How the ETS Works
- The Cap-and-Trade System:
The EU sets a cap on the total emissions permitted from activities covered by the ETS. This cap is reduced over time, gradually decreasing the number of allowances available. Each allowance represents the right to emit one tonne of carbon dioxide equivalent.
Companies must hold enough allowances to cover their verified emissions. Those that require more can purchase them, while companies that reduce their emissions may retain or sell surplus allowances. This creates a financial incentive to improve efficiency and invest in lower-carbon technologies. - Compliance and Monitoring:
Companies covered by the ETS must monitor their emissions, prepare an annual emissions report, and have it verified by an accredited verifier. They must then surrender the corresponding number of allowances through the Union Registry.
Operators that fail to surrender enough allowances face a financial penalty for every uncovered tonne and must still provide the missing allowances. Carbmee can help consolidate and improve the underlying emissions data, but it does not replace official verification, registry, or surrender obligations. - Trading Allowances:
Allowances can be purchased at auction or traded between market participants. Companies that reduce emissions may need fewer allowances, while higher-emitting businesses may face additional purchasing costs.
Allowance prices are market-driven and can fluctuate with economic activity, energy demand, policy developments, and allowance supply. Carbon-cost forecasting helps businesses assess how different price scenarios could affect budgets, sourcing decisions, and product margins. - Expanding Coverage:
The Market Stability Reserve helps manage significant imbalances in the supply of allowances. When a large surplus exists, allowances can be placed in the reserve and, under certain conditions, released back into the market.
The mechanism is designed to improve market resilience and preserve an effective carbon-price signal. The Commission’s July 2026 proposal includes potential changes intended to improve liquidity, predictability, and protection against excessive price volatility. - Expanding Coverage
The EU ETS covers power generation, energy-intensive industry, aviation, and maritime transport. Maritime transport entered the system in 2024, covering emissions within EU ports and voyages, as well as 50% of emissions from voyages between EU and non-EU ports. Its allowance obligations have been introduced gradually.
Buildings and road transport are covered through ETS2, a separate upstream system regulating fuel suppliers rather than households or individual drivers. ETS2 is currently expected to become fully operational in 2028.
The Relationship Between the EU ETS and CBAM
The EU Carbon Border Adjustment Mechanism is closely connected to the EU ETS.
CBAM applies a carbon price to certain carbon-intensive goods imported into the EU. Its purpose is to ensure that imported goods face a carbon cost comparable to that applied to products manufactured within the EU ETS.
As CBAM enters its definitive phase, free allocation for corresponding EU industries is being reduced under the current rules. This means businesses purchasing materials such as steel, aluminium, cement, fertilizers, hydrogen, and certain other covered products may face carbon costs through both domestic suppliers and imported goods.
For procurement and finance teams, ETS and CBAM exposure should therefore not be viewed as isolated compliance issues. Both mechanisms can influence supplier pricing, material costs, sourcing strategies, and product margins.
The July 2026 Commission proposal would slow the reduction of free allocation for CBAM sectors and extend the phase-out to 2038. Because this remains a proposal, businesses should distinguish clearly between current obligations and possible future changes.
How Carbmee Helps with ETS Compliance
Carbmee allows businesses to consolidate and monitor emissions data across operations, sites, suppliers, materials, and products. Automated data flows from ERP, procurement, energy, and operational systems reduce dependence on manual spreadsheets and make emissions information easier to maintain and analyze.
- Improve data quality
Carbmee helps companies identify data gaps, anomalies, and inconsistencies, supporting more reliable emissions calculations and internal decision-making. - Optimize emissions reduction strategies:
Carbmee identifies emissions hotspots and helps businesses assess where reductions can be made. Companies can compare reduction measures, suppliers, materials, and sourcing options to determine where action could deliver the greatest environmental and financial benefit. - Forecast emissions and carbon costs
By connecting emissions data with financial and procurement information, Carbmee enables companies to model different ETS and CBAM price scenarios and understand how carbon costs could affect suppliers, products, and margins. - Businesses can compare alternative suppliers, materials, production locations, and sourcing strategies before commercial decisions are locked in.
- Support allowance planning
Insights into current and projected emissions can inform a company’s internal allowance requirements and purchasing strategy. - However, Carbmee should not be described as purchasing, selling, or surrendering allowances on behalf of operators. Its role is to provide the data visibility and forecasting intelligence required to support better-informed decisions.
- Connect sustainability with business decisions
Carbon costs increasingly affect more than sustainability teams. They influence procurement negotiations, finance forecasts, capital allocation, product design, operations, and supply-chain strategy. - Carbmee provides a shared data foundation that enables these teams to evaluate carbon alongside financial and operational considerations.
Benefits of ETS for Businesses
While ETS compliance can be demanding, it can also reward businesses that act early. Reducing emissions can lower allowance costs, limit exposure to future carbon-price increases, and strengthen the financial case for energy efficiency, electrification, renewable energy, and lower-carbon materials.
The ETS can also improve sourcing and investment decisions. By understanding the emissions intensity of suppliers, materials, and products, companies can identify where carbon costs affect margins and choose more resilient alternatives.
The same emissions data can support CBAM, carbon accounting, product carbon footprints, and future regulatory requirements. This helps businesses improve transparency, respond to customer expectations, and strengthen long-term competitiveness.
Conclusion
The EU Emissions Trading System is a critical part of the EU’s broader climate strategy. As the emissions cap declines, businesses must adopt new strategies to meet their obligations, control costs, and reduce their exposure to carbon pricing.
The system is also relevant far beyond directly regulated installations. ETS-related costs can be reflected in energy, raw materials, transportation, supplier contracts, and product margins throughout the value chain.
Recent changes - including the addition of maritime transport and the development of ETS2 - have expanded the reach of emissions trading. The Commission’s July 2026 proposal indicates that the system will continue to evolve after 2030, although the proposed measures are not yet final law.
Carbmee’s emissions intelligence, carbon accounting, and carbon-cost forecasting capabilities provide businesses with the transparency and insights needed to understand their exposure, identify reduction opportunities, and make better-informed decisions.
By connecting emissions information with procurement, finance, products, suppliers, and operations, companies can move beyond reactive compliance. They can reduce emissions, protect margins, prioritize effective investments, and prepare more confidently for the future of European carbon pricing.
