ETS2 (European Emission Trading System 2): the new frontier of Carbon Pricing for buildings and transport
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The introduction of the Emission Trading System 2 (ETS2) represents one of the cornerstones of the European legislative package “Fit for 55,” with the ambitious goal of reducing the European Union’s net greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels.
Unlike the original ETS (often referred to as ETS1), which has regulated emissions from heavy industry, power generation, and intra-EU aviation for years, the ETS 2 is specifically designed to extend the carbon pricing mechanism to two key sectors previously excluded: road transport and buildings.
This extension marks a monumental shift. These sectors, characterized by high fragmentation and an almost complete reliance on fossil fuels, are responsible for a significant portion of the EU’s total emissions. The ETS2 is the instrument chosen by the European Union to internalize environmental costs, providing a clear economic incentive for the transition towards cleaner energy sources and energy efficiency.
Key timelines and objectives of ETS2
The new ETS2 system is officially set to take effect on January 1, 2027. However, an important safeguard clause is in place to protect consumers from energy shocks:
- Safeguard Clause (2027): if average natural gas or oil prices are exceptionally high before the start date, the system launch will be postponed to January 1, 2028.
- Allowance Reduction (from 2028): the mechanism will fully engage from 2028 with the first significant reduction of the maximum emissions cap, which will progressively decrease year after year.
The objective is to achieve a 42% reduction in emissions in the sectors covered by ETS2 by 2030, compared to 2005 levels.
Who is involved in ETS2?
It is crucial to note that the ETS2 does not impose direct obligations on individual citizens, drivers, or property owners. The system operates at an “upstream” phase of the supply chain.
The obligated parties participating in ETS2 are the Regulated Entities, meaning the main distributors of fossil fuels placing products on the market for consumption in the covered sectors:
- Distributors of heating fuels (such as heating oil, LPG, natural gas, coal, and other fossil fuels used in buildings).
- Distributors of road transport fuels (gasoline, diesel, LPG, natural gas).
These distributors will be required to purchase and surrender emission allowances for every tonne of CO2 generated by the fuels they put on the market. They will then pass the cost of these allowances on to final consumers through an increase in the selling price.
Impact of ETS2 on the building and transport sectors
The introduction of carbon pricing has direct consequences for operational costs and investment decisions for both households and businesses.
Building sector: heating costs and the incentive for efficiency
The building sector, responsible for approximately 36% of total CO2 emissions in Europe, is a primary focus. The obligation to purchase allowances will result in an increase in the cost of fossil heating sources. This creates a powerful economic incentive to:
- Insulate and renovate buildings: to reduce overall energy demand.
- Switch to heat pumps and renewables: replacing old fossil fuel boilers with systems powered by electricity or renewable sources (heat pumps, solar thermal, efficient district heating) becomes more economically advantageous.
Transport sector: fuel prices and E-mobility
The ETS2 aims to drive the decarbonization of road transport. The allowance purchasing obligation will impact pump prices for gasoline and diesel, with an increase that acts as a disincentive to the use of inefficient internal combustion vehicles. The rising cost of fossil fuels makes zero-emission alternatives, such as Electric Vehicles (EVs), more economically competitive.
The Social Climate Fund: a compensation mechanism
The European legislator has recognized the risk that ETS2 could weigh disproportionately on low-income households and micro-enterprises, fueling so-called “energy poverty.” To mitigate this social impact, the Social Climate Fund (SCF) has been established.
- Purpose: to finance measures and investments aimed at combating energy and mobility poverty.
- Funding Source: approximately 25% of the revenue generated from the sale of ETS 2 allowances by Member States will be channeled into the Fund.
- Usage: funds will be used by Member States (in Italy, through a National Plan) for direct income support and investments in energy efficiency (e.g., insulation, purchasing zero-emission vehicles).
The SCF is the key mechanism to ensure that the energy transition, while driven by carbon pricing, is just and equitable.
ETS2 vs. ETS1: exploring the differences
It’s essential not to confuse the two systems, as they cover distinct sectors and obligated parties.
| Feature | ETS 1 (original) | ETS 2 (new) |
|---|---|---|
| Sectors covered | Heavy industry, power plants, intra-EU aviation. | Buildings (heating/cooling) and Road Transport. |
Obligated parties | Producers (facility operators) and air carriers. | Distributors of fossil fuels (upstream). |
Primary goal | Decarbonization of industry and the power sector. | Decarbonization of buildings and civil transport. |
Start date | 2005 (in subsequent phases). | January 1, 2027 (or 2028). |
ETS2: strategies for businesses and citizens
For economic operators and citizens, ETS2 is not just a cost, but a powerful market signal that requires strategic planning to seize investment opportunities and mitigate risks:
- For citizens: prioritize investments in thermal insulation and replacing inefficient boilers, leveraging national incentives.
- For distributor companies: integrate the cost of CO2 allowances into pricing models and evaluate the offering of alternative, low-emission fuels.
- For logistics companies: accelerate the adoption of zero-emission vehicles, optimize routes to reduce consumption, and consider the use of advanced biofuels not covered by ETS2 (if certified).
How to prepare for the impact of ETS2
The ETS2 is a bold political and environmental move that consolidates European leadership in the fight against climate change. The system will ensure that all major sectors of the European economy, even those historically most difficult to decarbonize, contribute to achieving the 2030 targets.
The impending entry into force of the system (2027/2028) makes strategic planning an urgent priority for all involved parties, from fuel distributors to large logistics and real estate companies. Understanding the carbon pricing mechanisms and the funding streams of the Social Climate Fund is essential to turning potential costs into competitive advantages.
Contact Prometheus: we provide your ETS2 consulting strategy
The complexity of transitioning to ETS 2 requires a deep understanding of European regulations, carbon allowance markets, and specific efficiency strategies for the building and transport sectors.
Prometheus offers specialized consulting for:
- Impact assessment: estimating the financial impact of ETS2 on your business (distribution, logistics, real estate).
- Mitigation strategies: developing transition plans to reduce carbon price exposure (e.g., energy efficiency of real estate assets or fleet transition).
- Fund access: support in identifying funding opportunities related to the Social Climate Fund and other green incentives.
Don’t wait for operational costs to rise. Anticipate the future of carbon pricing.
