Navigate the EU ETS-2: From emissions pricing to operational readiness.
The European Union's Emissions Trading System (EU ETS) is evolving to include a second scheme—ETS-2—expanding carbon pricing to new sectors and upstream fuel suppliers. VURDHAAN guides regulated entities through scope, obligations, and compliance strategies that reduce risk and enable operational planning.
ETS-2 at a glance
EU ETS-2 extends carbon pricing to sectors not covered by the original ETS, creating new compliance obligations for fuel suppliers.
- Scope: Buildings, road transport, small industry fuel combustion
- Regulated entities: Primarily upstream fuel suppliers
- Mechanism: Cap-and-trade with auction-only allowances
- Timeline: MRV starts 2025, trading begins 2027
What is the EU ETS-2?
EU ETS-2 is an extension of the European Union's cap-and-trade carbon market designed to cover greenhouse gas emissions not included under the original ETS (ETS-1). While the existing EU ETS regulates emissions from electricity generation, heavy industry, aviation and maritime transport, ETS-2 expands carbon pricing to fuel combustion in buildings, road transport, and additional sectors.
Under ETS-2, regulated entities—typically fuel suppliers—will be required to monitor, report and surrender emission allowances equivalent to CO₂ released during fuel combustion. Unlike the original EU ETS where allowances could be allocated for free initially, ETS-2 allowances will be distributed exclusively by auction, creating a transparent carbon price signal that drives investment in low-carbon technologies.
Key difference from ETS-1
ETS-1 covers approximately 40–45% of EU greenhouse gas emissions from large installations (power, industry) and sectors like aviation. ETS-2 closes a major gap by addressing fuel combustion in buildings and road transport—sectors that account for a significant share of remaining emissions.
Scope & How ETS-2 Works
The original EU ETS operates on a cap-and-trade principle, where a total emissions cap across covered sectors is set and decreased over time. Entities must hold enough allowances to cover their reported emissions, either purchased via auction or traded.
ETS-2 extends this model to sectors that historically lacked carbon pricing, such as road transport and building heating fuels. The regulated entities under ETS-2 will be primarily fuel suppliers, not end-users—the requirement is triggered when fuel is released for consumption.
Buildings sector
Fuel combustion for heating and cooling in residential and commercial buildings becomes subject to carbon pricing.
Road transport
Fuels for road vehicles (excluding those already covered by ETS-1) are included in the new trading scheme.
Small industry
Fuel combustion in small industrial installations not covered by ETS-1 falls under ETS-2 obligations.
| Feature | EU ETS-1 (Original) | EU ETS-2 (New) |
|---|---|---|
| Coverage | Power, heavy industry, aviation, maritime | Buildings, road transport, small industry fuel |
| Regulated entities | Installation operators, airlines, ship operators | Primarily fuel suppliers (upstream) |
| Allowance allocation | Free allocation + auctions (phasing out free) | Auction-only from start |
| MRV start | Operational since 2005 | 2025 |
| Trading start | 2005 | 2027 |
Why EU ETS-2 Matters
The introduction of ETS-2 closes a major gap in the EU's carbon pricing architecture. ETS-1 has significantly reduced emissions in covered sectors compared with historical baselines, demonstrating the effectiveness of market-based mechanisms.
With ETS-2, carbon pricing will extend to sectors that account for a large share of fuel combustion emissions, accelerating investment in energy efficiency, electrification, and low-carbon technologies. Revenues from ETS-2 auctions are also expected to support social and climate measures, including through the EU's Social Climate Fund.
🎯 Price signal for decarbonization
Creates direct financial incentives for fuel switching, efficiency improvements, and low-carbon investments across buildings and transport.
💰 Revenue for climate action
Auction revenues support the Social Climate Fund, helping vulnerable households and small businesses transition to low-carbon alternatives.
🔄 Market-driven innovation
Carbon pricing encourages development and deployment of clean heating, electric vehicles, and energy-efficient technologies at scale.
🌍 Policy alignment
Integrates with EU climate targets (Fit for 55, net-zero 2050) and creates consistent carbon pricing across economic sectors.
Compliance & Operational Challenges
ETS-2 introduces new regulatory obligations for entities that have historically not been subject to carbon market compliance. Regulated fuel suppliers must establish systems and governance frameworks well in advance of the scheme becoming operational.
MRV readiness
Monitoring, reporting, and verification systems must be designed and implemented ahead of the 2025 reporting start. Early preparation reduces compliance risk and avoids data gaps.
Allowance management
Fuel suppliers must plan for allowance purchasing, cash-flow impacts, and surrender strategies under an auction-only system with no free allocation.
Data quality & audit
Accurate emissions calculation and auditable data trails are essential to avoid penalties and ensure regulatory confidence.
Cross-scheme coordination
Companies operating under both ETS-1 and ETS-2 must align internal reporting, governance, and carbon cost management across schemes.
Early readiness is a competitive advantage
Organizations that invest early in ETS-2 readiness gain better cost visibility, stronger compliance assurance, and improved strategic positioning as carbon prices evolve.
ETS-2 Timeline & Milestones
ETS-2 is being phased in gradually to allow regulated entities time to prepare operationally and financially. Understanding the timeline is essential for compliance planning.
2024 – Preparation phase
National transposition, registry preparation, and early compliance planning by fuel suppliers.
2025 – MRV obligations begin
Mandatory monitoring and reporting of emissions under ETS-2 without allowance surrender.
2027 – ETS-2 trading launch
Allowance auctions begin and regulated entities must surrender allowances for verified emissions.
2028 onwards – Market stabilization
Full integration into the EU carbon market framework with price signals influencing fuel and technology choices.
Start your ETS-2 readiness program
ETS-2 compliance requires integrated operational, reporting, and governance frameworks. VURDHAAN helps regulated entities map exposure, build MRV systems, manage carbon costs, and align compliance with long-term decarbonisation goals.
Talk ETS-2 compliance