How does the European emissions trading market work?

The European Emissions Trading System (EU ETS) operates on a cap-and-trade principle: the European Union sets a maximum emissions limit for the covered sectors, allocates the corresponding number of allowances, and allows companies to trade them among themselves. One allowance authorizes the emission of one metric ton of CO₂. Each year, every covered facility must surrender as many allowances as it has emitted. The cap automatically decreases year over year, which reduces the supply of allowances and gives carbon a market value. In mid-July 2026, a metric ton was trading at around 79 euros, following an all-time high of 88.31 euros on January 7 of that same year.

Key Takeaways

• The system is based on the “polluter pays” principle: one allowance is equivalent to one metric ton of CO₂, and its price is determined on a trading market.
• Established in 2005 by a European directive, the EU ETS covers heavy industry, electricity generation, airlines, and, since 2024, shipping companies.
• The cap has been decreasing by 4.3% per year since 2024, and will decrease by 4.4% starting in 2028.
• The price rose from 6 euros per metric ton in 2017 to nearly 88 euros in early 2026, driven by the tightening of the cap.
• A company that does not return its quotas must pay 100 euros per metric ton of excess and remains liable for any shortfall.
• The expansion to include road fuels and building fuels—known as ETS2—will become fully operational starting in 2028.
• Even companies that are not subject to these regulations bear the cost, which is passed on in their energy, transportation, and purchasing bills.

What is the EU ETS?

Le système d’échange de quotas d’émission de l’Union européenne, le SEQE-UE, est le premier marché carbone au monde par le volume échangé. Lancé en 2005, il applique le principe du pollueur-payeur aux plus gros émetteurs de gaz à effet de serre : centrales électriques, cimenteries, aciéries, raffineries, verreries, papeteries, ainsi que l’aviation et le transport maritime.

In France, more than 1,000 facilities are covered, accounting for approximately 84 million metric tons of CO₂, or nearly 20% of domestic emissions. At the European level, emissions from the covered sectors have fallen by about 39% since the program’s inception.

Two useful clarifications. The system is not a tax: the regulator sets a quantity of allowances, not a price, and the value results from the interplay between supply and demand. And an allowance is not a carbon credit: the former is a right to emit issued within a binding regulatory framework, while the latter certifies an emissions reduction achieved through a project, most often in the voluntary market.

Which industries and companies are affected?

The scope of application is set forth in Annex I of the European directive, which has been transposed into French law through the Environmental Code. It applies to specific activities that exceed certain capacity thresholds, rather than to companies as such: a single company may operate one facility that is subject to the directive and ten others that are not.

In France, just over 1,000 classified facilities are covered by the system, accounting for approximately 84 million metric tons of CO₂, or nearly 20% of the country’s emissions. At the EU level, the system covers approximately 40% of Europe’s greenhouse gas emissions. Each Member State publishes a list of the operators, airlines, and shipping companies covered by the system.

A company that does not operate any covered facilities has no reporting obligations under the system. It nevertheless bears the cost of the system, as we will see later.

The cap-and-trade mechanism

The process consists of four steps:

1. 1. The cap. The European Commission sets the total volume of allowances to be placed on the market for the year. This cap is reduced according to a linear reduction factor, which has been set at 4.3% per year since 2024 and will increase to 4.4% starting in 2028, as part of the Fit for 55 package.
   2. Allocation. A portion is sold at auction, while the rest is allocated free of charge to sectors exposed to international competition.
   3. Trading. Companies trade these allowances over the counter or on organized exchanges. A company that reduces its emissions sells its excess allowances; one that exceeds its allocation buys them. It is this transfer that creates the economic value of carbon.
   4. Offsetting. Each year, the facility offsets to the government an amount equal to the number of metric tons emitted, following verification by an accredited organization.

A fifth element regulates the entire system: the market stability reserve, which removes allowances from circulation when the surplus becomes too large. It was this mechanism that brought an end to the period of collapsing prices in the 2010s.

Free allocation and phased-out

Free allowances are provided to prevent carbon leakage—that is, the relocation of production to a country without equivalent restrictions. For a long time, they covered most of the needs of heavy industry, which explains why it took years for the economic signal to become binding.

This period is coming to an end. For sectors covered by the Carbon Border Adjustment Mechanism, free allowances will be phased out between 2026 and 2034. European manufacturers will therefore pay for all of their emissions, while importers will pay the equivalent amount on the products they bring into the EU. The two mechanisms are two sides of the same coin.

What specific requirements apply to a facility that is subject to these regulations?

The market is not limited to a price quote: it is based on a strict compliance chain, governed by Directive 2003/87/EC and, in France, by the Environmental Code.

Two points are worth noting. The deadline for returning allowances has been pushed back from April 30 to September 30 starting in 2024, which allows additional time to finalize purchases. And the verifier’s accreditation is not a mere formality: a declaration verified by a non-accredited body is deemed non-compliant. In France, the authority responsible for maintaining the accounts in the European registry is a national administrator, the Caisse des dépôts et consignations, and the list of covered facilities, airlines, and shipping companies is public.

There is one indicator that every exposed company should monitor: the total number of allowances in circulation, published annually by the Commission before June 1. This figure triggers withdrawals or injections from the stability reserve, and thus accounts for a portion of the price movements in the following year.

How is the price per metric ton determined?

Supply is regulated: it depends on the cap set by the directive, the auction schedule, and withdrawals made by the stability reserve. Demand, on the other hand, is driven by economic factors. Four factors cause it to fluctuate.

• Industrial activity. A recession reduces industrial production, which in turn reduces demand and, consequently, prices.
• The electricity mix. A heat wave that limits nuclear power availability, a period of no wind, and thermal power plants running more frequently. The summer of 2026 provided a clear example of this.
• Gas prices. Historically, high gas prices have led to increased use of coal—which emits more greenhouse gases—and driven up demand. This link has weakened since 2025.
• Political risk. Debates over industrial competitiveness, calls for caps from certain Member States, and the Commission’s planned revision of the directive in the third quarter of 2026 now carry as much weight as the fundamentals. European climate policy has become a market factor in its own right.

Projections from major banks point to a continued rise, with estimates around €145 per metric ton in 2030. These figures are scenarios, not certainties: they depend on political decisions that have yet to be made.

What are the consequences for a company that fails to return its quotas?

The fine amounts to 100 euros per metric ton over the limit, and it does not waive the obligation: the shortfall must still be made up the following year. In addition, the offender’s name is published. The system is designed so that compliance always costs less than noncompliance, regardless of the facility’s size.

On the revenue side, national authorities must allocate at least half of the auction proceeds to climate and energy projects. These funds are used, in particular, to support the Innovation Fund and the Modernization Fund, which co-finance industrial decarbonization projects.

The Case of Maritime Transport and Aviation

Maritime transport was included in the system in 2024, with a phased rollout: 40% of emissions covered in the first year, 70% in 2025, and 100% starting in 2026. The entities responsible are shipping companies, for their vessels exceeding 5,000 gross registered tons, which must open an account in the registry and surrender their allowances by September 30. Voyages between two European ports are fully covered; those entering or leaving the Union are covered at 50%.

This sector has a feature that is useful to shippers: ships’ fuel consumption and emissions data are reported under the European Monitoring, Reporting, and Verification Regulation, and some of this data is publicly available. This information makes it possible to calculate the actual cost incurred by a shipping company on a given route and to compare it to the surcharge charged.

In the aviation sector, only aircraft operators that exceed certain annual emissions thresholds are required to report and surrender allowances, and free allowances for the sector will be phased out in 2026. Flights within the European Economic Area are covered.

ETS2: The Second Expansion, Starting in 2028

A second market, separate from the first, will cover road transport fuels, building fuels, and fuels used by small industries. Monitoring and reporting obligations for the suppliers concerned began in 2025, with a monitoring plan approved by the national authority.The timeline was pushed back by one year: the Council of the European Union approved the postponement in November 2025, which was confirmed by the European Parliament’s vote on February 10, 2026. The Parliament took this opportunity to conduct a broader revision of the Climate Act. The system will become fully operational starting in 2028, with the first reporting covering fuels released for consumption in the previous year.

Three major differences from the first system.

• An upstream system. The regulated entities are not trucking companies or shippers, but fuel suppliers, who purchase fuel when it is released for consumption and pass on the cost at the pump.
• No free allocations. Everything is allocated through auctions.
• A cap. A flexibility mechanism is designed to keep the price around 45 euros through 2030, with additional allowances released in the event of sustained price spikes.

The target is a 42% reduction in emissions from the relevant sectors by 2030 compared to 2005. The estimated impact on diesel fuel for road transport is around 15 centimes per liter at the outset. Two points are often misunderstood: rail and inland waterway transport are not covered by the regulations governing road transport and buildings, and the basis for the calculation focuses solely on engine combustion emissions—known as TTW—and not on full fuel cycle emissions, which serve as the basis for ISO 14083 accounting and Scope 3.

Finally, a Social Climate Fund with 86.7 billion over the 2026–2032 period will provide support to the households and businesses most at risk.

The MACF, an extension of the import market

As of January 1, 2026, the Carbon Border Adjustment Mechanism—established by a European regulation separate from the ETS Directive—has entered its final phase. Importers of steel, aluminum, cement, fertilizer, hydrogen, or electricity must report the embedded emissions of their products and purchase allowances indexed to the European market price. Reporting is quarterly during the ramp-up phase, with an annual verified report and a list of covered products defined by the customs nomenclature.

The consequence is clear: the price per metric ton quoted on the European market no longer affects only manufacturers subject to the EU ETS; it now determines the import costs for thousands of industrial companies, many of which had never had to consider this issue before. In the absence of actual data provided by the supplier, the calculation is based on default values increased by 10% in 2026, 20% in 2027, and 30% in 2028.

Does the system reduce emissions?

That is the fundamental question, and the answer is well-documented: in the sectors covered, emissions have fallen by about 39 percent since 2005. Part of this reduction in emissions is due to the phase-out of coal in electricity generation, another part to gains in industrial efficiency, and a third part to economic conditions.

The debate centers instead on the pace. The “Fit for 55” package aims for a 62% reduction in emissions from the relevant sectors by 2030 compared to 2005, and the Climate Act, revised in February 2026, sets a target of a 90% reduction by 2040 for the entire European Union. Meeting these targets requires a cap on allowances that shrinks faster than actual emissions—and thus a rising price.

Two criticisms come up regularly. The first concerns free allocation, which has long neutralized the economic signal for the industry. The second concerns volatility: a business leader who must decide on a decarbonization investment spanning fifteen years needs price visibility that the market does not provide. This is precisely the argument put forward by Member States calling for price regulation, and it is one of the topics of the review initiated by the Commission.

How much does it actually cost?

Three examples with figures, based on a price of 79 euros per metric ton.

• A French cement plant emitting 400,000 metric tons per year will face an annual cost of approximately 31.6 million euros once the exemption is lifted. It is this amount that makes investments in carbon capture or fuel substitution—which were previously out of reach—profitable, and that justifies a multi-year reduction plan.
• A shipping company operating a container ship on an Asia-Europe route passes on its compliance costs directly to the shipper in the form of a surcharge. For a volume of 10,000 containers per year, the difference between the surcharge applied and the actual cost commonly amounts to 200,000 euros.
• A steel importer purchasing 5,000 metric tons from outside the Union pays, under the border adjustment mechanism, an amount indexed to the same price, calculated based on the intrinsic emissions reported by the producer or, failing that, on increased default values, regardless of the importer’s actual performance.

These three situations have one thing in common: carbon is an item on the income statement, not a metric in the annual report. This is the essence of carbon’s economic value, and it explains why the issue has shifted from CSR departments to finance and procurement departments.

What This Means for a Company Not Subject to the Rule

Not being subject to the tax does not mean you do not have to pay. The cost of carbon is passed on through three channels.

• Electricity. The wholesale price includes the cost of thermal power plants, which determine the marginal rate.
• Maritime transport. Since 2024, shipping companies have been charging their customers an ETS surcharge. This surcharge frequently exceeds the actual cost incurred, sometimes by a ratio of one to five. Recalculating this cost using publicly available data on ship fuel consumption makes it possible to dispute the invoice.
• Purchasing. Your suppliers participating in the system include the quota fee in their pricing, though they do not always itemize it on the invoice.

This is the essence of the concept of the economic value of carbon: carbon is no longer merely a unit of environmental reporting; it is a cost item included in the income statement, just like the cost of energy or raw materials.

The Most Common Confusions

• Confusing quotas with voluntary carbon credits: they are not the same markets, nor do they have the same prices or the same legal status.
• Treating the ETS as a tax, even though the regulator sets a volume rather than a rate.
• Underestimating the compliance chain: without an approved monitoring plan or an accredited audit, the declaration is inadmissible.
• Add the TTW emissions from the ETS2 baseline to the full fuel cycle emissions used in carbon accounting.
• Agreeing to a flat-rate ETS surcharge without verifying the actual cost of the service in question.
• Assuming that the price will follow a linear trajectory: the volatility observed in 2026—ranging from 70 to 88 euros over four months—shows that this is not the case.

How does Decarbo’Solution® address this issue?

Our ETS-Monitor® module reconstructs the actual cost of allowances line by line, based on public data and the carrier’s actual intensity, and then compares it to the surcharge billed. For a maritime shipment of 10,000 containers per year, the recoverable difference typically amounts to €200,000.My-CBAM® handles the import side by substituting the supplier’s actual data for the inflated default values, and Decarbo’Transport® provides the primary emission intensities needed to plan for ETS2. An integrated suite built on a single platform—this is the basis of our proprietary carbon SaaS solution that generates cash flow. Upon request, we’ll be happy to provide you with our ETS Fair Pricing Manual.

FAQ

What is the difference between the EU ETS and ETS2?

These are two separate markets, each with its own cap and its own pricing mechanism. The first is aimed at large facilities, aviation, and the maritime sector. The second will target fuel and combustion fuel suppliers starting in 2028.

Who can purchase European emission allowances?

Participating companies, as well as financial intermediaries and investors—provided they hold an account in the registry—which ensures the market’s liquidity. This financial participation is sometimes criticized, but it is an essential part of how an exchange market operates.

Can the price drop on a sustained basis?

Yes, in the event of a prolonged recession or a policy easing of the ceiling. It did so for nearly a decade after 2008. The stability reserve was created precisely to limit this risk by reducing the volume put up for auction when a surplus builds up.

Does this apply to a small or medium-sized business?

Rarely directly, but almost always indirectly—through its electricity bill, road or maritime transportation costs, and the prices charged by its suppliers. It has no reporting obligations in this regard. Since 2026, it may also be subject to direct reporting if it imports products subject to the MACF.

How do I verify a carbon surcharge billed by a carrier?

By calculating the actual cost: emissions from the service, price per metric ton on the relevant date, and the portion of the voyage covered by the system. Since vessel consumption data is publicly available, verification is possible without the company’s cooperation.

Will the free allocation of allowances come to an end?

For the sectors covered by the MACF, yes, gradually between 2026 and 2034. The border adjustment mechanism takes over to preserve competitive conditions.

What are the requirements for a newly registered facility in France?

Three steps must be taken before the facility can begin operations: obtain a permit to emit from the competent authority under the Environmental Code, have the monitoring plan approved, and open an account in the registry. Reporting requirements begin the following year.

How does this relate to CSRD reporting and the GHG inventory?

There is no direct legal link, but the two are highly complementary: emissions reported under the program contribute to Scope 1 of the GHG inventory and climate reporting. However, it is important to note that the scope is not identical: the system covers only certain facilities and certain gases, whereas a GHG inventory covers all of the company’s activities.

What is the proceeds from the auctions used for?

At least half must be used to finance climate and environmental actions in the Member States, under the Commission’s oversight, in particular through the Innovation Fund, the Modernization Fund, and—for ETS2—the Climate Social Fund.