ETS 2
As part of the 2023 revisions of the ETS Directive, a new emissions trading system named ETS2 was created, separate from the existing EU ETS. This new system will cover and address the CO2 emissions from fuel combustion in buildings, road transport and other sectors. Grey Epoch is here to help you prepare your business for the challenges and opportunities presented by the ETS 2.
What is ETS 2 and How Does It Affect Businesses?
ETS 2 is reshaping emissions compliance for fuel suppliers and downstream industries. In this short video, we explain how the system works, who it applies to, and what businesses need to consider to stay compliant and competitive.
Launched in 2023, ETS 2 is a separate EU carbon market covering fuels for building heating, road transport, and smaller industries not included in ETS 1.
It uses a cap-and-trade model alongside the existing EU ETS, extending carbon pricing across more of the economy.
For businesses in scope, ETS 2 introduces new compliance obligations, cash flow impacts, and exposure to carbon market volatility, making proactive management essential.
A New Cap-and-Trade Market
ETS 2 applies primarily to fuel suppliers serving road transport, buildings, and other covered sectors. Companies are in scope if they are liable for excise duties on these fuels and release them for consumption within regulated markets.
This includes:
Wholesalers
Importers
Refiners
Distributors
Importantly, suppliers may be responsible for emissions compliance even if they do not burn the fuel themselves. ETS 2 captures emissions at the point of supply, holding suppliers accountable when the fuels they place on the market lead to CO₂ emissions downstream.
Does ETS2 Affect You?
EU ETS 2 Compliance Timeline
Market Regulation
Starting Smoothly
To ensure a smooth start in 2028, the EU will auction 30% more ETS 2 allowances than that year’s emissions cap, bringing forward part of the future supply to provide extra market liquidity.
The ETS 2 will operate with a dedicated, rule-based market stability reserve to mitigate insufficient or excessive supply of allowances to the market, and with measures in the event of an excessive price increase. The reserve will be initially endowed with 600 million allowances.
Mechanisms & Triggers
During the first three years the ETS 2 is operational, if the price of allowances exceeds €45 (adjusted for inflation), additional allowances may be released from the ETS 2 market stability reserve to address excessive price increases.
Allowances may also be released from this reserve if the price of allowances increases too rapidly, according to specific rules and conditions.
Compliance Solutions for Fuel Suppliers
To help fuel suppliers efficiently, Grey Epoch Europe offers clear advice about the regulatory landscape, access to procurement, and hedging solutions while providing comprehensive support in navigating the emissions landscape.
Manage Price Volatility
With the price fixed, you’re not exposed to market fluctuations.
Fix Now, Pay Later
With a forward transaction, you pay the bulk of the fixed price up to 3 years later.
Budget Certainty
Lock in your profits by fixing the price.
Available Now
Forward Purchase
Forward buying in the ETS 2 involves purchasing EU Allowances (EUAs) in advance to lock in prices for future compliance without a large upfront payment.
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TAKE THE NEXT STEP
Prepare your business for the challenges and opportunities presented by the new EU ETS 2 scheme.
Contact Grey Epoch today to learn more about our services and how we can help you navigate the regulatory landscape.
FAQs
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A separate ETS starting in 2028 for fuels used in road transport, buildings, and smaller industries.
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ETS 1 and ETS 2 are both cap-and-trade systems, but they cover different sectors, use separate allowances, and have different supply and demand dynamics.
ETS 1: energy-intensive industries and aviation
ETS 2 (from 2028): adds fuel distributors for buildings and road transport
The main differences are new sectors, new compliance obligations, and the need to surrender allowances for distributed fuels.
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The following fuel suppliers are regulated under the EU ETS 2:
Authorised keepers of tax warehouses liable for excise duty, mainly covering liquid transport fuels.
If this does not apply, any person liable for excise duty on natural gas or solid fuels, including those exempt from paying (e.g. household coal suppliers) who must still register with national authorities.
If neither applies, Member States may designate another responsible party, for example where multiple persons are jointly liable for the same excise duty or where national systems require a different point of obligation
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End consumers are in scope when fuel is released for consumption by an ETS2-regulated supplier and the activity is not already covered by ETS1. Coverage is based on Common Reporting Format (CRF) categories from the IPCC 2006 Guidelines:
Buildings – CRF 1A4a (commercial/institutional) & CRF 1A4b (residential): space/water heating, cooking, small equipment and off-road tools used in these settings.
Road transport – CRF 1A3b: cars, motorcycles, vans, lorries, buses.
Energy industries not in ETS1 – CRF 1A1: small power/heat plants, refineries/coke ovens and other combustion where the installation is outside ETS1.
Manufacturing & construction not in ETS1 – CRF 1A2: on-site combustion for heat/electricity and mobile/off-road machinery, plus head-office energy use for these firms.
Member-State opt-ins – Article 30j: any additional sectors a country adds to ETS2.
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The ETS 2 will have a soft price cap of €45 (inflation adjusted) per tonne of CO₂.
If the average allowance price exceeds this level for a predefined amount of time, additional allowances can be released from the Market Stability Reserve.
The mechanism will be reviewed in 2030.
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The €45 trigger is inflation-linked at 2020 prices. When the EU ETS starts, this means the cap might already exceed €55.
Further changes may be reviewed periodically by EU regulators as part of ETS 2 updates.
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The annual compliance cycle is as follows:
Jan-Dec: Monitor emissions.
April 30th:From 2026 - submit verified annual emissions report for previous year’s emissions.
April 30th: From 2028 - report on average share of carbon costs passed on to consumers in the previous year.
May 31st: From 2028 - surrender allowances for previous year’s emissions.
July 31st: Submit possible improvements to Monitoring Plan (deadline extension to September possible).
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Yes, certified biofuels may reduce or remove the obligation to surrender allowances.
In Scope - Biofuels, including biodiesel, fall under ETS 2 because they are supplied for use as motor or heating fuels, even though they are derived from biological sources.
Zero-Rating - When a biofuel meets the sustainability and greenhouse gas savings criteria set out in the Renewable Energy Directive (RED II), its emissions are treated as zero, meaning no allowances need to be surrendered.
Proof Required - To qualify for zero-rating, operators must provide documented evidence that the fuel complies with RED II sustainability standards.
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The ETS 2 scheme itself starts in 2028, so primary compliance purchases aren’t yet possible. However, for those comfortable with derivatives, futures contracts are already available on exchanges, allowing early market exposure and hedging ahead of the scheme’s launch.
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No, the two systems will have separate allowances.
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