What is ETS2 and how will it affect European fuel suppliers?
Launched as part of the 2023 revisions to the EU ETS Directive, ETS2 represents a significant step in broadening Europe’s carbon market to accelerate decarbonisation efforts, designed to cut emissions by at least 42% by 2030 (compared ot 2005 levels). Unlike the original EU ETS, which focuses on end users in industry, shipping and aviation, ETS2 targets fossil fuels used ‘upstream’ through fuel suppliers and distributors for buildings, road transport, and smaller industries previously not covered by the EU ETS.
Who will ETS 2 Cover?
ETS 2 will primarily affect the following types of businesses:
Fuel suppliers providing energy for heating, road transport, or smaller industrial uses
Energy suppliers and wholesalers involved in fuel distribution
Building owners or operators relying on fossil fuels for heating
Logistics providers, fleet operators, and transport companies that consume fossil fuels
Smaller industrial installations currently outside the scope of the existing EU ETS
If this affects your business, it’s important to begin preparing now for the scheme’s start in 2027.
Key Features
Coverage: ETS2 targets fuel suppliers liable for excise duties in sectors accounting for approximately 40% of the EU’s total CO₂ emissions , previously not covered by the original EU ETS. Carbon pricing is expected to regulate around 75 % of EU GHG emissions from 2027 ).
Market Size: The initial market will include suppliers distributing fuels to approximately 230 million Europeans and millions of vehicles on EU roads.
Auction Supply: To ensure liquidity at launch, the EU will auction 30% more allowances than the emissions cap in 2027 with total auctioned allowances for 2027 at 1.347 billion.
Market Stability: ETS2 has a dedicated Market Stability Reserve, initially endowed with 600 million allowances, designed to adjust supply dynamically in response to market conditions and moderate price volatility.
Price Control: If allowance prices exceed €45 (inflation-adjusted) in the first three years, additional allowances will be released from the reserve to counteract excessive price increases.
Compliance Obligations: Fuel suppliers should monitor, report, and surrender allowances corresponding to emissions from distributed fuels annually, extending carbon pricing downstream to the point of fuel supply.
A timeline illustrating ETS2’s phased rollout
Implications for Businesses:
Implementation Challenges
Early adopters involved in ETS2 pilot programs have reported challenges integrating monitoring, reporting, and verification (MRV) systems into existing operations, citing data accuracy and infrastructure upgrades as key needs. These efforts enable robust emissions tracking critical for compliance.
On the positive side, companies that invested early gained market insights, allowing more effective emission procurement strategies and reducing compliance costs through forward purchasing and risk management. Also, advances in digital MRV and blockchain promise to improve compliance efficiency.
Strategic Implications
ETS2 encourages suppliers to improve fuel pollution transparency, reduce emissions intensity, and use carbon pricing signals for cost optimisation. Proactively participating positions companies as sustainability leaders, improving stakeholder trust and opening access to green financing.
Expected Higher Fuel Prices
As fuel suppliers must cover both the cost of compliance and the fuel itself, these expenses are likely to be passed down the supply chain.
Potential Changes
The EU plans ongoing ETS2 revisions to include additional sectors and tighten caps that will affect volatility.
How to Prepare:
1. Begin tracking emissions
Review the EU’s Monitoring, Reporting and Verification (MRV) framework to understand new data requirements. You may need to implement or upgrade systems to track fuel volumes, types, and applications accurately.
2. Plan for carbon costs
Assess how ETS 2 could impact your operational and carbon compliance costs.
Consider risk management solutions for compliance purchases, such as derivatives, which allow for early market exposure and hedging ahead of the scheme’s launch.
Develop a forward-looking strategy that may include efficiency improvements, renewable heating, electrification of fleets, or alternative energy sources to reduce exposure and optimise long-term costs.
3. Stay informed
Keep up to date with EU and national guidance on ETS 2 as details evolve. Regular monitoring will help ensure your business remains compliant and fully prepared when the system comes into force in 2027.
How Grey Epoch can support your business with ETS 2
Grey Epoch’s market access, regulatory expertise, and tailored risk strategies help fuel suppliers navigate ETS2’s complexities with confidence. We offer bespoke consultations, training webinars, and compliance toolkits designed to reduce costs while maintaining regulatory integrity.
Contact Grey Epoch today to ensure your ETS2 readiness and turn carbon compliance into a strategic advantage.
