ETS2: What is it and what impact will it have on households and businesses?

From 2005, energy intensive companies and electricity producers in the European Union (EU) must own emission allowances to emit CO₂[1] . Initially, these allowances are given away for free[2] or auctioned, after which they can be traded. The allowances are valid for a certain period of time, then the process starts again. The emissions trading system (ETS) now also covers intra-European aviation and parts of international shipping. This system is an important tool for reducing greenhouse gas emissions in Europe. The EU determines how many emission allowances are available. This quantity decreases annually by a predetermined percentage. The fewer allowances there are, the fewer greenhouse gases can be emitted.[3] If the existing phase-out path for the availability of ETS allowances is continued, from 2040 onwards there will be no allowances available anymore, which means the sectors covered by this system must have net zero greenhouse gas emissions. About 40% of total European greenhouse gas emissions are covered by the ETS. Emissions from heavy industry and the power sector fell by almost 50% between 2005 and 2023, thanks in part to the ETS.

[1] In some cases, companies also need allowances to emit nitrous oxide (N₂0) and fluorocarbons. Starting in 2026, methane (CH₄) is also covered by the ETS for some sectors.

[2] Free rights will be phased out over the next few years.

[3] Learn more about how the ETS works.

The importance of ETS2

In the sectors not covered by the ETS – such as the built environment (homes, offices, schools et cetera), road transport and small industry – emissions have not fallen as fast as in the sectors covered. To achieve the European goal of climate neutrality[4] by 2050, it is important that the emissions of the non-ETS sector decrease faster. A new emissions trading system should help achieve this. ETS2 is thus a complement to ETS1. Once ETS2 is in place, about three-quarters of European emissions will be covered by an ETS.

How does ETS2 work?

Organizations covered by ETS1 must monitor their own emissions and purchase and surrender the necessary emission allowances.[5] To prevent all European households and (small) companies from having to do the same, ETS2 works differently. In this case, it is the energy and fuel suppliers who have the obligation to monitor emissions and purchase and surrender the necessary allowances. This applies, for example, to energy suppliers that sell natural gas to households and businesses. It also applies to oil companies that sell petrol and diesel through service stations. They have to keep track of which fuels they supply to which type of customer. If they supply fuels covered by ETS2 to parties covered by ETS2, they must purchase and surrender sufficient emission allowances. The costs they incur to do so will likely be passed on in full to end customers, see Figure 1. Initially, all available allowances will be auctioned; after that, they will be freely tradable. No free allowances are provided.

[4] Climate neutrality is defined as net zero greenhouse gas emissions.

[5] These are scope-1 emissions: emissions that result directly from an organization's activities.

When does ETS2 come into effect?

In 2025 and 2026, energy and fuel suppliers must submit emission reports covering previous years (2024 and 2025) to the Netherlands Emissions Authority (NEa). No allowances have to be bought or surrendered yet. The first auction of ETS2 allowances will probably start in January 2027. Then, in 2028, the aforementioned parties must surrender allowances to the NEa for the first time for the previous year's CO₂ emissions. Figure 2 shows the expected timeline for ETS2 implementation. If the gas price rises sharply in the coming years, there is still a chance that the auction of allowances and the duty to surrender allowances will be postponed by one year.

Which sectors are covered by ETS2?

The European Union has determined that at least the built environment, road transport[6] and industrial companies not covered by ETS1 are covered by ETS2. In addition, individual member states may apply so-called opt-ins, i.e. they may extend the ETS2 obligation to other (sub)sectors not covered by ETS1. In principle, the Netherlands chooses to include as many (sub)sectors as possible in the opt-in, as this facilitates the implementation of the law. Indeed, the more exceptions there are, the greater the administrative burden to separately identify the supply of fuels to the excepted (sub)sectors. Also, exceptions are susceptible to fraud. Emissions from the combustion of fuels from rail transport, inland shipping and recreational boating will therefore be included in ETS2 in the Netherlands. This is also (partially) the case for emissions from agricultural equipment, stables and the defense sector.[7] However, the fishing industry is not included because, according to the government, this sector has insufficient options to decarbonize. Also, an opt-in for the fishing industry would lead to an uneven playing field compared to other countries. In the spring of 2025, the Dutch government will decide whether or not greenhouse horticulture will be included in ETS2. As this subsector is already being stimulated to decarbonize by several other policies, the Dutch government fears that including this subsector in ETS2 leads to over-stimulation. At the same time, as mentioned earlier, there are also disadvantages to making exceptions. For (sub)sectors not covered by ETS2, the fuel supply does have to be monitored, but no allowances have to be surrendered. Table 1 shows which (sub)sectors are included in which emissions trading system (if any).

[6] Except for agricultural vehicles traveling on paved roads.

[7] Excluding fuels used in national, bilateral or multilateral operations or collaborations.

Which fuels are covered by ETS2?

Natural gas, petrol, gas oil (diesel), coal and coke, heavy fuel oil, LPG and kerosene are all covered by ETS2, provided they are supplied to (sub)sectors covered by ETS2. This also applies to these fuels if they have a biological origin such as biodiesel and biokerosene. If the biofuels meet the European renewable energy criteria, their emission factor is zero and thus no emission allowances are required.[8]

What will an ETS2 allowance cost?

The price of ETS1 and ETS2 allowances is set separately. In principle, the price of ETS2 allowances depends on supply and demand, as with ETS1 allowances, but there is political pressure not to let the price of ETS2 allowances rise too much to avoid households and businesses facing sharply rising costs. Therefore, price protection mechanisms have been built in that, at least until 2029, steer towards a price of up to EUR 45 per metric ton of CO₂ (2020 price level).[9] This limit is soft, i.e. it cannot be ruled out that the ETS2 price temporarily exceeds the EUR 45 per metric ton CO₂ limit. If this happens, the EU will bring additional allowances to the market so that the price will fall.[10]

At present, it is not yet clear whether the EU will maintain the price protection mechanism after 2029 and, if so, at what price level. In its most recent Climate and Energy Outlook (KEV), the Netherlands Environmental Assessment Agency (PBL) assumes that the ETS2 price will be at or around the maximum until 2030, which, indexed, comes to EUR 55 per metric ton of CO₂ (2023 price level). From 2030 onwards, PBL uses a price range of EUR 55 to EUR 110 per metric ton CO₂ (2023 price level).[11]

Where do the revenues from the allowances go?

Companies that need ETS allowances can buy them at public auctions or from other companies that have a surplus of allowances.[12] In the Netherlands, the auctions are conducted through NEa. This organization brings the Dutch allowances to the market, receives the proceeds and reports on the auctions. The NEa transfers the proceeds from ETS1 auctions to the Ministry of Finance.

From 2026, part of the ETS1 auction proceeds must be remitted to the so-called Social Climate Fund (SCF). From 2027, the same applies to part of ETS2 auction proceeds. This European fund is intended to support vulnerable households and small businesses in the transition to a decarbonized economy. This should make the energy transition feasible for everyone. The Social Climate Fund is intended to hold about EUR 87bn for the period 2026 to 2032. The European Union will manage the fund but member states must submit so-called social climate plans outlining measures and investments to mitigate the impact of carbon pricing on vulnerable households and businesses. For example, member states may use the money from the SCF to renovate buildings or encourage clean transport. Some of the money may also be used for direct income support to vulnerable groups. Member states must submit their first plans to the European Commission (EC) by June 2025 at the latest. The EC will then assess these plans and distribute the money from the fund.[13] The Netherlands can claim EUR 720m for the period 2026 to 2032.[14]

[8] Source: Netherlands Emissions Authority.

[9] Source: CL2003L0087EN0160010.0001_cp 1..2

[10] Learn more about exactly how the price protection mechanism works.

[11] PBL, TNO, CBS and RIVM (2024). Climate and Energy Outlook 2024.

[12] In the case of ETS1, some companies can still get free allowances. No free ETS2allowances will be allocated.

[13] Source: Social Climate Fund - European Commission.

[14] Source: Internet consultation begins for Social Climate Fund proposals | News release | Rijksoverheid.nl.

Higher prices of natural gas, petrol and diesel

The main consequence of ETS2 for households and businesses is financial. This is because it is expected that energy and fuel suppliers will (fully) pass on the costs they will incur to purchase the necessary allowances to the end customer. Table 2 converts the expected costs for ETS2 allowances used by PBL into costs per cubic meter of natural gas, liters of petrol and diesel. These costs exclude the costs that energy and fuel suppliers incur for conducting the necessary administration.

The table below shows the expected annual ETS2 costs for an average household.

Whether natural gas, petrol and diesel will indeed become more expensive from 2027 by the amounts mentioned above depends on many things. First, of course, on the price of ETS2 allowances. Also the prices of natural gas and oil on the wholesale markets play a role in the final consumer prices of gas, diesel and petrol. In addition, the blending obligation[15] of biomethane into the natural gas grid is likely to provide an additional 12 to 17 eurocents per cubic meter of natural gas, according to the Dutch government.[16] Finally, the government influences the consumer prices for natural gas, petrol and diesel in several ways. For example, the government can decide to make adjustments to the amount of energy tax charged on natural gas and the amount of excise tax charged on petrol and diesel. Next to that, the government had the option to provide direct income support to vulnerable households and businesses through the Social Climate Fund? At the moment, the Dutch government has not yet announced definitive plans on how it intends to use the money from the Social Climate Fund. Partly because of this, it is currently difficult to estimate the exact financial impact of ETS2 on consumer tariffs for natural gas, petrol and diesel. Households and businesses that want to be less vulnerable to any price increases of these fuels would do well to reduce their demand for these fossil products.

Potentially higher administrative burden for parties NOT covered by ETS2

As mentioned earlier, not all (sub)sectors not covered by ETS1 will (fully) fall under ETS2. For example, it currently appears that agricultural machinery will fall under ETS2 and agricultural vehicles driving on paved roads won’t.[17] Energy and fuel suppliers must therefore administratively distinguish between the supply of fuels to customers that do and do not fall under ETS2. However, this is not always feasible. For example, a supplier of petrol and diesel does not know exactly who refuels these fuels or for what purpose the fuels are used. It may therefore happen that certain end users are paying ETS2 allowances unduly. In that case, they are entitled to a refund from the government. To this end, a refund request will have to be submitted including evidence. Exactly what this refund scheme will look like will be announced later,[18] but it is therefore possible that companies that are not (fully) covered by ETS2 will face additional administrative burdens. Of course, these companies can also choose to pay the additional costs.

[15] From 2026, energy suppliers must add an increasing percentage of green gas to the regular natural gas they supply to customers covered by ETS2. Learn more about the Netherlands' ambitions for scaling up green gas production.

[16] Source: Kamerbrief aanpassingen bijmengverplichting groen gas | Kamerstuk | Rijksoverheid.nl.

[17] Source: Netherlands Emissions Authority.

[18] Source: parliamentary letter Implementing ETS2, 17-09-2024.