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Fit for 55: reform of the EU emissions trading system

The EU emissions trading system (EU ETS) is the EU’s key tool for reducing greenhouse gas emissions. The reform of the system is a part of the ‘Fit for 55’ package – a set of proposals to revise and update EU climate, energy and transport legislation, which will contribute to the EU’s climate goals of reducing net greenhouse gas emissions by at least 55% by 2030 and reaching climate neutrality by 2050.

In December 2022, the Council and the European Parliament reached a provisional political agreement on ETS reform. The Council formally adopted the new legislation in April 2023.

The infographic explains the reform of the EU emissions trading system, what sectors it covers, the changes the reform will result in and how it contributes to climate neutrality.

Reform of the EU emissions trading system explained

The EU’s emissions trading system (EU ETS) is one of the world’s largest carbon markets and the EU’s key tool for reducing greenhouse gas emissions.

  • The system puts a price on carbon. Every year, entities covered by the ETS have to buy ‘allowances’ corresponding to their greenhouse gas emissions.
  • Every year, a cap is set on how many allowances are put on the market for that year; that cap then decreases with every passing year. This creates financial incentives for companies to cut emissions.
  • However, certain sectors that are exposed to ‘carbon leakage’ get free allowances to support their competitiveness.

How does the EU ETS contribute to the goal of climate neutrality?

The EU ETS covers around 40% of total EU emissions and has already proved to be the key tool for emissions reduction.

Since 2005 (when it was introduced), EU emissions have been cut by 41% in the sectors covered.

The reform will result in further emissions reductions, bringing the EU closer to climate neutrality.

Which sectors are currently covered?

The EU ETS covers approximately 10 000 companies

  • electricity and heat generation
  • energy-intensive industry sectors (e.g. oil refineries, steel industry, cement, glass and paper production)
  • commercial aviation (flights within the European Economic Area)

What will change with the reform?

  • more ambitious emissions reduction goals
    • new reduction of 62%
  • faster reduction of the cap, fewer allowances on the market:
    • reduction of 117 million allowances over two years
    • 4.3% reduction annually (2024-2027) and 4.4% (2028-2030) instead of the current 2.2%
  • the ETS to cover new sectors:
    • extension to maritime transport (introduced gradually between 2024 and 2026)
    • a separate new ETS for buildings, road transport and fuels for additional sectors
  • gradual phasing out of free allowances for certain sectors (in parallel with the introduction of the carbon border adjustment mechanism – a carbon pricing system applicable to energy-intensive products imported into the EU in order to avoid carbon leakage)
  • increased funding for decarbonising ETS sectors
    • modernisation fund
    • innovation fund
  • Up to €65 billion to address the carbon pricing impact of the proposed ETS for buildings and road transport and fuels for additional sectors
    • a part of revenues from allowances for buildings, road transport and fuels for additional sectors will contribute to the social climate fund (protecting the most vulnerable people and companies from the carbon pricing impact of this new ETS system)

 

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Last review: 31 January 2025