EU ETS & Compliance
The operational guide to Europe's carbon market: who is covered, what to do and by when, how to manage the cost, and what CBAM changes for importers.
What you will find in this guide
- How to determine whether your installation, flights or voyages fall under the EU ETS
- The annual compliance cycle: monitoring plan, verified report by 31 March, surrender by 30 September
- How free allocation is being phased out for CBAM sectors between 2026 and 2034
- CBAM in its definitive regime: authorised declarants, certificate prices and the first surrender in September 2027
- What to watch: the Market Stability Reserve, the 2040 target and the ongoing reform debate
Are you covered? Scope, thresholds and sectors
The EU ETS is a cap-and-trade system: the EU sets a declining cap on total emissions and covered operators must surrender one allowance (EUA) for every tonne of CO₂ equivalent they emit each year. It applies to power generation and energy-intensive industrial installations — steel, cement, chemicals, refining, pulp and paper, glass, aluminium and others — above the capacity thresholds defined in Annex I of the ETS Directive (for combustion, the reference threshold is 20 MW of rated thermal input). If your site operates combustion units, furnaces or production processes above those thresholds in the EU/EEA, you are almost certainly in scope and need a greenhouse gas emissions permit from your national competent authority.
Aviation has been covered since 2012 for flights within the EEA, and maritime transport entered the system in 2024: ships of 5,000 gross tonnage and above calling at EU/EEA ports surrender allowances for 100% of emissions on intra-EEA voyages and 50% on voyages to or from non-EU ports, with a phase-in of 40% of 2024 emissions, 70% of 2025 emissions and 100% from 2026 — and from 2026 methane and nitrous oxide count alongside CO₂. The next expansion is ETS2, a separate system for fuels used in road transport, buildings and small industry: it was originally due to start in 2027, but the amended EU Climate Law adopted in March 2026 postponed its launch to 2028. ETS2 obliges fuel suppliers upstream, not end users — but the cost will flow through to fuel prices.
- In scope: power plants, industrial installations above the Annex I thresholds (20 MW for combustion), intra-EEA aviation, maritime transport ≥5,000 GT since 2024
- Maritime phase-in: 40% of 2024 emissions, 70% of 2025, 100% from 2026; CH₄ and N₂O added from 2026
- Geographic coverage for shipping: 100% of intra-EEA voyages, 50% of voyages to/from third countries
- ETS2 (buildings, road transport, small industry fuels): postponed from 2027 to 2028; obligation sits on fuel suppliers, no free allocation
- Out of scope of ETS1 but affected indirectly: small emitters below thresholds, and anyone buying fuel or importing CBAM goods
- First check: list every combustion unit and process at each EU site and compare rated thermal input against the 20 MW threshold — aggregation rules mean several small units on one site can bring you into scope
- If you are an importer rather than an installation operator, your obligation is not the ETS but CBAM: check your CN codes against Annex I of the CBAM Regulation before assuming you are outside the system
- If you buy fuel, heat or shipping services, expect ETS and ETS2 costs embedded in supplier prices: model pass-through clauses in contracts rather than discovering them in invoices
What you must do and by when: the annual compliance cycle
EU ETS compliance follows a fixed annual rhythm. Before you emit a single tonne, you need an approved monitoring plan describing how you will measure emissions — meters, calculation methods, fuel analyses — and a greenhouse gas permit from your national authority. During the year you monitor emissions according to that plan. By 31 March of the following year you submit an emissions report verified by an accredited independent verifier. By 30 September of the following year you surrender one allowance per verified tonne through your account in the Union Registry. Both dates moved with the 2023 revision: surrender used to be due in April, it is now due by 30 September.
The consequences of failure are designed to hurt: the excess emissions penalty is €100 per missing tonne, indexed to inflation, and it does not cancel the obligation — you must still buy and surrender the missing allowances the following year, and your name is published. Allowances are financial instruments: you buy them at auctions (run mainly on the EEX exchange) or on the secondary market, and you can hold them in your registry account indefinitely. Most industrial operators still receive a share of allowances for free, but that share is shrinking — see the next section.
- Before operating: greenhouse gas permit + monitoring plan approved by the competent authority
- 1 January – 31 December: monitor emissions according to the approved plan
- By 31 March (year+1): submit the verified emissions report (accredited verifier required)
- By 30 September (year+1): surrender allowances equal to verified emissions in the Union Registry
- Penalty for shortfall: €100 per tonne, inflation-indexed, plus the obligation to make up the missing allowances and public naming
- Where to get allowances: free allocation (shrinking), EEX primary auctions, secondary market via brokers or exchanges
- Treat 31 March and 30 September as hard internal deadlines with a month of buffer: verifier availability tightens sharply in February-March every year
- Keep a registry account open and tested well before your first surrender — account opening with the national administrator takes weeks, not days
- If you are a shipping company, check which Member State administers you (attribution depends on your port calls) and make sure THETIS-MRV reporting aligns with your ETS registry entries by 31 March
Managing the cost: free allocation, auctions and hedging
As of August 2026, EUAs trade around €75 per tonne — the Commission's CBAM reference price, based on EUA auction averages, was €75.36/t for Q1 2026 and €75.28/t for Q2 2026 — within a range of roughly €60–95 over 2025-26, and analyst surveys carried an average 2026 forecast near €92. For an installation emitting hundreds of thousands of tonnes beyond its free allocation, the carbon line is now one of the largest variable costs on the P&L, and it deserves the same treasury discipline as energy or FX exposure.
Free allocation still cushions the blow for industry: allowances are handed out based on product benchmarks reflecting the most efficient installations, and benchmark values for 2026-2030 have been cut by more than 16% on average compared with 2021. For the sectors covered by CBAM — iron and steel, cement, aluminium, fertilisers, hydrogen — free allocation is being phased out entirely between 2026 and 2034, because imports now pay an equivalent carbon cost at the border: the share of benchmark emissions still covered for free falls from 97.5% in 2026 to 95% in 2027, 90% in 2028, 77.5% in 2029, 51.5% in 2030, 39% in 2031, 26.5% in 2032, 14% in 2033 and zero in 2034. Aviation's free allocation also ends in 2026. Everything you no longer receive for free, you buy — at auction or on the secondary market — which is why hedging has moved from a trading-desk topic to a CFO topic.
- Free allocation = production volume × product benchmark × CBAM factor (for CBAM sectors, declining to zero by 2034)
- Power generators receive no free allocation and buy everything at auction — the EUA price is directly in your electricity bill
- Basic hedging toolkit: forward purchases on EEX/ICE, futures, staged buying programmes, price collars; CBAM exposure can be hedged with the same EUA instruments
- Liquidity is deep: the EU ETS is the world's largest carbon market, so execution risk is low — the risk is price, not market access
- Watch the spread between your procurement calendar and the 30 September surrender deadline: many operators buy gradually through the year instead of in September
- Quantify your net position first: verified emissions minus free allocation is the volume you must buy; stress-test it at €90 and €110/t, not at today's price
- A simple layered buying strategy (e.g. monthly purchases covering a rolling 12-month need) removes most timing risk without any derivatives
- Assign ownership: carbon procurement belongs to treasury or energy procurement with a board-approved mandate — not to the sustainability team alone
Importing goods: CBAM in the definitive regime
Since 1 January 2026 the Carbon Border Adjustment Mechanism is in its definitive regime: if you import cement, iron and steel, aluminium, fertilisers, electricity or hydrogen into the EU from third countries, you owe a carbon cost on the emissions embedded in those goods, mirroring what EU producers pay under the ETS. The legal obligation sits with the EU importer. Importers below 50 tonnes of cumulative net mass of CBAM goods per calendar year are exempt (the de minimis does not apply to electricity and hydrogen); everyone else must obtain authorised CBAM declarant status and report actual, verified embedded emissions — or accept punitive default values.
The money part runs on a delay you must plan for. CBAM certificates go on sale on a central platform from 1 February 2027; the first annual declaration and surrender, covering 2026 imports, is due by 30 September 2027. For 2026 imports the certificate price is the quarterly average of EUA auction prices — €75.36/t for Q1 2026 and €75.28/t for Q2 2026, so accrue the liability quarterly in your accounts even though you cannot buy certificates yet. From 2027 prices become weekly. The number of certificates due equals embedded emissions minus the free-allocation adjustment (the CBAM factor: only 2.5% of benchmark emissions are chargeable in 2026, rising to 100% by 2034) and minus any carbon price already paid in the country of production. Typical mistakes: missing the authorised-declarant application, relying on default values when supplier data exists, ignoring the 50% quarterly holding requirement (declarants must hold certificates covering at least 50% of embedded emissions at each quarter end), and forgetting that indirect emissions count for cement and fertilisers.
- Sectors: cement, iron & steel, aluminium, fertilisers, electricity, hydrogen — scope is defined by CN codes in Annex I, not by product descriptions
- Exemption: under 50 t/year of cumulative CBAM goods per importer (not valid for electricity and hydrogen)
- Certificates on sale from 1 February 2027; first declaration + surrender by 30 September 2027 for 2026 imports
- 2026 prices quarterly (Q1: €75.36/t, Q2: €75.28/t); weekly from 2027; accrue liabilities during 2026
- Deductions: free-allocation adjustment via the CBAM factor (97.5% in 2026 → 0% in 2034) and carbon price paid at origin (with proof)
- Ongoing duty: hold certificates covering ≥50% of embedded emissions at the end of each quarter
- Apply for authorised CBAM declarant status now if you import above 50 t/year — importing without authorisation is itself an infringement, before any certificate is due
- Get actual installation-level emissions data from your suppliers under contract: verified actual data almost always beats default values, which are set at the level of the worst-performing exporters
- Put CBAM clauses in purchase contracts: who provides data, who bears certificate cost risk between order and delivery, and what happens if default values apply because data was late
What to watch: the MSR, price signals and the 2040 reform
The single most important structural feature of the EU ETS is the Market Stability Reserve (MSR): when the surplus of allowances in circulation (the Total Number of Allowances in Circulation, published each year) exceeds 833 million, 24% of the surplus is withdrawn from auction volumes into the reserve, and allowances in the reserve above 400 million are invalidated. This automatic supply tap, combined with a cap that tightens by 4.3% per year in 2024-2027 and 4.4% from 2028, is why the long-run price direction is upward even when short-term politics pushes prices down. As of August 2026 the political debate is unusually intense: energy-intensive industries are lobbying for stability measures, while the Commission's July 2026 review package proposed changes to supply and to the CBAM factor.
The anchor for everything is the amended EU Climate Law, adopted in March 2026 (Regulation (EU) 2026/667): a legally binding 2040 target of -90% net emissions versus 1990, with up to 5 percentage points allowed through high-quality international credits from 2036 — a provision that could eventually reconnect the EU ETS to the global credit market — and the postponement of ETS2 to 2028. For compliance planning, the practical signals to monitor are the annual TNAC publication (it drives MSR withdrawals and auction volumes), the free-allocation benchmark revisions, the EU-UK ETS linkage negotiations, and the ETS2 pre-auctions that precede its 2028 start.
- MSR mechanics: TNAC above 833 Mt triggers withdrawal of 24% of the surplus per year; reserve stock above 400 Mt is cancelled permanently
- Cap tightening: linear reduction factor of 4.3%/year (2024-2027), then 4.4% — supply falls regardless of demand
- 2040 target: -90% net vs 1990, binding since March 2026; international credits allowed up to 5% of 1990 net emissions from 2036
- ETS2 postponed to 2028; watch early auctions and price-cap discussions (the €45/t soft ceiling mechanism)
- Reform risk is two-sided: industry pressure for a softer ETS vs the 2040 target requiring a steeper cap — plan for volatility, not for a single scenario
- Build a simple monitoring routine: TNAC publication (spring), Commission reform proposals, ETS2 milestones, and the quarterly CBAM price — four dates a year cover 90% of what moves your cost
- Do not bet your compliance budget on a political softening of the ETS: even in the 2026 reform fight, industry associations asked for stability, not a weaker cap
- If you have a 2030+ investment horizon, price carbon in your models at the level implied by the 2040 target, not at today's spot price
