What is the EU ETS?
The EU Emissions Trading System (EU ETS) is the world’s first and one of the largest global carbon markets. It is the EU’s main tool that makes clean investment pay off, rewards frontrunners and supports economic transformation, thus contributing to the EU’s competitiveness and independence.
Under the system, companies must pay for their greenhouse gas emissions, encouraging them to cut pollution in the most cost-effective way. The money raised helps fund the transition to cleaner energy and technologies.
Since it was launched in 2005, the system has helped cut emissions by around 50%. It has also helped reduce gas consumption and Europe’s dependency on imported fossil fuels.
As Europe's economy and global challenges evolve, the EU ETS also needs to evolve. The reform will strengthen support for clean investment and provide a clear, predictable path to help businesses reduce emissions while remaining competitive. The EU’s new industrial needs and challenging geopolitical context are requiring a reform of the system.
The EU ETS has applied to power generation and energy-intensive industries since 2005. It was extended to aviation in 2012 and to maritime transport in 2024. It operates in all EU countries, as well as Iceland, Liechtenstein and Norway. Since 2020, it has also been linked to the Swiss Emissions Trading System (Swiss ETS).
The EU ETS has delivered real results. Since 2005, emissions from covered sectors have decreased by more than 50%.
Source: European Environment Agency
EU ETS investments
Since 2013, the EU ETS has generated more than €270 billion in revenues, with around three quarters allocated to Member States and €255 billion in free allowances to support the transition.
- Innovation Fundover €15.00billioninvested since 2020
- EU ETS auction revenues€270.00billiongenerated since 2013
- Modernisation Fundover €23.00billiondisbursed since 2021
- Free allocation€255.00billionin support to industry between 2013 and 2025
The ETS review
Since the EU ETS was introduced in 2005, Europe's economy and global challenges have evolved. The EU ETS also needs to evolve, therefore the EU is now reviewing the emissions trading system.
What will change in the EU ETS?
The review will make the EU ETS more supportive for European industry while keeping it a key tool to achieve Europe’s climate goals.
- The annual reduction of the EU ETS emissions cap will be adjusted to make the transition more gradual:
- 3.7% per year between 2031 and 2035
- 1.7% per year between 2036 and 2040
- This will provide more predictability for businesses while maintaining progress towards climate neutrality.
- The EU will mobilise €100 billion through the new Industrial Decarbonisation Bank to help industry invest in cleaner technologies.
- An ETS investment booster will also support additional investments before 2030.
- The EU ETS Innovation Fund will continue supporting the development and use of innovative clean technologies.
- EU countries will be required to use 50% of their national ETS revenues to support the decarbonisation of ETS sectors.
- This could generate more than €100 billion in additional investments before 2030.
- The Modernisation Fund will continue supporting lower-income EU countries in upgrading their energy systems and transforming their industries.
- Free allowances for companies will continue beyond 2030, with stronger links to investments in decarbonisation.
- This will reward companies that invest in clean technologies and encourage others to accelerate their transition.
- Industry will receive an additional €6 billion in free allowances between 2026 and 2030.
- For sectors covered by the Carbon Border Adjustment Mechanism (CBAM), the reduction of free allowances will be slowed down, with the phase-out extended until 2038.
- Permanent carbon removals will be integrated into the EU ETS. This will provide more flexibility for sectors where reducing emissions is particularly difficult, while supporting the growth of carbon removal technologies.
ETS2 – the new EU carbon market for buildings, road transport and additional sectors
ETS2 is the new EU carbon market designed to help reduce emissions from sectors that were not covered by the existing EU ETS, mainly road transport, buildings and some additional small industries. It will become fully operational in 2028 and is not impacted by the reform proposals.
Like the original ETS, it will operate through a “cap-and-trade” system, but it will regulate emissions upstream: meaning it will apply to fuel suppliers, not directly to households or individual consumers.
A share of the revenues generated will be used to support vulnerable households and micro-enterprises through the Social Climate Fund by:
- helping renovate buildings to improve insulation and energy-efficiency
- replacing outdated heating, cooling and cooking systems with cleaner options
- installing renewable energy sources, like solar panels
- improving access to zero-emission transport, like electric public transport and shared mobility
- providing temporary direct financial help for those who need it most
Frequently asked questions
How is carbon pricing helping cutting emissions?
Carbon pricing helps cut emissions by putting a price on pollution and creating a clear incentive for businesses to reduce their greenhouse gas emissions. Through the EU ETS, the emissions cap decreases over time, encouraging companies to invest in cleaner technologies and innovate.
The revenues generated are reinvested in people and communities to support the clean transition. Since its launch 20 years ago, the EU ETS has helped cut emissions from electricity and heat generation, energy-intensive industry, aviation and maritime transport by 50%.
How is the EU ETS helping EU businesses?
The EU ETS lowers the emissions cap each year in a predictable way, sending a clear long-term signal to companies that there is a business case for clean technologies. This helps businesses to plan ahead and invest in low-emission technologies, knowing their investments will stay competitive and pay off over time.
Carbon pricing drives industrial modernisation and supports investment in clean technologies. Programmes such as the Innovation Fund and the Modernisation Fund, fully financed by EU ETS revenues, provide funding for clean projects across Europe.
How will the ETS review help the EU industry?
The EU ETS review will help European industries reduce their emissions while staying competitive globally. Industries at risk of carbon leakage (the transfer of CO2 emissions from one country to another with less strict climate rules) will continue to receive free allowances to remain competitive. Access to such free allowances will be made conditional on its investments in decarbonisation in Europe.
The review of the EU ETS will also boost investments in industrial decarbonisation through the Industrial decarbonisation bank, the investment booster, as well as the continuation of the Innovation Fund and Modernisation Fund.
For sectors covered by the Carbon Border Adjustment Mechanism (CBAM), the phase-out of free allocation will be slowed down and the final phase-out date will be extended until 2038. This will help protect European companies, especially in trade-intensive sectors, from unfair competition.
How are carbon pricing revenues supporting jobs in the EU?
By 2030, carbon pricing revenues could help create more than 1 million new jobs across clean industries, energy efficiency, and green transport. This job creation will be supported by revenue recycling, retraining schemes, and regional investment under the ETS.
What is the role of the EU ETS in reducing the EU’s energy dependence and boosting clean and affordable energy?
Europe's reliance on imported fossil fuels drives up energy costs. Putting a price on carbon emissions drives investment in homegrown clean energy, keeping more money in European economies and reducing dependence on imported fuels.
Carbon pricing also boosts clean and affordable energy. In 2023, almost half of the EU’s electricity came from renewables – and when including nuclear, nearly 70% was generated from zero-emission sources. Price signals from the ETS make clean energy investments more attractive, and encourage consumers to switch to cheaper, cleaner energy sources.
How is carbon pricing contributing to a healthier environment?
Carbon pricing contributes to cleaner air. It discourages fossil fuel use, cutting harmful pollutants like sulphur oxides (SOx), nitrogen oxides (NOx) and fine particulate matter (PM2.5).
By reducing air pollution, carbon pricing can help reduce the risk of asthma, respiratory illness, cardiovascular disease and premature deaths. Cleaner air saves on healthcare costs and improves quality of life, especially in urban areas.
What benefits does the EU ETS bring to society?
Carbon revenues directly benefit society, the economy and citizens’ daily life. The EU ETS has generated around €270 billion in revenues for EU countries since auctions were launched in 2013. These funds have been reinvested directly in clean public transport, energy-efficient housing and modern infrastructure that improves daily life for millions of people.
These revenues have supported projects such as new green buses in Hungary, flood risk management in Estonia or a mobility voucher programme in Italy. Under the review, a greater share of these revenues will be reinvested in industry covered by the ETS to help accelerate industrial decarbonisation.
Is the EU the only region in the world with carbon pricing?
Carbon pricing is a proven approach used in an increasing number of countries worldwide. It is already in place in countries such as China, South Korea, New Zealand, Canada, and several US states. New systems are being developed in Brazil, Turkey, Japan and India to name just a few.
In fact, between 2016 and 2026, the number of implemented carbon taxes and ETSs more than doubled, along with the share of global GHG emissions they cover. Carbon pricing schemes now cover almost 30% of global emissions.
This page was last updated on 17 July 2026