The primary difference between ETS 1 and ETS 2 lies in their scope, the sectors they cover, and their operational independence, even though both are cap-and-trade systems designed to reduce greenhouse gas emissions within the European Union. ETS 2 is a new, distinct system specifically targeting emissions from buildings and road transport, operating separately from the established ETS 1.
Understanding the EU Emissions Trading System (ETS 1)
The EU Emissions Trading System (ETS 1), established in 2005, is the world's first major carbon market and remains the largest. It operates on a "cap and trade" principle: a cap is set on the total amount of certain greenhouse gases that can be emitted by installations covered by the system. This cap is gradually reduced over time to ensure overall emissions fall. Within the cap, companies receive or buy emission allowances, which they can trade with one another as needed.
Key aspects of ETS 1:
- Scope: Primarily covers emissions from large-scale stationary installations such as power plants and energy-intensive industrial plants (e.g., oil refineries, steelworks, cement production).
- Expansion: It has also been expanded to include emissions from aviation within the European Economic Area and, more recently, maritime transport (shipping).
- Mechanism: Companies must surrender enough allowances to cover their emissions each year. If they emit less, they can sell their surplus allowances; if they emit more, they must buy additional allowances. This creates a financial incentive to reduce emissions efficiently.
- Objective: To achieve the EU's climate targets by making polluters pay for their carbon emissions, encouraging investment in cleaner technologies and practices.
Introducing the New Emissions Trading System for Buildings and Road Transport (ETS 2)
ETS 2, also known as the "new ETS" or "separate ETS," is a critical component of the European Union's ambitious "Fit for 55" package, aimed at reducing net greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels. It was introduced as part of the 2023 revisions of the EU ETS Directive (Directive 2003/87/EC).
Key aspects of ETS 2:
- Scope: Specifically targets greenhouse gas emissions from the buildings and road transport sectors. Unlike ETS 1 which directly regulates large emitters, ETS 2 will regulate fuel suppliers who place fuel on the market for consumption in these sectors.
- Independence: Crucially, ETS 2 will be independent from the existing ETS 1. This means it will operate with its own separate cap, allowance market, and administrative framework.
- Mechanism: Like ETS 1, it will be a "Cap and Trade" system. Fuel suppliers will need to surrender allowances for the emissions caused by the fuels they sell for use in buildings and road transport.
- Objective: To drive down emissions in these historically harder-to-decarbonize sectors, which significantly contribute to the EU's overall carbon footprint. It aims to incentivise a shift towards cleaner fuels, energy efficiency in buildings, and electric mobility.
- Implementation: The system is set to apply from 2027, with a preceding reporting period to ensure a smooth transition.
Key Differences at a Glance
| Feature | ETS 1 (Existing EU ETS) | ETS 2 (New EU ETS for Buildings & Road Transport) |
|---|---|---|
| Scope of Coverage | Large stationary installations (power plants, heavy industry), aviation, maritime transport. | Emissions from buildings (heating/cooling) and road transport. |
| Regulated Entities | Operators of installations, airlines, shipping companies. | Fuel suppliers (placing fuel on the market for buildings and road transport). |
| Operational Link | Established system. | Independent from ETS 1. Operates with its own separate market. |
| Start Date | 2005 (with continuous revisions). | Planned to start in 2027 (with a reporting period from 2025). |
| Purpose | Decarbonize heavy industry, power generation, aviation, and shipping. | Drive emissions reductions in residential/commercial heating and cooling, and road vehicle fuel. |
| Market | Established carbon market for industrial and aviation/maritime allowances. | New, separate carbon market for allowances covering buildings and road transport fuels. |
| Legislative Basis | Directive 2003/87/EC (as amended). | Part of the 2023 revisions to Directive 2003/87/EC. |
Practical Implications and Impact
The introduction of ETS 2 marks a significant expansion of carbon pricing within the EU. While ETS 1 primarily impacts industrial players, ETS 2 will have a more direct, albeit indirect, effect on consumers through the price of heating fuels and petrol/diesel.
- For Consumers: Higher fuel prices for vehicles and heating fuels (gas, oil) are anticipated as suppliers pass on the cost of allowances. To mitigate this, the EU has established a Social Climate Fund to support vulnerable households and small businesses.
- For Businesses: Fuel suppliers will bear the direct responsibility for surrendering allowances, integrating the carbon cost into their pricing strategies. Industries within ETS 1 will continue to face their existing carbon costs.
- For Decarbonization: ETS 2 is expected to accelerate the transition to electric vehicles, promote energy efficiency improvements in buildings, and encourage the uptake of renewable energy for heating.
By establishing two distinct, yet complementary, emissions trading systems, the EU aims to create a comprehensive framework for achieving its ambitious climate neutrality goals across a broader range of economic sectors.
