EU Emissions Trading System (EU ETS)

The EU Emissions Trading System (EU ETS)¹ is a market-based instrument for reducing greenhouse gas emissions in a cost-effective and economically efficient way. It operates a cap-and-trade system covering electricity and heat generation, energy-intensive industries, maritime transport, and aviation within the European Economic Area.

An EU-wide emissions cap limits the total volume of emissions permitted from covered installations. This cap declines annually in line with EU climate targets. Within the cap, companies receive or buy emission allowances², each corresponding to one tonne of CO₂ equivalent. Companies may receive a limited share of allowances free of charge or acquire them through auctions. Allowances can be traded between companies, allowing those that reduce emissions at a lower cost to sell surplus allowances, while companies with higher emissions must purchase additional ones. This trading mechanism creates a clear economic incentive to invest in cleaner technologies, improve efficiency, and shift towards lower-carbon production.

The EU ETS allowances exist exclusively in electronic form. Companies covered by the system are required to hold accounts in the Union Registry,³ a secure EU-wide electronic system that functions in a similar way to an online banking platform, but for holding and transferring carbon allowances rather than financial assets.

Most emission allowances under the EU ETS are auctioned, generating significant public revenues. These revenues⁴ are primarily allocated to Member States participating in the ETS, alongside contributions to EU-level climate funds. Under EU legislation, Member States are required to use most of their auction revenues for climate- and energy-related purposes, including:

• reducing greenhouse gas emissions;
• supporting renewable energy deployment;
• improving energy efficiency; and
• contributing to climate action in third jurisdictions.

In addition to domestic spending, a share of EU ETS revenues is channelled into dedicated EU-level financial instruments⁵. These include the Innovation Fund⁶, which supports the development and deployment of innovative low-carbon technologies and industrial decarbonisation, and the Modernisation Fund⁷, which assists lower-income Member States in modernising their energy systems and improving energy efficiency.

Following the extension of carbon pricing to buildings and road transport through a separate emissions trading system (ETS2), part of the revenues will also support the Social Climate Fund⁸, which aims to mitigate potential social impacts of the transition and ensure that climate policies are implemented in a fair and inclusive manner.

Monitoring, Reporting, Verification and Accreditation (MRVA)

The effective functioning of the EU ETS is underpinned by a robust MRVA system, which ensures the accuracy, consistency, transparency, and integrity of emissions data across all covered installations.

The EU ETS compliance cycle is governed by a detailed regulatory framework, primarily set out in the following legal acts:

• Implementing Regulation (EU) 2018/2066⁹ - Monitoring and Reporting Regulation (MRR), which establishes rules for monitoring and reporting greenhouse gas emissions and activity data; and
• Implementing Regulation (EU) 2018/2067¹⁰ - Accreditation and Verification Regulation (AVR), which governs the accreditation of verifiers and the verification of emissions reports.

An updated set of rules under the Accreditation and Verification Regulation (AVR, second package¹¹, adopted in June 2025) further strengthens verification procedures, quality assurance, and consistency across Member States, reinforcing trust in EU ETS data and compliance outcomes.