How the European CO2 emissions allowance market works and how it impacts business energy costs.
The EU ETS (European Union Emissions Trading System) is the world's largest carbon market. Created in 2005, it caps CO2 emissions from industrial plants and power stations, requiring them to purchase emission allowances (EUA - EU Allowances) for every tonne of CO2 emitted.
Key EU ETS numbers
EU ETS phases
| Phase | Period | Key features | Annual cap reduction |
|---|---|---|---|
| Phase 1 | 2005 - 2007 | Pilot period, free allocation, CO2 only | N/A |
| Phase 2 | 2008 - 2012 | Kyoto alignment, first aviation sectors | N/A |
| Phase 3 | 2013 - 2020 | Single EU cap, auctioning as primary method | -1.74%/year |
| Phase 4 | 2021 - 2030 | Fit for 55, CBAM, new sectors | -4.3%/year (from 2024) |
How it works
The EU sets an annual cap on total emissions, which progressively decreases. Companies receive a free allocation of permits and must purchase the rest through auctions or on the secondary market. Those who emit less than expected can sell their surplus allowances. This mechanism creates an economic incentive to reduce emissions.
The cap-and-trade mechanism
The carbon price
The EUA price is determined by supply and demand, quoted on platforms like ICE and EEX. In recent years it has shown a strong growth trend, exceeding 100 EUR/tCO2 in 2023, before stabilizing. The price is a fundamental indicator for industrial decarbonization strategies.
Impact on Italian businesses
Even companies not directly subject to the ETS are indirectly affected: the EUA cost is reflected in the price of electricity generated from fossil sources. The ETS reform (Fit for 55) plans to extend to new sectors (transport, buildings) and introduce the CBAM (Carbon Border Adjustment Mechanism), which will impact imports from countries without carbon pricing systems.
Informational content by IPGS Energy. Information is reviewed as of the stated update date and does not replace a contractual, tax or regulatory assessment specific to an individual business.