The EU Emissions Trading System 2 (ETS2) is a new, separate EU emissions trading system (EU ETS), which will become fully operational in 2027. It was introduced as part of the 2023 revision of the EU ETS Directive.

Main aspects of ETS2 and why it is important:

1. Sectors covered: ETS2 is designed to cover sectors where historical progress in decarbonisation has been limited. These include:
   • Road transport
   • Buildings
   • Additional sectors (mainly industry not included in the original ETS1)
2. Objectives and link to policy: ETS2 is not an isolated policy, but part of a broader package of national and EU-wide measures aimed at accelerating decarbonisation. It is an integral part of the EU's efforts to achieve ambitious climate goals:
   • Reducing greenhouse gas emissions by 55 % by 2030 compared to 1990 levels.
   • Climate neutrality by 2050.
   • It provides the most cost-effective approach to achieving these goals.
3. Mechanism of operation and motivation:
   • ETS2 is introducing carbon pricing for CO₂ emissions from fuel combustion in the covered sectors.
   • Will have annual declining emissions ceiling, which is designed to align with the EU's 2030 climate targets and eventual climate neutrality by 2050.
   • Since carbon costs will be included in fuel prices, the financial burden will be passed on to final consumers – households, drivers, businesses and public services.
   • This will change the price signals and encourage the choice of low-carbon alternativesFor example, in the buildings sector, ETS2 will affect the cost of heating fuels (such as natural gas, which was not covered by ETS1), creating a level playing field for different heating systems and catalysing investments in cleaner technologies and energy renovations. In the transport sector, it will increase the running costs associated with owning diesel and petrol cars, making electric vehicles and public transport more attractive.
4. Social Dimension and Social Climate Fund (SCF):
   • The EU recognises the challenges that extending carbon pricing to new sectors may pose for the most vulnerable groups, including households at risk of energy poverty, micro-enterprises and vulnerable transport users.
   • To mitigate these impacts and ensure a fair and equitable transition, a Social Climate Fund (SCF).
   • The SCF will be primarily funded by revenues from ETS2 auctions and supplemented by auctions of 50 million allowances from the existing ETS1.
   • Member States are required to co-finance 25 % measures financed by the SCF, mobilising total resources of up to EUR 86.7 billion for the period 2026-2032.
   • Member States will have to submit Social climate plans, in which they outline the specific measures they intend to implement (e.g. direct income support, investments in energy efficiency in housing, access to zero- and low-emission mobility options).
   • In addition, Member States will be obliged to use all remaining national revenues from ETS2 for climate and social measures.
5. Additional measures: ETS2 is embedded in a broader policy package, including existing legislation such as the Alternative Fuels Infrastructure Regulation (AFIR), CO₂ emission standards for new passenger cars and light commercial vehicles, the Energy Efficiency Directive (EED) and the Energy Performance of Buildings Directive (EPBD). These initiatives use legally binding targets, mandatory performance requirements and increased transparency for end-users.

Overall, ETS2 is key for achieving EU decarbonisation goals in a cost-effective manner, while takes into account social impacts through the Social Climate Fund and motivates the transition to low-carbon solutions in sectors that have so far lagged behind. JRi