What is the EU ETS and how does it work?
The EU Emissions Trading System is the world's largest carbon market. It sets a price on carbon for around 10,000 industrial facilities and airlines across Europe. Here is how it works, where prices stand in 2026, and...
The EU Emissions Trading System is the world's largest carbon market. It sets a price on carbon for around 10,000 industrial facilities and airlines across Europe. Here is how it works, where prices stand in 2026, and why it matters beyond Europe's borders.
What is the EU ETS (European Union Emissions Trading System)?
The European Union Emissions Trading System (EU ETS) is a cap-and-trade system that has operated since 2005. It covers heavy industry, including power generation, cement, steel, aluminium, chemicals, paper and aviation, which together account for a large share of EU greenhouse gas emissions.
The system works by setting a total cap on the emissions allowed from covered sectors. Installations receive or buy permits called EU Allowances (EUAs), each representing one tonne of CO₂ equivalent. At the end of each year, every installation must surrender enough allowances to cover its actual emissions. If it emits more than it holds, it must buy more. If it emits less, it can sell the surplus.
The cap declines over time, gradually tightening supply and, in theory, pushing the carbon price higher. That creates an ongoing incentive to cut emissions, switch fuels, improve efficiency or invest in lower-carbon production.
Where is the carbon price in 2026?
EU ETS allowances are volatile and should be checked against live market data before budgeting or investing. In recent 2026 trading, EUAs have been in the tens of euros per tonne rather than the low single digits seen before the market was reformed. The important point for businesses is not one daily price print; it is that regulated carbon now carries a material cost.
For context, in 2017 the EU ETS price was below €5 per tonne. The dramatic increase reflects a series of structural reforms, including the Market Stability Reserve (MSR), which automatically removes excess allowances from the market, that have transformed the ETS (emissions trading system) from an ineffective symbolic mechanism into a credible carbon price signal.
Phase 4 (2021-2030)
The current Phase 4 of the EU ETS reduces the annual cap by 4.3% per year from 2024 onwards, up from 2.2% in Phase 3. The EU's "Fit for 55" package tightened this further. The result is a significantly more constrained supply of allowances through the decade.
Who is covered?
EU ETS Phase 4 covers stationary installations in power generation, energy-intensive industry, aviation within the EEA, and - from 2024 - shipping. From 2028, EU ETS2 (European Union Emissions Trading System 2) covers buildings, road transport and additional sectors through upstream fuel suppliers rather than end users. For detail, read the EU ETS2 guide.
UK installations are covered by the separate UK ETS (UK Emissions Trading Scheme), which has operated since January 2021 following Brexit. UK ETS and EU ETS prices have historically tracked each other but can diverge. Linking the two systems remains under discussion as of 2026.
How does it affect businesses outside covered sectors?
Even businesses not directly regulated by the EU ETS feel its effects. Electricity costs embed the carbon price, because power generators pass ETS costs through to industrial and commercial customers. Any business buying electricity in Europe is indirectly exposed to the ETS price.
From 2026, CBAM (Carbon Border Adjustment Mechanism) extends the emissions trading system (ETS) price signal to importers of carbon-intensive goods - initially cement, iron, steel, aluminium, fertilisers, electricity, and hydrogen. Companies importing these into the EU must purchase CBAM certificates reflecting the embedded carbon content of their imports. For the detailed border-rule guide, read EU CBAM explained.
For the broader policy background behind carbon pricing, border rules and climate diplomacy, read the climate policy and carbon markets guide. For the newer coordination question, read Open Coalition on Compliance Carbon Markets explained.
What does a €68/t carbon price mean in practice?
The table below uses €68/t as an illustrative scenario so readers can see how allowance prices translate into operating costs. It is not a live quote.
| Activity | Approximate CO₂e | Cost at €68/t |
|---|---|---|
| Producing 1 tonne of steel (basic oxygen) | ~1.8t CO₂e | ~€122 |
| Producing 1 tonne of cement | ~0.6-0.8t CO₂e | ~€41-54 |
| One return flight London-New York (per passenger) | ~0.9t CO₂e | ~€61 |
| 1 MWh of coal-fired electricity generation | ~0.9-1.0t CO₂e | ~€61-68 |
What is the outlook for EU carbon prices?
Price forecasts vary significantly. Banks and energy analysts have published 2030 targets ranging from €80 to €150 per tonne. The range reflects genuine uncertainty around the pace of industrial decarbonisation, the trajectory of the MSR, and policy decisions that have not yet been taken.
The structural direction is tighter supply because the cap continues to fall and free allocation to industry is phasing out. But the price path will not be linear. Economic downturns reduce demand and can push prices down. Political interventions, energy shocks and changes to industrial output can also move the market sharply.
How to use EU ETS information
For most readers, the EU ETS is useful in three practical ways. First, it gives a market-based reference point for the cost of regulated carbon in Europe. Second, it helps explain why energy-intensive materials can become more expensive as free allowances fall. Third, it creates a benchmark for other carbon policies, including the UK ETS, EU ETS2, CBAM and aviation rules.
Do not use this article as a live allowance quote. EUA (European Union Allowance) prices move daily and any budget, valuation or procurement decision should use current market data. The more durable lesson is that carbon exposure has moved from a reputational issue into a financial one.
Key takeaway
The EU ETS carbon price is a genuine signal of the cost of carbon in Europe's regulated sectors. For businesses in covered industries, it is a material operating cost. For businesses outside those sectors, it feeds through via electricity prices, from 2026 via CBAM for importers of carbon-intensive materials, and from 2028 through EU ETS2 for buildings, road transport and additional sectors. Aviation readers should also compare CORSIA vs EU ETS, because eligible emissions units and allowances follow different rules.
EU ETS FAQ
Is the EU ETS a carbon tax?
No. A carbon tax sets a fixed price per tonne of emissions. The EU ETS sets a cap and lets the allowance price move in the market. The policy controls quantity first, while price is set by supply, demand and market expectations.
Does the EU ETS apply in the UK?
Not directly. The UK has had a separate UK ETS since 2021. The two systems are similar but separate, and allowance prices can diverge. Businesses with EU and UK exposure may need to track both.
Why does the EU ETS matter to importers?
CBAM extends part of the EU carbon price signal to certain imported goods. Importers of covered materials need to understand embedded emissions, supplier data and any carbon price already paid in the country of origin.
Why CBAM makes the EU ETS more important
The EU ETS used to matter most to companies directly covered by the system. CBAM (Carbon Border Adjustment Mechanism) changes that. It extends part of the EU carbon-price logic to importers of selected carbon-intensive goods, which means companies outside Europe can still be affected if they sell cement, steel, aluminium, fertilisers, electricity or hydrogen into the EU market.
This matters because carbon pricing becomes a supply-chain issue, not only a compliance issue. Importers need embedded-emissions data, suppliers need to understand how their production route is assessed, and buyers may start favouring suppliers that can provide clear emissions evidence. For a business outside the regulated sectors, the EU ETS is therefore a signal of where trade policy is moving. It links carbon prices, industrial competitiveness and supplier data in a way that can affect procurement decisions long before a company becomes directly regulated.
Useful source links
- European Commission: EU Emissions Trading System
- European Commission: Market Stability Reserve
- European Commission: Carbon Border Adjustment Mechanism
- European Commission: EU ETS2
- EU ETS vs UK ETS
Tool via The Carbon Workbench