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 why it matters beyond Europe's borders.
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?
The European Union Emissions Trading System (EU ETS) is a cap-and-trade system that has operated since 2005. It covers heavy industry — power generation, cement, steel, aluminium, chemicals, paper, and aviation — which together account for around 40% 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, creating an ongoing incentive to decarbonise.
Where is the carbon price in 2026?
EU ETS allowances were trading at approximately €68 per tonne in May 2026 — near a 14-month high. The price rose through early 2026 as industrial demand recovered and Phase 4 supply tightening continued.
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 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 2026, a separate ETS II covers road transport and buildings fuel combustion, initially for fuel suppliers rather than end users.
UK installations are covered by the separate UK ETS, 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, the Carbon Border Adjustment Mechanism (CBAM) extends the 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.
What does an €68/t carbon price mean in practice?
| 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 upward — the cap continues to tighten and free allocation to industry is phasing out — but the path will not be linear. Economic downturns reduce demand and push prices down; political interventions (as seen in 2023 when some politicians called for ETS reform to combat energy prices) create uncertainty.
Key takeaway
The EU ETS carbon price at €68/t in 2026 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 and, from 2026, via CBAM for importers of carbon-intensive materials. Aviation readers should also compare CORSIA vs EU ETS, because eligible emissions units and allowances follow different rules.