About
EU adopted Directive 2023/959 amending Directive 2003/87/EC (ETS Directive) on 16 May 2023, expanding the scope of the ETS Directive to a new activity targeting fuel consumed in buildings, road transport and additional sectors. Additional sectors primarily refers to industries that are not independently covered by the current quota system. This expansion of the ETS Directive is referred to as ETS2. The legislative framework of the ETS2 is spelled out in the ETS Directive, see especially Chapter IVa and Annex III.
What primarily distinguishes ETS2 from the other activities covered by EU's existing emissions trading system for stationary installations, aviation, and maritime transport (ETS1) is, firstly, the establishment of a separate quota market with its own quota ceiling. Thus, there are specific quotas to be used for quota obligations, and these quotas cannot be used interchangeably between ETS1 and ETS2.
Secondly, the obligated party under ETS2 is set upstream to those who place the fuel on the market, rather than to the actual consumer of the fuel as in ETS1. This is due to the fact that there are thousands of emission sources covered by ETS2, including various heating units for heating purposes and vehicles for households. Those who are imposed with the obligations in ETS2 are the actors who ensure that fuel products are consumed in buildings, road transport, and additional sectors. Within the EU system, these are among the same actors who pay excise duty on the fuel, and the legal frameworks for the quota obligation are closely linked with the legal frameworks for EU's fee regulations (Directive (EU) 2020/262 on excise duty and Directive 2003/96/EC on the taxation of energy products and electricity).
All emission allowances in the ETS2 will be auctioned, and a share of the revenues will be used to support vulnerable households and micro-enterprises through a dedicated Social Climate Fund.
Timeline
The quota system for ETS2 will start in 2024. In the first phase, obligated parties under ETS2 will have requirements for monitoring and reporting emissions. Gradually, they will have the same obligations as the activities currently part of the emissions trading system under ETS1:
- By 1 January 2025: Obligated parties under ETS2 must hold a permit with an approved monitoring plan in accordance with the regulation on monitoring and reporting, as per Directive 2023/959 Article 30b. Obligated parties under ETS2 must submit their application at least four months before, unless member states set a shorter deadline.
- By 30 April 2025: Obligated parties under ETS2 must report historical emissions for 2024 (no requirement for verification by an independent third party).
- By 30 April 2026, and annually thereafter: Obligated parties must for the first time report a verified emissions report for greenhouse gas emissions of the previous year (first time for emissions for 2025).
- By 30 April 2028, and annually until 30 April 2030: Obligated parties under ETS2 must report the average annual share of quota cost transferred to the consumer, according to Directive 2023/959 Article 30f (3).
- From 31 May 2028, and annually thereafter: Obligated parties under ETS2 must surrender quotas for the previous year's emissions. In the event of extraordinarily high energy prices, the quota obligation will be postponed by one year according to the ETS Directive Article 30k. If this postponement occurs, the first deadline for quota settlement will be May 31, 2029. If Norway applies for and is granted an exemption from the obligation to impose quota obligations on the obligated entities under ETS2 according to Directive 2023/959 Article 30e, our understanding is that the deadline for Norwegian actors will be May 31, 2031 (2032 if postponed by extraordinary high energy prices)
Who does it impact?
- EU/EEA Member States
- Entities covered by the ETS2. ETS Directive Annex III refers to the 2006 IPCC Guidelines for National Greenhous Gas Inventories for the sources of emissions.
The building and road transport sectors shall correspond to:
(a) Combined Heat and Power Generation (CHP) (source category code 1A1a ii) and Heat Plants (source category code 1A1a iii), insofar as they produce heat for categories under points (c) and (d) of this paragraph, either directly or through district heating networks;
(b) Road Transportation (source category code 1A3b), excluding the use of agricultural vehicles on paved roads;
(c) Commercial / Institutional (source category code 1A4a);
(d) Residential (source category code 1A4b).
Additional sectors shall correspond to:
(a) Energy Industries (source category code 1A1), excluding the categories defined under the second paragraph, point (a), of this Annex; (Subsection a above under the building and road transport sector)
(b) Manufacturing Industries and Construction (source category code 1A2).
The content of the mentioned IPCC codes referred to here is extensive and essentially covers all sectors where fuel is burned, with some specific exceptions. Therefore, the scope of ETS2 will largely cover the remaining sectors where fuel combustion occurs, which are currently not covered by ETS1.
Status: In force
The ETS2 will become fully operational in 2027.
Relation to other initiatives and regulations
- The EU ETS2 will complement other policies of the European Green Deal in the covered sectors, helping Member States to achieve their emission reduction targets under the Effort Sharing Regulation.
- The ETS2 is a separate quota system to ETS1, and emissions covered by ETS1 should not be counted in ETS2, but due to their nature the two systems are linked together. It is planned that plant operators will report which fuel operators they receive fuel from, and vice versa. Reporting in ETS1 also takes place one month before reporting in ETS2 to allow time to gather information.
- The ETS2 is implemented into Norwegian law through the Norwegian Climate Quota Act.
Participants
The EU ETS2 applies to the EU Member States as well as the three members of the European Economic Area, Norway, Iceland and Liechtenstein.
Thommessen's comments
So far, the emission reductions in the sectors that now will be covered by the ETS2 have been insufficient to put EU on a solid path towards its goal of climate neutrality by 2050. The carbon price set by ETS2 intends to provide a market incentive for investments in building renovation and low-emission mobility.
In Norway there is already a ban on the use of mineral oil for heating of buildings, including residences, public buildings and commercial buildings. The Norwegian Environment Agency sent out a proposal for public consultation regarding a ban on the use of fossil gas for heating of buildings at construction sites this May. Based on this, the ETS2 will to our understanding make a bigger impact on the transport sector and additional sectors in Norway, compared to the buildings sector.
The Norwegian Climate Quota Regulations was updated with new and revised sections regarding monitoring and reporting under ETS2, which entered into force 1 July 2024. 4 April 2025 the Ministry of Climate and Environment presented a legislative proposal that aims to provide the legal basis for completing the national implementation of ETS2 in Norway. The scope of the Climate Quota Act was proposed to be expanded to include the activities and obligated entities covered by ETS2. 20 June 2025 the legislative proposal amending the Climate Quota Act entered into force.
As of today, a final decision has not yet been made on whether Norway will notify the possibility of granting exemptions from the fuel operator's quota obligation in ETS2 for the years 2027–2030, as allowed by the ETS Directive. Large parts of the scope of ETS2 are currently covered by the Norwegian CO2 tax, but ESA has stated that Norway will need to expand the scope of the CO2 tax in order to qualify for such an exemption. Therefore, it is unclear which year will be the first year of quota obligations under ETS2 for Norwegian actors. In relation to this, the Norwegian Environment Agency sent out a public consultation 5 June 2025 including the possibility of a regulatory provision authorizing the Ministry to establish rules on exemptions from quota obligations for the reporting years 2027-2030. This becomes relevant if it is decided that Norway wishes to make use of the exemption option. The consultation paper explains some uncertainty regarding how an exemption rule would function and request inputs on whether it is desirable to allow for exemptions. The deadline for input was 5 September 2025.
Furthermore, on 4 November 2025, the EU Member States reached agreement on the Council’s position regarding the new climate target for 2040. The position from the meeting of the Environment Council also includes agreement to postpone the obligation to surrender emission allowances in the ETS2 by one year, from 2027 to 2028. The justification is, among other things, to give households in the EU more time to adapt to higher fuel costs. Other obligations, such as monitoring and verified emissions reporting, are not proposed to be changed. The agreement in the Council is a position and will now be discussed in the European Parliament before the legislation is submitted for public consultation. If the proposal is adopted, the postponement will also apply to Norway.