European Union Emissions Trading System regulates carbon markets

The European Union's Emissions Trading System (ETS) serves as a cap-and-trade mechanism designed to reduce greenhouse gas emissions, particularly CO2, from heavy-industry sectors. Under this system, companies must purchase allowances for every metric tonne of CO2 they emit. The market price for these credits is driven by supply and demand, influenced by the total emissions cap and the availability of credits.

As part of the ‘Fit For 55’ package, the system has been updated to align with EU climate targets, which aim for at least a 55% reduction in emissions by 2030 and climate neutrality by 2050. To address concerns regarding industrial competitiveness and ‘carbon leakage’—where companies might relocate to regions with laxer environmental rules—the European Commission has proposed extending the conditional allocation of free allowances beyond 2039.

Since its implementation in 2005, the ETS has helped reduce greenhouse gas emissions in covered sectors by approximately 50%. Market volatility has been noted in recent years, with average prices in 2023 reaching approximately 86.17 euros per tonne, while projections for 2026 suggest prices around 80-82 euros per tonne.