A Guide to ETS2: What You Need to Know (and Do) Now

ETS2 is a new cap-and-trade system under the EU’s Fit for 55 package, designed to cut emissions by at least 55% by 2030. Unlike ETS1, it places responsibility “upstream”—on fuel suppliers and distributors rather than end users. This includes companies supplying natural gas, liquid fuels, and energy for heating in homes, buildings, transport, and smaller industrial processes previously outside the EU ETS. 

These sectors are major contributors to EU emissions but have been harder to regulate and slower to decarbonize. By targeting the supply chain, ETS2 makes compliance more manageable while pushing the system toward cleaner energy. 

Read on to learn what your obligations are and how to prepare. 

ETS2 was designed to address the emissions of fuel combustion in buildings, road transport and additional sectors—mainly small industry that’s not covered by the existing EU ETS. If your company is part of the upstream fuel supply chain—before the fuel reaches the end user—ETS2 likely applies to you. 

The scheme covers a wide range of fossil fuels, including natural gas, petrol, diesel, heating oil, coal, and others. ETS2 mainly affects the following entities: 

• Fuel suppliers providing energy for heating, road transport, or smaller industrial uses 

• Energy suppliers and wholesalers operating in the upstream fuel distribution chain 

• Owners or operators of building portfolios that rely on fossil fuels for heating 

• Logistics providers, fleet operators, and transport service companies consuming fuel 

• Small industrial installations currently outside the scope of the existing EU ETS 

If your business falls into one of these categories, it’s essential to start preparing for the reporting and compliance obligations that will come with ETS2 in 2027. 

Emissions Reporting & Monitoring 

Compliance starts with data. For ETS2 regulated entities, the core responsibility lies in accurately, consistently, and timely reporting emissions. While the scheme doesn’t start until 2027, preparation is key. Understanding what’s expected now will save time, resources, and potential penalties down the line. 

This is what you’ll need to do to comply with ETS2: 

• Fuel suppliers must report CO₂ emissions from combustion-based fuel on the quantity of fuel sold 

• Comply with the annual procedure of a monitoring, reporting and verification (MRV) system, known as the ‘ETS compliance cycle’    

The first reporting period starts in 2028 and will cover 2027 emissions. That means accurate data from day one is critical—so get your systems and processes in place now.  

EU Allowances  

Under ETS2, every tonne of CO₂ emitted must be covered by one carbon allowance. Unlike the current EU ETS, there’s no free allocation of EU allowances, but they can be obtained in the carbon market or through the EU ETS auctions. 

To keep the prices of carbon allowances stable, the EU will cap the prices on the allowances until 2030. After that, the cap will tighten progressively, which will result in fewer available allowances—and an expected rise in their prices. 

ETS2 doesn’t just bring reporting obligations—it also introduces your business to financial and operational risks, such as: 

• Expected rising fuel prices: As suppliers pass on the cost of carbon, fuel prices will likely rise—especially where low-carbon alternatives are not yet widely adopted or infrastructure is lacking. 

• Volatile allowance pricing: Particularly after 2030, when the emissions cap tightens, and cost-effective abatement options vary by sector. 

• Pressure to adapt: Depending on your industry, you may need to invest in electrification, alternative fuels, efficiency upgrades, or CCS. The feasibility and cost of these vary widely. 

• Compliance risks: Failure to meet reporting or allowance obligations can lead to fines, operational delays, or reputational harm. 

The risks are real, but avoidable. So, review fuel use. Tighten emissions data management. And explore your options to reduce your exposure to the rising carbon prices. 

2027 might seem in the distant future, but the key to staying compliant is to start the groundwork now. Here are three key steps to get started: 

Step 1: Start tracking emissions 

Begin by setting up systems to track the volume and type of fuel your business sells or uses, broken down by application. 

Make sure your data collection methods are aligned with the EU’s MRV framework to avoid gaps or costly fixes later. 

Step 2: Plan for carbon cost exposure 

How will ETS2 affect your bottom line? Navigate how carbon costs might be passed through to your customers and factor this into your pricing strategy. 

At the same time, explore what operational changes can reduce your emissions—such as efficiency upgrades, renewable heating, or transitioning to electric vehicles. 

Additionally, you can look into energy attribute certificates or biomethane sourcing as ways to offset fossil fuel use and demonstrate climate leadership. 

Step 3: Stay informed and engage early 

ETS2 is still evolving, but it is happening. That’s why it’s essential to monitor both EU and national-level guidance as it develops. 

Stay connected with industry associations, fuel registries, and compliance experts to make sure you’re not caught off guard. 

And last but not least: Prepare early to avoid last-minute compliance risks in 2027.