ETS2 carbon price could rapidly breach €100

Europe's second carbon market is expected to be very sensitive to emission allowance scarcity

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In May 2025, futures trading will begin, in what promises to be, the worlds largest emissions trading scheme by value.

No, we’re not talking about the Chinese carbon market, which will continue to be the biggest ETS based on emissions covered. We’re talking about Europe’s second emissions trading scheme, known as ETS2. To recap, ETS2 is a separate emissions trading scheme that will cover buildings, road transport, as well as those manufacturing industries (under 20 MW threshold) that are not yet covered by ETS1.

The buildings sector accounted for 15% and road transport 21% of EU greenhouse gas (GHG) emissions in 2022, according to the European Environmental Agency (EEA). Following full implementation of ETS2, three-quarters of the EU’s carbon emissions will be subject to direct carbon pricing. In 2024 around 13 Gt CO2e of emissions faced a direct carbon price, accounting for 24% of global emissions. ETS2 adds the equivalent of 1Gt CO2e in covered emissions, or almost 2 percentage points to the global share (see It's the carbon price, stupid!).

Monitoring and reporting of emissions began in 2024. Full compliance obligations (i.e., including procuring and surrendering allowances) are expected to begin in 2027, but as we’ll see, there is a small chance of a delay. In contrast to ETS1, which places the compliance burden at the point of consumption, the obligated entity under ETS2 are the fuel suppliers, distributers, and resellers. The European Commission (EC) estimates that 11,400 of these companies will count as regulated entities under ETS2.

ETS2 will contribute to the EU’s goal of reducing emissions by 55% from 1990 levels by 2030. If Europe is to achieve that target then the road transport and heating sectors must reduce their emissions by at least 40% compared to 2005 levels. Emissions will then need to continue to drop sharply, even after 2030, to meet the proposed 90% emission reduction target set for 2040. Overall, ETS2 emissions will need to drop from around 1.1 Gt CO2 in 2027 to 0.2 Gt CO2 in 2040.

ICE Endex, Europe’s energy futures and options exchange, announced in December that it will launch a series of EUA 2 futures contracts on 6th May. The move will allow obligated companies to hedge their carbon risk exposure. The financial impact for parts of the fuel supply chain that fail to plan ahead could be brutal. At the same time it could also be a big opportunity for speculators, but one that does come with risks - namely, a political backlash.¹