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Effective CBAM cost management (part 2): Cost mark-ups, procurement strategies and hedging

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In our first article in this series, we derived the demand for CBAM certificates to be submitted annually and the associated explicit CBAM costs based on a specific case study. To effectively manage the strategic and financial impact of CBAM, this article presents CBAM cost mark-ups at product level as well as strategies for procuring CBAM certificates and hedging options.

CBAM cost mark-ups and contractual adjustments

Our fictitious importer of 100,000 tonnes of steel ingots has an initial indication of the liquidity required for imports in 2026 by estimating the need for CBAM certificates and the associated costs. To manage these additional costs of around EUR 10 million at the company level and integrate them into supplier or customer contracts, it is necessary to determine the additional CBAM costs per supplier or per product group and import process. This allows for the consideration of the CBAM costs per product or the influence on gross margins per product during pricing.

The additional CBAM costs should be included in the risk analysis. It is particularly relevant whether real emission values are available or whether an authorised CBAM applicant must use default values in the CBAM declarations. The latter are subject to a penalising mark-up, which means higher CBAM costs.

Our analyses show that the cost differences between the two options are often immense. For example, some of our customers do not incur any CBAM costs in the first years of the CBAM definitive phase when using real emission values. If the importer were to import the same CBAM goods and (must) use default values for reporting, price increases of over 40% could occur as early as of imports in 2026 (see examples in Figure 1).

Figure 1: Additional CBAM costs at commodity level depending on real or default values for emissions (source: CBAMCC model by carboneer)

In many cases, CBAM requires a change to supply or sales contracts. A risk and cost analysis as described above should be taken into account, for example by:

  • Requiring guaranteed and verified emission values from suppliers,
  • Setting price discounts in the event of missing data,
  • Adjusting the purchase or sales prices of goods depending on the CBAM emissions.

In addition, CBAM certificates for imports in 2026 will not be issued until February 2027. This means that costs that will only be incurred in 2027 will already have to be taken into account for contracts and budget planning in 2026. Without the explicit inclusion of additional CBAM costs today, affected companies would have to bear the costs incurred in 2027 due to the purchase of CBAM certificates alone.

Cost management through CBAM certificate procurement strategies

The limited validity and the 50% holding obligation during the year (final decision still pending) of CBAM certificates requires ongoing CBAM certificate management. Obligated companies should therefore develop a procurement strategy for CBAM certificates that covers the following, tailored to the respective risk and company profile:

  • Liquidity constraints and risk profile
  • Potential for cost pass-through in the supply chain
  • Planning and purchasing processes and timeframes
  • Price volatility in the EU ETS

An optimal procurement strategy for CBAM certificates should take the above-mentioned boundary conditions into account individually and must also be statistically superior. To illustrate the differences between procurement strategies, Figure 2 compares the procurement of CBAM allowances at the end of each quarter with a strategy that uses technical analyses of prices in the EU Emissions Trading System (EU ETS). The fictitious CBAM certificate prices are based on the auction prices in the EU ETS in 2022-2024.

Figure 2: Comparison of two procurement strategies for CBAM certificates (regulation-driven strategy in green, SMART import-based strategy in blue) based on fictitious CBAM certificate prices in the years 2022-2024 (source: carboneer CBAMCC model)

Depending on the timing and quantity of CBAM certificate purchases, large price differences can occur, as prices in the EU ETS are subject to fluctuations and therefore have a direct influence on the prices for CBAM certificates. However, cost advantages can be achieved with the help of intelligent procurement strategies. The SMART import-based strategy of Figure 2 was particularly successful when analysed over several years and enabled the importer in the case study to make savings in the millions. Over an observation period of 10 years, the strategy developed by carboneer allows for almost 20% cost savings compared to a purely regulation-driven procurement of CBAM certificates. Active procurement can therefore reduce the explicit costs of CBAM certificates, thereby reducing financial risk, conserving liquidity and providing a competitive advantage.

Hedging of CBAM costs via the EU ETS

As purchased and unused CBAM certificates will be cancelled on 1 October of the second year after purchase (final decision still pending), they cannot be used for the submission obligation in the long term. However, for orders whose actual import date is further in the future or for longer-term cost certainty, an importer can take a further step to minimise risk.

As CBAM certificate prices are based on the prices of emission allowances (EUAs) in the EU ETS, the EU ETS provides a market that enables a hedging transaction. An importer can therefore hedge in advance the maximum CBAM certificate costs during an order or for future planned imports, at least in good approximation. The same principle also applies to the producer or supplier of a CBAM product, as they can guarantee the buyer in the EU maximum CBAM costs through a hedging transaction. This price fixing enables negotiations with suppliers, the calculation, adjustment or passing on of CBAM costs to downstream customers and better budgeting of CBAM certificate costs. Hedging can be used by purchasing physical EUAs or derivative market products on EUAs.

Medium to long-term hedging of CBAM certificate costs based on physical EUAs or futures market contracts purchased in 2025 (currently at EUR 70/tCO2) enables price fixing at the lower end of the expected CBAM costs for the future and, in our case study, savings of several million euros per year. Price hedging as outlined requires integration into the corporate strategy due to its complexity.

Figure 3: Cost forecast for CBAM certificates of the importer in the case study without hedging (green) and with hedging (blue). (Source: carboneer CBAMCC model)

To manage CBAM costs effectively, minimise risks and enable planning security, it is essential to analyse exposure at an early stage. The cost of CBAM certificates is likely to be higher than many market participants and prospective CBAM declarants currently realise. Although there are some uncertainties with regard to CBAM costs, tools such as CBAMCC can already be used today to develop customised scenarios and, based on these, strategies for procuring and hedging CBAM certificate costs.

Effective CBAM cost management (part 1): CBAM certificate demand and explicit costs

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In the first part of a series on effective CBAM cost management, we use a specific case study to derive the CBAM certificate requirements and the resulting explicit costs. Importers of CBAM goods may already incur high costs for imports in 2026 and should prepare for this at an early stage.

Assessing the financial impact of CBAM

While only reporting obligations apply for importers or indirect customs representatives in 2025, CBAM will enter the regular phase from 2026 (review our article on CBAM here). Above all, this means that, in addition to continuing to report imported goods and corresponding emissions, authorised CBAM declarants will have to acquire CBAM certificates for the embedded emissions contained in the imports from 1 January 2026 and submit them annually by 31 August of the following year. From the perspective of an importer or indirect customs representative, this has strategic relevance and the impact on risk and liquidity management of this additional financial burden should therefore already be analysed in 2025 in order to:

  • Plan a budget for the procurement of CBAM certificates
  • Develop a purchasing strategy for the acquisition of CBAM certificates
  • Manage or hedge price uncertainties of CBAM certificates and thus costs for imported goods
  • Adapt supplier and customer contracts to avoid being stuck with CBAM costs
  • Integrate the effects of CBAM into strategic purchasing decisions

The steps for developing a targeted strategy for CBAM cost management are described below using a case study. The starting point is to determine the relevant CBAM emissions, as this determines the quantity of CBAM certificates to be purchased. The following formula shows the most important parameters. To simplify matters, the assumption here is that no CO2 prices were paid in the upstream supply chain.

Figure 1: Calculation of the demand for CBAM allowances and relevant data sources (without taking into account CO2 prices in the upstream supply chain)

In addition to the information on the imported products and the embedded emissions they contain, the CBAM benchmarks are particularly relevant for calculating the quantity of CBAM certificates to be purchased. The CBAM benchmarks are expected to be published in Q4 2025. and will be based on the benchmarks for determining the free allocations in the EU Emissions Trading System (EU ETS). The CBAM benchmarks will therefore only be officially announced relatively shortly before the date on which CBAM allowances are purchased. However, a scenario analysis can already be used today to estimate the CBAM certificate requirement with the aid of the corresponding EU ETS benchmarks.

Analyse of the CBAM certificate demand

To illustrate the approach, the following case study uses an annual import volume of 100,000 tonnes of steel ingots in equal parts each quarter. Other important assumptions for modelling the CBAM certificate demand are:

  • No deductible CO2 prices in the upstream supply chain
  • Direct specific emissions: 2.58 tCO2/tproduct
  • Indirect specific emissions: 0.43 tCO2/tproduct
  • Use of a combination of EU ETS benchmarks as a proxy for the CBAM benchmark
  • Inclusion of indirect emissions from 2030 (envisioned in the CBAM Regulation, not yet part of the legal text)

The quantity of CBAM certificates to be purchased annually for the CBAM declarant in the case study is shown below. The importer must purchase over 130,000 CBAM certificates for its imports in 2026, which corresponds to pricing of 50 % of the imported direct specific emissions. This means that a significant proportion of embedded emissions could be priced right from the start of the CBAM definitive phase. This depends in particular on the level of embedded emissions in the imported CBAM goods and therefore on the CO2 intensity of the production process of the corresponding manufacturer. An analysis per import unit, CBAM product and supplier can provide information on important metrics such as the absolute and relative contribution to the need for CBAM certificates.


Figure 2: Estimation of CBAM certificate demand for 2026-2034 with import of 100,000 tonnes of steel ingots per year (source: carboneer CBAMCC model)

Important: The quantity of CBAM certificates that must be held by CBAM applicants for imported goods is 50% of the imported emissions since the beginning of the year at the end of each quarter (final decision still pending), with an exemption to this rule for imports in 2026, as CBAM certificates can only be purchased from 2027 onwards. However, the actual quantity of CBAM certificates to be submitted is ultimately based on the verified embedded emissions of the imported goods or the standard values of the EU Commission that are yet to be published. This difference between verified emissions values and default values can be significant in some cases. A precise analysis of the relevant imports and associated embedded emissions is essential for estimating the need for CBAM allowances from 2026 onwards.

Cost estimate and liquidity demand for CBAM certificates

The annual costs for CBAM certificates assuming constant import volumes in our case study can now be estimated. Forecasts and scenarios for emission allowance (EUA) prices in the EU ETS can be used for this purpose, as CBAM allowance prices for imports from 2027 are formed on a rolling basis by the weekly average of EUA auction prices (currently at around 70 EUR/tCO2). The carboneer CBAMCC model uses price projections from various publications for this purpose. The projected costs for the CBAM certificates for constant annual imports are shown below; the uncertainty factor due to uncertain price developments in the EU ETS is illustrated by the bars.

Figure 3: Forecast of CBAM certificate costs for 2026-2034 for imports of 100,000 tonnes of steel ingots per year (source: carboneer CBAMCC model)

The liquidity requirement for CBAM certificates for the importer or CBAM applicant in the case study increases from around EUR 10 million for imports in 2026 to EUR 25-45 million in 2030. CBAM certificates are neither tradable between companies nor valid in the long term. CBAM certificates purchased under the 50% holding requirement in the previous year can be sold back to the regulatory authority, while excess CBAM certificates will be cancelled on 1 October of the second year after purchase without compensation (final decision still pending). Obligated companies should therefore prepare to understand the financial impact of CBAM.

In the next article, we will go into detail about the options available to importers to manage risk and hedge their CBAM certificate costs.

DEHSt

Emission trading in Germany: Revenue, key developments and prospects

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Germany’s emissions trading systems are undergoing fundamental changes. The EU emission trading system (EU ETS 1) faced declining revenues, while the national system (nEHS) sets new revenue records. What drives these developments, and how will upcoming regulatory shifts – from CBAM to the EU ETS 2 – shape Germany’s carbon pricing landscape?

EU ETS 1: Declining revenue with potential upside

The EU ETS 1, which regulates emissions from energy-intensive industrial plants, intra-European aviation, and maritime transport, saw a significant decline in German auction revenue in 2024. The total revenue from auctioning the EU ETS 1 emission allowances (EUA) amounted to approximately EUR 5.5 billion marking a 28% decrease from the EUR 7.7 billion recorded in 2023 (Figure 1). This decline was driven by two main factors: a reduction in the number of EUAs auctioned and a fall in the average EUA price in 2024 compared to 2023 (UBA, 2025).

Figure 1: Auction revenues from the EU ETS 1 in Germany 2023-2025 (source: DEHSt, 2025a)

To reinforce climate goals, the EU continues to reduce the quantity of available EUAs. In 2024, the auctioned amount for Germany dropped to 85 million, down from 92 million in 2023. Additionally, the average price per EUA decreased from 83.66 EUR/tCO2 in 2023 to 65.00 EUR/tCO2 in 2024, reflecting lower demand from the energy and industrial sectors due to higher shares of renewables in the electricity grid and weaker economic conditions. Despite this, the 2024 average price remained 24% higher than the 2021 level, showcasing the long-term strengthening of emissions pricing.

Since the end of 2024, the allowance price in the EU ETS 1 has rallied amid the expectations of lower supply of allowances and thus higher prices during 2025. While the price stood at 65 EUR/tCO2 mid December 2024, it has risen by almost 25% and sometimes traded at above 80 EUR/tCO2 in February 2025. The EUA price expectations for the year 2025 ranges between 80-90 EUR/tCO2 indicating both a tightening of supply and thus likely higher auction revenues again this year.

Record revenues in Germany’s national emission trading system

Unlike the EU ETS 1, the German national emissions trading system (nEHS), which covers emissions from heating and transport, witnessed an increase in revenue. In 2024, revenue from the nEHS reached EUR 13 billion, up 21% from the EUR 10.7 billion recorded in 2023 as Figure 2 shows. This increase was primarily due to a rise in the fixed price of nEHS certificates from €30 per tonne in 2023 to €45 per tonne in 2024 (UBA, 2025).

Figure 2: Sales revenues from the nEHS in Germany 2023-2025 (source: DEHSt, 2025b)

A total of 278 million nEHS certificates were sold on the European Energy Exchange (EEX) in Leipzig in 2024 at the new fixed price, generating approximately EUR 12.5 billion. An additional 17 million certificates for 2023 were sold at the previous year’s price of 30 EUR/tCO2, adding another €500 million to the total revenue. Despite a lower number of certificates sold compared to 2023 (which saw 358 million certificates sold), the revenue increase was sustained by the price hike.

Total revenues from emission pricing at record high

Germany’s combined revenue from the EU ETS 1 and nEHS reached EUR 18.5 billion in 2024, surpassing the EUR 18.4 billion in 2023 and significantly exceeding the EUR 13 billion in 2022. These funds are allocated to the Climate and Transformation Fund (KTF), which finances initiatives supporting Germany’s energy transition and decarbonisation goals.

Dirk Messner, President of the German Environment Agency (UBA), emphasized that emissions trading must continue to be a driving force for climate protection, economic competitiveness, and social sustainability. He advocates for a climate bonus to support households affected by rising carbon prices, alongside targeted subsidies to assist vulnerable groups in transitioning to climate-friendly alternatives (UBA, 2025).

Regulatory developments: Aligning national legislation

The German Bundestag passed the TEHG-Europarechtsanpassungsgesetz 2024 in the end of January 2025, aligning national regulations with the reformed emission trading rules of the EU. Key aspects of this reform include (BMWK, 2025):

  • Inclusion of maritime transport: From 2024, 40% of emissions from shipping are covered under EU ETS 1, increasing to 70% in 2025 and 100% in 2026.
  • Stricter emission caps in aviation: Starting 2024, airlines face lower emission limits, and for the first time, they must report non-CO2 climate effects such as contrail formation.
  • Transition to the EU ETS 2 in 2027: The new European emissions trading system for transport and heating will replace the German nEHS and other national carbon pricing schemes of EU Member States.
  • Implementation of the Carbon Border Adjustment Mechanism (CBAM): CBAM introduces carbon pricing for imports of energy-intensive products such as steel, cement, and aluminum, ensuring fair competition within the EU market. A transition phase is underway, with full financial obligations beginning in 2026.

At the start of 2025, the fixed CO2 price in the nEHS rose from 45 to 55 EUR/tCO2 (compare Table 1), a step that has been planned since the introduction of the system in 2021. This gradual increase allows citizens and businesses time to transition to greener alternatives and will also likely lead to higher sales revenues during 2025 again. With the nEHS being absorbed into the EU ETS 2 from 2027, price for emissions in those sectors will be based on free auction prices.

YearPrice EUR/tCO2Mechanism
202125    Fixed price  
202230
202330
202445
202555
202655-65Auction with price corridor
From 202745-100 (estimates)Auction with free market price (EU ETS 2)
Table 1: Development of emission pricing in the sectors covered by the nEHS

The 2025 price hike in the nEHS is expected to have only moderate impact on fuel costs. The price per liter of gasoline and diesel may rise by around 3 cents. However, fuel prices fluctuate due to external factors such as global oil prices, which often cause greater price variability than carbon pricing alone. For an individual driving 15,000 km annually, the expected cost increase will be around EUR 50 per year (Bundesregierung, 2025).

Conclusion and future trajectory

As the EU emission trading framework expands, carbon pricing evolves as central mechanisms for climate policy. While the EU ETS 1 faced revenue declines due to economic fluctuations and market adjustments, the nEHS saw record revenues driven by increased carbon pricing. Germany’s total revenue from emissions trading reached an all-time high, reinforcing the importance of dedicating these funds to climate mitigation and social equity initiatives.

The price increase in the nEHS, the expected higher prices in the EU ETS 1, the introduction of CBAM and the launch of the EU ETS 2 in 2027 mark significant milestones in the transition towards a carbon-neutral economy. As Europe moves towards its 2050 net-zero target, emissions trading will remain a cornerstone of environmental and economic policy.

Sources

BMWK, 2025, Bundestag beschließt umfassende Reform des Emissionshandels, URL: https://www.bmwk.de/Redaktion/DE/Pressemitteilungen/2025/20250131-bundestag-emissionshandel.html

Bundesregierung, 2025, CO2-Preis beträgt jetzt 55 Euro, URL: https://www.bundesregierung.de/breg-de/aktuelles/co2-preis-kohle-abfallbrennstoffe-2061622

DEHSt, 2025a, Auctioning report: Fourth Quarter 2024, URL: https://www.dehst.de/SharedDocs/downloads/EN/auctioning/2024/2024_report_Q4.pdf?__blob=publicationFile&v=3

DEHSt, 2025b, Sales report: Fourth Quarter and entire year 2024, URL: https://www.dehst.de/SharedDocs/downloads/EN/nehs/sales-reports-nehs/2024/2024-Q4_sales-report.pdf?__blob=publicationFile&v=3

UBA, 2025, Revenue from emission trading one again at record level, URL: https://www.umweltbundesamt.de/en/press/pressinformation/revenue-from-emissions-trading-once-again-at-record

Carbon markets: Which role does biomass play?

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Although compliance and voluntary carbon markets vary in scope, mechanisms and participants, biomass occupies a unique place. In compliance carbon markets such as the EU ETS, participants are obliged to monitor and report their emissions and ultimately pay for them. Using biomass in industrial facilities can allow for reduced financial burdens. Regulators set rules around biomass use and sustainability criteria to comply with. A large part of voluntary carbon market credits is generated by nature-based solutions, including forestry and other biomass-related projects. These projects are however under intense scrutiny due to issues regarding transparency and associated climate claims. Novel carbon removal solutions with biomass as feedstock show promising development and renewed regulatory oversight could restore trust.

Which CO2 and which carbon markets?

To assess the relevance of carbon markets for biomass and vice versa, requires an understanding of different types of emissions and how carbon markets account for them. The sources of CO2 emissions and their final sink can be categorized into four main pathways (Figure 1).

  • Unabated carbon emissions from fossil sources add emissions to the atmosphere (grey and black)
  • Abated emissions from fossil sources through carbon capture and storage (CCS) with long-term storage might not add additional GHG emissions to the atmosphere (purple)
  • Negative emissions through nature-based or technological carbon dioxide removal (CDR) solutions taking CO2 out of the atmosphere and storing it durably (green)
  • Utilisation of CO2 through carbon capture and utilisation (CCU) technologies, where the ultimate source of the CO2 (atmospheric or fossil) and the final product into which the CO2-molecules has been transformed determine the climate impact (blue)

Detailed analysis of the technological pathways, supply-chain emissions, and substitution effects is required to establish emission reduction potentials of these solutions.

Figure 1: Different pathways of CO2: fossil emission, CCS, CCU and carbon dioxide removal. Source: carboneer

Compliance and voluntary carbon markets both incentivise emission reduction or carbon removal, however each from a different angle. Compliance carbon markets aim to fulfill national or regional climate targets. By putting a price tag on emissions and they incentivise compliant actors to reduce their emissions in a cost-efficient way. The mechanics of voluntary carbon markets (VCM) aim at financially supporting projects that either reduce emissions or provide negative emissions through CDR. Private actors can purchase carbon credits from project developers to offset or neutralise their corporate emissions.

The EU ETS: zero rating for biomass

The EU ETS is one of the largest and most mature compliance carbon markets. Since its inception in 2005, the EU ETS has been a cornerstone of EU climate policy, covering 35-40% of the region’s emissions. Large industrial facilities, such as steel mills, chemical plants, cement kilns, and power plants as well as aviation and maritime transport operators need to monitor and report their annual emissions. For each ton of CO2-eq emitted, the compliant entity must surrender an emission allowance. The price of this allowance is determined at the market. Currently, many industrial facilities still receive free allowances. To prevent carbon-leakage while facing out this free allocation, the Carbon Border Adjustment Mechanism (CBAM) requires importers of certain goods from non-EU countries to report the embedded carbon emissions in imports and from 2026 onwards also to pay the same carbon price as EU-based industry. Most emissions from buildings and road transport in the EU are not yet subject to a carbon price. This changes with the new EU ETS 2 covering another 35-40% of the EU’s GHG emissions. Since 2024, suppliers of liquid, gaseous or solid fuels are required to monitor and report emissions released by their fuels at the end-user. Pricing in the EU ETS 2 starts in 2027.

Carbon in biomass ultimately comes from the atmosphere. When combusted, only CO2 stored in the biomass is released back to the atmosphere. However, for a comprehensive life cycle assessment, factors such as land-use emissions due to biomass harvesting or emissions along the value chain need to be considered. According to current regulations, emissions from biomass and biofuels in the EU ETS 1, CBAM and EU ETS 2 can generally be counted as zero, thus reducing the number of allowances to be purchased by compliant entities and reducing their costs (Figure 2). Depending on the type of biomass and its utilisation, compliance with the Renewable Energy Directive for sustainability or GHG saving criteria needs to be achieved.

Figure 2: Criteria for biomass utilisation in the EU ETS 1. Source: carboneer

VCM: Carbon removal with biomass

Forests, mangroves, biochar kilns and waste-to-energy plants with CCS all have in common that they are examples of biomass-based project on the VCM. Private entities purchase carbon credits from project developers to offset or neutralise their (hard-to-abate) emissions. These projects either reduce emissions or remove CO2 from the atmosphere and must follow certain standards and methodologies for project set-up and emission calculation. Third-party verification of the projects’ climate effects is needed to create trust and transparency in voluntary carbon markets where regulatory oversight is only rudimentary.

While a wide range of VCM methodologies and projects exist, biomass-based projects are ubiquitous and particularly divers. Many biomass VCM projects potentially create negative emissions (to stay within the targets of the Paris Agreement, estimates for the required global carbon removal capacity range from 5-10 Gt/year or 5-20% of today’s total emissions). While trees might store atmospheric carbon for decades, technological solutions, such as pyrolysis with biochar or bioenergy with CCS remove carbon for hundreds or thousands of years. Project developers and buyers of credits on the VCM need to navigate complexities arising from cost considerations, project types and quality, and applicable methodologies and standards (Figure 3).

Figure 3: Carbon removal solutions and considerations for VCM projects. Source: carboneer

To reduce the lack of credibility that has plagued the VCM and associated climate claims of credit buyers, the EU currently develops its own methodologies under the Carbon Removal Certification Framework. As corporates are increasingly under pressure to develop credible climate strategies, carbon removal solutions utilising biomass have their role to play. Several announcements of large-scale credit purchases by corporates from biochar and bioenergy with CCS project developers underscores that point.

Biomass and carbon markets: the take-aways

CO2 is not CO2: The ultimate origin of the molecule matters. Compliance and voluntary carbon markets assess emissions from different perspectives and objectives. Due to the wide array of biomass applications, rules on eligibility as well as on emission accounting in compliance and voluntary carbon market differ. Biomass use in the ETS can reduce costs for industrials and allow for decarbonisation at the same time. Biomass enables carbon removal solutions, but stakeholders need to navigate the murky waters of voluntary carbon markets. Finally, interactions between the EU ETS and the VCM might be restored against the backdrop of industrial carbon management policies, the need to scale carbon removal and to provide market stability in the ETS. Complexities abound when biomass meets carbon markets.

This article appeared first in Bioenergy International No 1-2024

The EU ETS 2 – pricing emissions in buildings and road transport

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The European Union’s Emissions Trading System (EU ETS) constitutes a cornerstone of the EU’s strategy to combat climate change since its establishment in 2005. The new EU ETS 2, implemented from 2024 covers emissions from buildings, road transport, and additional sectors such as fuel use in small industrial installations. The EU ETS 2 is founded upon the objectives of the EU Climate Law and the Fit-for-55 package and requires the fuel suppliers to monitor and report emissions in their fuels. From 2027 when the EU ETS 2 is fully operational, emission allowances need to be purchased and surrendered based on the emissions in the fuels sold. This new emission trading system adds a further layer of complexity to the regulatory compliance landscape.

Key facts about the EU ETS 2

The EU ETS 2 will be running in parallel to the EU ETS 1 and encompasses areas that were previously excluded, such as the buildings and road transport sectors. The operational principle of the EU ETS 2 is based on a cap-and-trade system, where an annually decreasing cap is set on total emissions and a corresponding number of allowances is auctioned to regulated entities. One allowance needs to be surrendered per ton of CO2 emitted. The EU ETS 2 is designed to reduce emissions by 42% by 2030 in comparison to 2005 levels. In contrast to the EU ETS 1, which regulates emissions at the point of origin, the EU ETS 2 places the compliance burden upstream at the release for consumption of fuels and not at the point where fuels are combusted. Estimates of the EU Commission expect up to 11.400 fuel suppliers, distributers and resellers to be regulated (regulated entities). This new system harmonises national and EU responsibilities, targets and emissions pricing.

To determine emissions under the scope of the EU ETS 2, a comprehensive monitoring, reporting, and verification (MRV) system is implemented at the company-level. To avoid double counting, emissions from fuel combustion under the EU ETS 1 should not be counted in the EU ETS 2. This requires fuel suppliers and their clients to provide proof and documentation in such cases. The EU ETS 2 permits the coexistence of national carbon taxes with the EU ETS 2, allowing EU Member States to exempt companies from EU ETS 2 requirements until 2030 if national measures are more stringent. In Germany the national ETS is only fully integrated into the EU ETS 2 from 2027 onwards, which makes a double reporting of emissions necessary for 2024 – 2026.

First compliance deadlines in 2024

For companies subject to the EU ETS 2, key compliance activities should already be ongoing, and deadlines are approaching soon. Companies must commence monitoring emissions by January 2024 and report those emissions by 30 April 2025. The timeline for compliance is stringent, as Figure 1 indicates.

Figure 1: Timeline of EU ETS 2 compliance obligations. Source: carboneer

To monitor emissions in accordance with the rules of the EU ETS 2, by 31 August 2024 a monitoring plan should be submitted to the competent national authority. Full compliance, especially procuring and surrendering allowances under the EU ETS 2 is required from 2027, and failure to meet these deadlines can result in significant penalties and legal repercussions, making it imperative for companies to commence preparations without delay. The potential consequences of non-compliance include financial penalties and loss of competitiveness.

From 2027 onwards allowances under the EU ETS 2 will be auctioned. An allocation of free allowances such as during the start of the EU ETS 1 and currently still applied to EU industry will not exist. To regulate the supply of allowances and maintain price stability, a market stability reserve will be implemented. The initial allowance cap in 2027 will be determined by applying a 5.1% annual reduction to the 2024 emission level. From 2025 onwards, this linear reduction factor increases to 5.38%. This implies that the total supply of allowances in 2027 will be approximately 1.25 billion, declining to below 800 million by 2030. Figure 2 illustrates the decline in the allowance auction volumes over time, aligned with the EU’s long-term sectoral climate targets.

Figure 2: Approximate EU ETS 2 allowance supply. Source: carboneer

Challenges and complexity

The EU ETS 2 presents a significant challenge for companies as they need to develop comprehensive emission monitoring plans, detailing their activities, fuel types, and emission calculation methodologies to comply with their obligations. Especially the calculation of the emissions can be a complex undertaking. First, a scope factor needs to be established to determine the portion of a company’s fuel sales that lie within the regulated activities, such as buildings and road transport. The scope factor ranges from 0 (no fuel in scope) to 1 (all fuel in scope). This ensures only relevant emissions are counted. Using the correct emission factor for different fuels along with the quantity of fuels, the total CO2-emissions can be calculated.

To ensure data quality, the MRV follows a tier system that categorises data accuracy from Tier 1 (least accurate) to Tier 4 (most accurate). Higher tiers, used for companies with more larger fuel streams and thus higher emissions, require more precise data, ensuring reliable results. Importantly, emissions from fuels based on biomass can be zero-rated if they fulfil the criteria on biomass under the Renewable Energy Directive (RED) II and the upcoming RED III.

Monitoring plans must gain approval from the competent national authority, underscoring the importance of early and thorough preparation. The emission reporting for 2024 is due 30 April 2025, with third-party verification becoming mandatory from the 2025 emission report on. The introduction of the EU ETS 2 pricing can result in significant cost increases, which will have an impact on both operational expenses and consumer prices. Figure 3 displays price forecasts for the allowances in the EU ETS from different sources. As prices are determined through demand and supply, they can be expected to exhibit significant volatility, with forecasts ranging from €48 to €340 per tCO2 by 2030. Companies ought to manage cost risk via tailored procurement strategies for EU ETS 2 allowances.

Figure 3: Forecast of EU ETS 2 allowances prices in 2030. Data Source: UBA, 2024, Source: carboneer


The Social Climate Fund plays a crucial role in mitigating the financial impact on vulnerable consumers in the EU. Its objective is to support vulnerable households and micro-enterprises that are impacted by the transition to a low-carbon economy. The fund, financed by revenues from the auctioning of allowances, provides financial assistance for measures that reduce emissions and energy costs. One example is the provision of subsidies to enhance the energy efficiency of residential properties such as improvements to insulation and the installation of more efficient heating systems. This dual focus on households and businesses ensures a broader impact, promoting social equity and economic resilience, and helps to offset some of the financial burdens and operational challenges posed by the EU ETS 2.

To understand the potential impact of the rising allowance prices, Figure 4 illustrates how different fuel types are being impacted by different allowance prices.

Figure 4: Price impact on different fuels under varying EU ETS 2 allowance prices. Source: carboneer

What should an EU ETS strategy entail?

Due to the complexity of the EU ETS 2 and its stringent timeline, a sound EU ETS 2 strategy is essential. But what does a company need to prepare for?

MRV details and compliance cycle

  • Development of comprehensive monitoring plans that cover all relevant activities, fuel types, and emission calculation methodologies
  • Monitoring plans must be approved by national authorities
  • Verification of emissions

Compliance obligations:

  • Detailed understanding of the EU ETS 2 rules and associated regulation
  • Build capacity, assign responsibilities, internal and external communication
  • Access to registries and EU ETS 2 allowances

Financial impact assessment:

  • Assessment of EU ETS 2 exposure and cost forecasts
  • Implementation of strategies to manage costs and pass on costs to consumers
  • Risk management and allowance procurement strategies to reduce financial exposure

Conclusion

The EU ETS 2 is a crucial tool in the European Union’s strategy to combat climate change by establishing a new cap-and-trade system for fuels in sectors such as buildings and road transport. It aims to reduce emissions by 42% by 2030 compared to 2005 levels. The system introduces complex obligation for companies that require planning and a compliance strategy, including stringent monitoring, reporting, and verification processes starting from 2024. With allowance prices expected to rise significantly, the financial implications are substantial and necessitate robust risk management and hedging strategies. Companies should act now to understand and navigate these new regulations, ensuring compliance and maintaining competitiveness.

Authors: Florian Schlennert and Simon Göß.

Sources: UBA, 2024, Supply and Demand in the ETS 2, URL: https://www.umweltbundesamt.de/publikationen/supply-demand-in-the-ets-2