ETS2 is the European Union's second Emissions Trading System, a separate cap-and-trade scheme covering CO2 emissions from buildings, road transport, and small industry. Launching in 2027, it pushes carbon costs directly onto household heating fuels and motor fuels via regulated upstream suppliers rather than emitters.
How it works
ETS2 imposes a separate emissions cap, distinct from the original ETS for power and heavy industry, with allowances surrendered by fuel suppliers and distributors. Carbon costs are passed through to end-user prices on diesel, petrol, heating oil and gas. A price-stability mechanism releases extra allowances if prices breach roughly €45/tonne.
Why it matters now
A live upside risk to euro-area HICP late this decade: as energy and food disinflation fades, ETS2 introduces a fresh, policy-driven cost-push that the ECB must look through. Estimated to add roughly 0.2pp to headline inflation around 2027-2028 — material at a target of 2%.
Example
The European Commission's directive sets ETS2 to go live in 2027 (deferrable to 2028 if energy prices spike). Briefing estimates the buildings-and-road-transport carbon price will add roughly 0.2 percentage points to euro-area headline inflation in 2028, concentrated in heating and motor-fuel components of HICP.
Frequently asked
- What is ETS2?
- ETS2 is the European Union's second cap-and-trade carbon market, covering CO2 emissions from buildings, road transport and small industry. Launching in 2027, it places allowance obligations on upstream fuel suppliers and distributors rather than end emitters, channeling carbon costs into household heating fuels and motor fuels. It runs as a separate scheme from the original EU ETS for power and heavy industry.
- How does ETS2 differ from the original EU ETS?
- ETS2 is a distinct, separate cap-and-trade system from the original EU ETS, with its own emissions cap and allowance pool. The original ETS, live since 2005, covers power generation, heavy industry and aviation at the installation level. ETS2 instead targets buildings, road transport and small industry, and regulates upstream fuel suppliers rather than the emitting facilities themselves.
- Why does ETS2 matter for euro-area inflation?
- ETS2 is a policy-driven cost-push risk to euro-area HICP late this decade, estimated to add roughly 0.2 percentage points to headline inflation around 2027-2028. As energy and food disinflation fades, it injects a fresh upstream carbon cost into heating and motor-fuel components. The ECB must look through it, since one-off carbon-pricing shocks are supply-side rather than demand-driven.
- When does ETS2 launch?
- ETS2 is scheduled to go live in 2027 under the European Commission's directive, with a deferral option to 2028 if energy prices spike. The scheme includes a price-stability mechanism that releases additional allowances if the carbon price breaches roughly €45 per tonne, capping the near-term inflationary and political impact of the rollout.
- How does ETS2 pass carbon costs to households?
- ETS2 passes carbon costs to households indirectly, by requiring fuel suppliers and distributors to surrender allowances on the CO2 content of diesel, petrol, heating oil and gas they sell. Suppliers embed this cost in retail prices, so the levy reaches consumers through the pump and the heating bill rather than through a direct charge on emitters.