To fight climate change, we all need to drastically cut

greenhouse gas emissions – and the EU is doing its part.

The EU’s Emissions Trading System – or EU ETS – is the main tool

of our European Green Deal for reaching climate neutrality by 2050.

But how does it work?

The EU ETS works on a system of “allowances”.

An allowance is a permit to emit one ton of CO2

and each year, companies across several key sectors

must surrender allowances equivalent to their CO2 emissions.

Allowances can be bought from EU countries in auctions

and traded afterwards by companies.

To discourage companies from moving their operations to countries

without strong climate policies and still emit

certain industries receive a share of their allowances for free.

But in any case, the number of allowances available across industries is capped

limiting the total amount of greenhouse gases that these sectors can emit.

And each year, this cap is reduced

driving overall emissions down.

When a company buys an allowance

the revenue is used to fund climate and energy projects across the EU

including scaling up green technologies and modernising energy infrastructure

in lower income EU countries – ensuring a green transition

which is fair, too.

How does the EU ETS change?

Until 2024, the EU ETS has covered

large industry, electricity generation and aviation in Europe.

Emissions from industry and electricity generation have already decreased

by some 47% compared to levels in 2005

when the system began.

But now the EU ETS is being enlarged and strengthened:

its 2030 objective to reduce emissions from 2005 levels is being raised to 62%.

The system will expand to cover emissions from shipping as of 2024.

And in 2026

the “polluter pays principle” will fully apply for aviation.

For other sectors – like steel, cement or aluminium

allocation of free allowances will gradually be phased out by 2034.

In parallel, the EU will gradually introduce a mechanism

to ensure that an equivalent price for CO2 emissions

is paid on imported goods from these sectors.

All these changes will ensure that the industries covered by the ETS

contribute their fair share to achieving the EU’s climate ambitions.

But there is more:

from 2027 a new, separate ETS will help reduce emissions

from heating buildings, road transport and small industry.

Under this new ETS

fossil fuel suppliers will buy allowances from auctions.

At the end of each year, they will surrender allowances

equivalent to the emissions from the fuel they sell.

Emissions across these sectors are capped and will have to decrease every year.

This will encourage improvements in the energy efficiency of houses and offices

and incentivise switching to low-emission transport.

But to make these changes possible, citizens and businesses

will need support to adopt greener alternatives.

That’s why EU countries will have to invest their revenue

from the new ETS in climate and energy transition projects

in a way which promotes the green transition for everyone.

At the heart of these investments is the Social Climate Fund

mobilising 86.7 billion euros from 2026.

The Fund will support the most vulnerable people

to join the green transition – and save money on energy costs.

This could include improving home insulation, installing heat pumps

or providing discounted access to public transport.

Each EU country will draw up a plan on how best to use the money from the Fund.

The Social Climate Fund will work in harmony with the new ETS

ensuring all citizens and businesses can play their part in reducing emissions

and that the green transition leaves no one behind.