What is ETS and how does it affect costs?
Author: Domeny.ForSale editorial team Published
In brief: ETS is an emissions trading system that puts a price on greenhouse gas emissions in the European Union and gradually reduces the total amount permitted. It aims to encourage businesses to cut emissions, including by saving energy and changing technologies. It raises the cost of emissions-intensive activities, but saying that it simply “restricts production and slows the economy” overlooks differences between industries and how the system’s revenues are used.
How does the European ETS work?
ETS stands for Emissions Trading System. The European system is known as EU ETS. It operates on a “cap-and-trade” basis: an overall limit is set on the emissions covered by the system, and businesses must surrender allowances to cover their emissions.
One allowance covers the emission of one tonne of CO₂ equivalent. CO₂ equivalent is a common measure of the climate impact of different greenhouse gases. Businesses must monitor their emissions, have their reports verified as required, and surrender the appropriate number of allowances, which cannot then be reused.
Allowances are sold at auction, while some are allocated free of charge to eligible entities under specific rules. They can be traded. Their market price fluctuates: it is not a single, fixed tax rate set for everyone for years ahead.
The cap on allowances gradually falls. This gives businesses an economic incentive to reduce emissions rather than keep buying the same quantity of allowances.
Who does ETS cover, and who bears the costs?
EU ETS covers, among other activities, energy generation, many energy-intensive industrial installations, and certain aviation and maritime transport activities. This does not mean that every business or form of transport faces identical obligations. The type of activity, the size of the installation and the detailed regulations all matter.
Entities covered by the system are directly responsible for surrendering allowances to cover their emissions. However, some of the cost may be passed on to customers through energy, material or service prices. How much is passed on depends on factors including competition, contracts and the availability of substitute products.
ETS2 is a separate system intended to cover emissions from fuels used primarily in buildings and road transport, as well as in additional sectors. The obligations are intended to apply to suppliers releasing fuels for consumption, rather than requiring drivers or homeowners to buy allowances individually. Check the latest materials from the European Commission and the Polish authorities responsible for the system for the timetable, exemptions and implementation rules.
Why does ETS encourage changes in technology?
The mechanism is straightforward: if emitting carries a cost, avoiding emissions saves money. A business can therefore compare the cost of upgrading its equipment with its future spending on allowances. ETS generally does not prescribe a particular technology—it changes the economic viability of the available options.
Suppose an installation emits 10,000 tonnes of CO₂ a year and must buy all the allowances it needs. At a purely illustrative price of 60 euros per tonne, this amounts to 600,000 euros a year. An upgrade that cuts emissions by 2000 tonnes would reduce that expense by 120,000 euros a year if the price remained unchanged.
This illustrates the mechanism; it is neither a current price estimate nor a complete investment calculation. The cost of the upgrade, financing, energy consumption, downtime and any free allowances must also be taken into account. A low-emission solution is not always cheaper from the outset, technically available or quick to implement.
Does ETS restrict production and slow the economy?
ETS directly limits the total emissions covered by the system, not the number of tonnes of steel, cement or other goods produced. Production can remain at a similar level or grow if emissions per unit of output fall. However, if a business has no alternative technology available, the cost of allowances may prompt it to cut production.
This risk is particularly significant for energy-intensive plants competing with suppliers outside the EU that do not face comparable emissions costs. This can lead to carbon leakage: production moves outside the area where those costs apply, rather than actually becoming less emissions-intensive.
On the other hand, the system makes energy efficiency and low-emission technologies more economically attractive. Auction revenues can fund the transition and measures to cushion its impact, in accordance with the applicable rules. The economic outcome therefore also depends on access to energy, capital and infrastructure, and on how those revenues are spent.
There is no basis for attributing a clear-cut effect on the entire economy to ETS without specifying the period, country and method of analysis. The costs for an individual plant may be substantial, but they are not the same as the overall balance of costs and benefits for society.
How can you assess what ETS means for your own spending?
For a business, the first step is to establish whether it has a direct obligation to surrender allowances for its emissions or simply pays more for energy and materials. It is then worth calculating emissions per unit of output and comparing several allowance-price scenarios rather than basing a decision on a single forecast.
Households should check the breakdown of their tariff or offer: ETS is not the only component of electricity or heating prices. Fuel, the network, taxes and contract terms also matter.
This explanation describes the mechanism; it does not determine the obligations of a particular installation or constitute legal or investment advice. Before making a decision, check the current rules with the European Commission and Poland’s National Centre for Emissions Management, and base your calculations on your own energy consumption and actual emissions.
See also: What is FSD?
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