ETS2 – the EU’s new Carbon Trading Scheme
The European Union (EU), under Directive 2023/959, has introduced a new carbon trading scheme called Emissions Trading Scheme 2 (ETS2), which expands its approach to reducing carbon dioxide (CO2) emissions from fuel combustion in the road transport, buildings, manufacturing and construction sectors. ETS2 builds on the existing EU Emissions Trading Scheme (ETS) but targets different sectors in the economy, requiring companies, specifically fuel suppliers, to purchase carbon allowances based on the emissions from the fuels that these companies supply.
Companies regulated by the EU ETS2 must acquire carbon allowances to cover the emissions arising from the fuels supplied to the above sectors. Carbon allowances are held electronically on an online system called the Union Registry. Carbon allowances can be purchased on the carbon market or through the EU ETS auctions. Unlike previous schemes, there will be no free allocations of carbon allowances under ETS2.
ETS2 is different to ETS1. It is an “upstream” system, which means the focus is on the supplier of specified fuels to specified sectors (i.e., the regulated entity) rather than the final fuel consumer (e.g., car owner, householder, etc.). ETS2 targets a range of fuel types including the following:
• Leaded and Unleaded Petrol;
• Gas Oil;
• Kerosene;
• Liquified Petroleum Gas (LPG);
• Natural Gas;
• Heavy Fuel Oil (HFO);
• Coal and Coke;
• Any other product intended for use, offered for sale or used as motor fuel or heating fuel as specified in Article 2(3) of the Energy Taxation Directive (ETD). This includes any fuel additives used as motor fuel, certain bio-based fuels, and any other hydrocarbons for heating purposes, except for peat.
However, certain categories of fuel are exempted from ETS2:
• Those used in activities that are already regulated under EU ETS1 (e.g., fuel combusted at any facility with a thermal input generating capacity of 20 MW or more, such as a power station), except:
- If used for transport of greenhouse gases for geological storage;
- If used in an installation notified by a Member State that in each of the three years preceding the notification either:
- Has reported emissions of less than 2,500 tonnes of carbon dioxide equivalent, disregarding emissions from biomass; or
- Is a reserve or backup unit that did not operate more than 300 hours per year.
• Fuels for which the applicable emission factor is zero (e.g., biomass);
• Hazardous or municipal waste used as fuel.
According to Annex III of the EU ETS Directive, the consumption of fuels for which the emission factor is zero, is not considered in the scope of ETS2. The emission factor is zero only for biomass that complies with the sustainability and greenhouse gas emission-saving criteria established by the Renewable Energy Directive (RED II).
In Ireland, the Environmental Protection Agency (EPA) is responsible for regulating ETS2 and ensuring compliance with national and EU regulations. Entities falling under ETS2 must submit monitoring plans, report their emissions, and apply for GHG permits by set deadlines beginning in 2024.
Timelines and Compliance
In order to ensure that your Greenhouse Gas (GHG) permit is issued by 1st January 2025, you will have needed to submit your monitoring plan to the EPA for approval by 31st August 2024. The European Commission issued guidance on the monitoring and reporting requirement for EU ETS2 regulated entities. This guidance document can be accessed here.
The obligation to hold a GHG permit, as well as the monitoring and reporting requirements will commence on 1st January 2025.
The monitoring, reporting and verification procedures laid down for EU ETS1 also apply to EU ETS2 emissions, with minor changes. Permit holders must record emissions corresponding to the quantities of fuels they supply, including precise quantities of each type of fuel supplied and its final use, and they must report them to the EPA in the following year beginning with 2026.
The obligation to monitor starts from 2025, with the first monitoring reports being due in 2026. However, before then, permit holders are under a separate requirement to report their 2024 emissions on 30th April 2025. In practice, therefore, this would appear to mean that operators must have an ‘up and running’ system in place to identify precisely the quantities of fuel being sold for uses falling within the EU ETS2 scheme from as early as 1st January 2025.
The EPA has issued a guidance document “Guidance for initial set-up on EU ETS Reporting for ETS2” in order to aid organisations to set-up and use the online reporting tool. This guidance document can be found here.
From 2028, permit holders must also report how much of the cost of buying EU ETS2 allowances they have passed on to their customers (the precise requirements and format for this are to be set out in secondary legislation). Monitoring reports must also be independently verified. Member States can, however, opt to allow simplified monitoring, reporting and verification where annual emissions are less than 1,000 t CO2eq (in the same manner as for EU ETS1).
Permit holders must surrender EU ETS 2 allowances for cancellation by 31st May each year to cover the emissions corresponding to the quantity of fuel they have “released for consumption” in the preceding calendar year. The first surrender date will be 31st May 2028.
Member State penalties for non-compliance must include an excess emissions penalty for missing allowances, in the same way as for EU ETS1.
A derogation from the requirement to surrender allowances is available for fuel suppliers who are subject to national carbon taxes that are in force by the end of 2023 and have been notified to the Commission.
If you have any queries in relation to the potential requirements for your company, please contact the EPA at ets2@epa.ie.
NOTE: If you pay excise duty (including SFCT) to the Irish Revenue Commissioners for a fuel released for consumption in Ireland you are likely to be a Regulated Entity requiring an ETS2 GHG permit from the Irish EPA. If you pay excise duty in another Member State you need to contact the National Competent Authority in your country for ETS2.
November 2024