European Union Emissions Trading System (EU ETS): Pioneer cap‑and‑trade climate policy

Background

The European Union Emissions Trading System (EU ETS) is a cornerstone of EU climate policy: a cap‑and‑trade regime launched in 2005, mandating that major emitters hold and surrender carbon allowances to reduce greenhouse gas (GHG) emissions cost‑effectively. It is based on Directive 2003/87/EC, most recently updated in 2023 by the Directive (EU) 2023/959. The legislative governance involves the European Commission, Parliament, and Council, while implementation (including oversight and issuance of technical acts) is led by the European Commission alongside national competent authorities in Member States. Pre‑existing climate rules such as the Monitoring, Reporting and Verification (MRV) regulations for aviation and shipping helped shape the EU ETS framework by providing a foundation for its emissions reporting mechanisms. The EU ETS now sits at the heart of the European Green Deal, the European Climate Law, and broader policy frameworks targeting at least 55 % emissions reduction by 2030 and net‑zero by 2050.

Reporting Requirements

For emissions generated in each calendar year, EU ETS operators must conduct detailed monitoring procedures in line with an approved monitoring plan and prepare an emissions report. That report, covering measured emissions for carbon dioxide (CO₂) and, where applicable, nitrous oxide (N₂O) and perfluorocarbons (PFCs), must be verified by an accredited third‑party verifier and submitted to the competent authority by 31 March of the following year. Operators then must surrender the equivalent number of emission allowances via the Union Registry by 30 September of the same year.

Reporting and submission pathways vary slightly between sectors.

• Stationary installations and aviation use the EU ETS Reporting Tool (ERT) developed by the European Commission. Operators submit monitoring plans, emissions reports, and verification documentation via ERT.

• Maritime operators continue to report through THETIS‑MRV, the EMSA‑administered platform. Company‑level emissions reports and aggregated reports must be verified and submitted via THETIS‑MRV by 31 March (or 28 February if required), then the same verified emissions must be entered into the Union Registry through a Maritime Operator Holding Account (MOHA) by 1 April, followed by allowance surrender by 30 September.

Two software solutions that could assist with EU ETS reporting include:

• DNV Emissions Connect, which facilitates monitoring-plan management, data collection, report generation, and verification workflows particularly for maritime and aviation entities;

• Hecla Emissions Management Platform, tailored to shipping companies to streamline MRV, aggregated emissions reporting, verification coordination, and allowance track­ing under EU ETS requirements.

Penalties for Non‑Compliance

Operators covered by the EU ETS are required each year to surrender a number of allowances equivalent to their verified emissions from the previous calendar year. They must acquire enough allowances to fully cover their emissions; failure to do so results in an excess emissions penalty of €100 per tonne, adjusted annually in line with EU inflation indices. Importantly, this penalty is in addition to the obligation to surrender the required allowances. They cannot opt to pay instead of surrendering allowances. The identities of operators penalized for non‑compliance are also publicly disclosed.

Current Status

As of July 2025, the EU ETS is fully operating in its fourth phase (2021–2030), embedding the 2023 Directive revisions in full effect. These reforms expanded sectors covered (including buildings, road transport, non‑CO₂ aviation effects, and maritime transport) and strengthened the Market Stability Reserve to stabilize allowance prices. The Commission adopted Implementing Decision 2025/1162 in June 2025, updating the Article 21 reporting questionnaire to reflect this expanded coverage, streamlining templates and removing redundant national data points to reduce reporting burdens. In July 2025, the Commission launched procurement for the fourth common auction platform, which will also handle future ETS2 allowances, indicating preparations for upcoming auctions and expanded sectors.

Resources

• European Commission "About the EU ETS" page – foundational overview and scope details

• EU ETS Handbook

• EU ETS 101 - Carbon Market Watch

• FAQs on Maritime transport in EU ETS (published by the ESMA)

• EUROCONTROL’s ETS support facility for aviation operators’ reporting

• Navigating EU ETS Compliance: A Step-by-Step Guide to GHG Monitoring & Reporting (VAF Whitepaper)

• 2025 State of the EU ETS Report by ERCST