The price of CO2

22 May 2025

By 2030, the EU wants to reduce emissions of climate-damaging gases by at least 55 percent compared to 1990; furthermore, the bloc seeks to become climate-neutral by 2050. The most important lever for achieving this goal remains European emissions trading. But how does the Emissions Trading System, or ETS for short, work? Our checklist clarifies the most important questions.

The European Emissions Trading System (ETS) came into force on 1 January 2005. Alongside the 27 EU member states, Liechtenstein, Iceland and Norway are also included in its scope. The principle behind it is that anyone who emits CO₂ or other climate-damaging gases such as nitrous oxide must compensate for this by purchasing certificates; in other words, they need to “pay” for the privilege. One certificate is required for every tonne of CO₂. The emission allowances are issued by the EU: Some are allocated free of charge, whereas others have to be purchased by companies in auctions on a stock exchange. Every year, emitting companies have to show the EU that the number of certificates purchased tallies exactly with the volume of CO₂ emitted. If they fail to do so, they risk incurring penalties of 100 euros per unaccounted for tonne and will still have to submit the missing certificates later. “This means that companies must be really on the ball to avoid quickly building up awkward debts,” says Susanne Günzerodt, director of the Sustainability Business Entity in the Certification Business Unit at TÜV NORD CERT. Since the total amount of available emission allowances is decreasing from year to year, the price of the certificates is tending to rise – and with it the incentive for companies to make their processes more efficient and climate-friendly.

An upper limit (cap) determines what volume of emissions the affected industries are allowed to emit in total. The EU issues CO₂ certificates for this total amount. If a company manages to reduce its greenhouse gas emissions, it can sell its surplus pollution rights to other companies (trade) that have not been able to reduce their emissions sufficiently and therefore need more certificates. “The economic idea behind this is that emissions are first reduced in particularly favourable areas and that other industries follow suit as and when technological development allows them to make the switch in an economically viable way," explains Ms. Günzerodt.

All electricity and thermal power plants with a capacity of at least 20 megawatts are subject to emissions trading. Small combined heat and power plants for residential areas are therefore not usually included. And then there are the energy-intensive industries, such as the chemical sector, steel mills, refineries, cement plants, and paper and glass manufacturers. Intra-European air transport has also been included in the ETS since 2012, and maritime transport was added in 2024. Currently, EU emissions trading covers around 45 percent of greenhouse gas emissions in Europe. From 2027, it will finally be extended to the problem children of the energy transition: The construction and transport sectors. “The European ETS will then also replaces the German Fuel Emissions Trading Act, which has imposed a CO₂ price on fossil fuels for heating and driving since 2021," explains Ms. Günzerodt. Instead of being allocated a fixed price, the CO₂ costs for heating oil, gas or petrol will then be decided by the market. Experts therefore expect significant price jumps: According to studies, the cost per tonne could triple to 200 euros compared to the German CO₂ price.

“The EU wants to protect European companies from competition from abroad by awarding certificates free of charge while at the same time preventing them from relocating their CO₂-intensive production to other countries,” Ms. Günzerodt explains. Environmental associations have criticised this awarding practice since the beginning of emissions trading. In response to this criticism, the ETS has been reformed, developed and refined again and again in the 20 years since it came into being: Electricity producers have not received free certificates since 2013. In aviation and maritime transport, this practice will end in 2026, and free allocation is to be phased out completely in 2034. However, even today steel and paper manufacturers and other energy-intensive industries are not given a blank cheque by the EU for their emissions: Since 2013, free certificate allocation has been based on benchmarks for the respective industrial sectors and products. “These benchmarks are calculated by taking the top ten percent of the most efficient plants in the EU in the industry in question,” Ms. Günzerodt explains.  So if you produce 100,000 tonnes of steel, say, you will only receive as many free CO₂ certificates as would be needed by a particularly efficient steel mill. The rest will have to be bought.

Germany alone generated 5.5 billion euros in 2024 through European emissions trading. Every last cent of these proceeds goes into the Climate and Transformation Fund, which is used to promote such things as the energy-efficient renovation of buildings, the expansion of renewable energies and charging infrastructure for electric cars. The proceeds from the national emissions trading scheme for heating and transport also go into the same fund. These amounted to around 13 billion euros in 2024.

The short answer is yes – at last. The long answer is that, in the first two phases of the ETS until 2013, various reasons led to the issue of too many certificates. The result was a massive drop in prices. At times, a tonne of CO₂ could be emitted for less than five euros – far too little to motivate companies to make the switch. “As a result, the reduction targets were missed,” Ms. Günzerodt says. “In 2019, the EU therefore introduced the Market Stability Reserve, which is an instrument for the withdrawal of surplus certificates from the market.” This had a noticeable impact on price developments: Between 2020 and 2023, the cost of a tonne of CO₂ climbed from just under 25 to around 84 euros. Compared to 2017, certificate prices have increased as much as seventeenfold. This is also reflected in the reduction rate: Since the introduction of the ETS in 2005, CO₂ emissions in the industries and transport sectors covered by the scheme have been reduced by 50 percent, the EU announced in April 2025. The affected industries are therefore well on their way to achieving the targeted reduction of 62 percent by 2030. This is down not only to emissions trading, but also to further agenda-defining political decisions to promote energy efficiency and renewable energies. Even today, the emissions trading scheme is far from perfect, says Ms. Günzerodt. Be that as it may, however, it has created a much more robust data basis for climate protection policy: “Through being obliged to pay attention to their own CO₂ emissions, companies have in many cases stumbled on areas where emissions were being generated that they didn’t even know about before and where there is corresponding potential for reductions.”