REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the functioning of the European carbon market in 2022 pursuant to Articles 10(5) and 21(2) of Directive 2003/87/EC
Date: 2023-10-31
Institutions: Directorate-General for Climate Action, European Commission
Subjects: EU Emissions Trading Scheme, EU emission allowance, EU environmental policy, air transport, carbon, clean technology, environmental monitoring, greenhouse gas, market supervision, reduction of gas emissions

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 31.10.2023  COM(2023) 654 final  REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the functioning of the European carbon market in 2022 pursuant to Articles 10(5) and 21(2) of Directive 2003/87/EC {SWD(2023) 346 final}  
 
 
List of abbreviations 

CEF DI 

CEMS 

CORSIA 

EEA 

EEX 

EFTA 

EIB 

ESMA 

EU  

Connecting Europe Facility Debt Instrument 

Continuous Emissions Measurement Systems 

Carbon Offsetting and Reduction Scheme for International 
Aviation  

European Economic Area 

European Energy Exchange 

European Free Trade Association 

European Investment Bank 

European Securities and Markets Authority 

European Union 

EU ETS 

EU Emissions Trading System 

EU27 

EUTL 

ICAO 

European Union Member States 

European Union Transaction Log 

International Civil Aviation Organization 

InnovFin EDP 

InnovFin Energy Demonstration Projects 

IOSCO 

IPCC 

MSR 

NECP 

NER 

TNAC 

International Organization for of Securities Commission  

Intergovernmental Panel on Climate Change 

Market Stability Reserve 

National climate and energy plan 

New Entrants’ Reserve 

Total number of allowances in circulation 

1 

 
 
 
 
 
 
 
Contents 

1. 

2. 

Introduction ..................................................................................................................... 3 

Important legislative developments ................................................................................ 4 

2.1.  Reform of the EU ETS in the context of the European Green Deal ............................... 4 

2.2.  ETS Directive in the context of the REPowerEU Regulation ........................................ 5 

3. 

EU ETS coverage ............................................................................................................ 5 

3.1.  Maritime included in the scope of the EU ETS from 2024 ............................................ 7 

4. 

5. 

6. 

7. 

Cap on emissions ............................................................................................................ 8 

Auctioning of allowances ............................................................................................. 11 

Free allocation of allowances........................................................................................ 13 

Revenues from emissions trading ................................................................................. 15 

7.1. 

Indirect carbon costs ..................................................................................................... 16 

7.2. 

Innovation Fund ............................................................................................................ 18 

7.3.  Modernisation Fund ...................................................................................................... 20 

8. 

9. 

Emission reductions in the EU ETS.............................................................................. 21 

Balancing supply and demand in the EU carbon market .............................................. 25 

10.  Aviation......................................................................................................................... 26 

11.  Market oversight ........................................................................................................... 29 

12. 

Framework for the monitoring and reporting of emissions .......................................... 31 

12.1.  Monitoring and reporting .............................................................................................. 31 

12.2.  Accreditation and verification....................................................................................... 32 

12.3.  Competent authorities ................................................................................................... 33 

12.4.  Compliance in the EU ETS ........................................................................................... 34 

13. 

14. 

Link between the EU ETS and the Swiss ETS ............................................................. 35 

EU ETS in the context of the EU’s climate and energy governance ............................ 37 

15.  Conclusions and outlook ............................................................................................... 38 

2 

 
 
 
 
 
 
1.  Introduction  

The European  Union’s  Emissions  Trading  System (EU  ETS) is  a cornerstone of  its climate 
policy,  designed  to  bring  down  emissions  cost-effectively.  In  line  with  the  ‘polluter  pays’ 
principle, the EU ETS sets a limit and puts a carbon price on emissions from the energy and 
industrial sectors as well as aviation in Europe, which are responsible for approximately 40% 
of the EU’s total emissions. By drawing on market forces to determine carbon price, the system 
creates an incentive to reduce emissions where it costs least to do so.  In turn, carbon prices 
determine  revenue  the  EU  ETS  generates  for  investment  in  climate  action  and  energy 
transformation. 

Since its launch in 2005, the EU ETS has helped drive down emissions from electricity and 
heat generation and industrial production by 37.3%1, while generating over EUR 152 billion in 
auction revenue for distribution to Member States. Overwhelmingly, Member States have used 
this revenue to fund investments in energy transformation and decarbonisation, as well as social 
measures  in  support  of  the  green  transition.  Nevertheless,  further  emission  reductions, 
including across other sectors, are needed to meet the economy-wide climate targets under the 
European Climate Law2. The EU ETS is critical to achieving this in a cost-efficient manner. 

To reach climate neutrality by mid-century, the EU has committed to reducing emissions by 
2030 to at least 55% below 1990 levels. In July 2021, the European Commission presented a 
package of policy reforms, Fit for 55, to deliver this target3, including a reform of the EU ETS. 
By June 2023, the European Parliament and Member States in the Council of the EU approved 
this and other related reforms. Most of the changes to the EU ETS framework will take effect 
from 2024 onwards.  

This report takes stock of the functioning of the EU ETS in 2022 and the first half of 2023 – 
under  the  rules  before  the  revision.  It  recaps  major  legislative  developments,  provides  an 
updated  insight  into  key  elements  of  the  system’s  framework  and  compiles  intermittent 
outcomes of emission trends and auction revenue. The report is presented in line with Articles 
10(5) and 21(2) of Directive 2003/87/EC4 (ETS Directive). It is based mostly on data from the 
Union  Registry,  the  EU  Transaction  Log  (EUTL)  and  reports  submitted  by  Member  States 
under  Article 21  of  the  ETS  Directive.  It  is  accompanied  by  a  technical  document  with 
supplementary information (Staff working document5). 

1 ETS emissions from installations in the power and industry sectors in 2021, without the UK, only the power 
sector in Northern Ireland, compared to an adjusted value of 2005 ETS emissions observing the same scope. Based 
on the European Environment Agency ETS data viewer, extracted on 29.8.2023.  

2 Regulation (EU) 2021/1119 of the European Parliament and of the Council of 30 June 2021 establishing the 
framework for achieving climate neutrality and amending Regulations (EC) No 401/2009 and (EU) 2018/1999 
(OJ L 243, 9.7.2021). 

3 Delivering the European Green Deal, DG Climate Action, 14.7.2021. 

4 Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a system 
for greenhouse gas emission allowance trading within the Union and amending Council Directive 96/61/EC (OJ 
L 275, 25.10.2003). 

5 SWD(2023) 346 

3 

 
 
 
2.  Important legislative developments 

In the first half of 2023, important amendments to the EU ETS framework were adopted in the 
context  of  the  Fit  for  55  package  and  as  part  of  the  EU’s  response  to  the  energy  crisis 
(REPowerEU). This chapter summarises these developments. They will be accounted for in 
detail in future reports on the functioning of the EU ETS once they take effect. 

2.1. Reform of the EU ETS in the context of the European Green Deal 

The following reforms made as part of the ‘Fit for 55’ package concern the ETS Directive or 
related legislation. By the end of June 2023, they had all been adopted. 

i.  Reform increasing the ambition of the EU ETS – adopted on 10 May 20236. 

ii.  Reform strengthening the Market Stability Reserve – adopted on 19 April 20237. 

iii.  Reform  of  the  EU  ETS  concerning  aviation  –  adopted  on  18 January8  and  10 May 

20239. 

iv.  Reform  of  the  rules  of  the  monitoring,  reporting  and  verification  of  emissions  from 

maritime transport – adopted on 16 May 202310.  

v.  Reform  creating  the  Social  Climate  Fund  to  complement  the  new  emissions  trading 
system for buildings, road transport and small-emitting industry– adopted on 10 May 
202311.  

vi.  Reform  establishing a Carbon Border Adjustment  Mechanism –  adopted  on  10 May 

202312. 

6 Directive (EU) 2023/959 of the European Parliament and of the Council of 10 May 2023 amending Directive 
2003/87/EC establishing a system for greenhouse gas emission allowance trading within the Union and Decision 
(EU) 2015/1814 concerning the establishment and operation of a market stability reserve for the Union greenhouse 
gas emission trading system (OJ L 130, 16.5.2023). See consolidated text. 

7 Decision (EU) 2023/852 of the European Parliament and of the Council of 19 April 2023 amending Decision 
(EU) 2015/1814 as regards the number of allowances to be placed in the market stability reserve for the Union 
greenhouse gas emission trading system until 2030 (OJ L 110, 25.4.2023). See consolidated text. 

8 Decision (EU) 2023/136 of the European Parliament and of the Council of 18 January 2023 amending Directive 
2003/87/EC  as  regards  the  notification  of  offsetting  in  respect  of  a  global  market-based  measure  for  aircraft 
operators based in the Union (OJ L 19, 20.1.2023). 

9 Directive (EU) 2023/958 of the European Parliament and of the Council of 10 May 2023 amending Directive 
2003/87/EC as regards aviation’s contribution to the Union’s economy-wide emission reduction target and the 
appropriate implementation of a global market-based measure (OJ L 130, 16.5.2023). 

10 Regulation (EU) 2023/957 of the European Parliament and of the Council of 10 May 2023 amending Regulation 
(EU) 2015/757 in order to provide for the inclusion of maritime transport activities in the EU Emissions Trading 
System  and  for  the  monitoring,  reporting  and  verification  of  emissions  of  additional  greenhouse  gases  and 
emissions from additional ship types (OJ L130, 16.5.2023). 

11 Regulation (EU) 2023/955 of the European Parliament and of the Council of 10 May 2023 establishing a Social 
Climate Fund and amending Regulation (EU) 2021/1060 (OJ L 130, 16.5.2023). 

12 Regulation (EU) 2023/956 of the European Parliament and of the Council of 10 May 2023 establishing a carbon 
border adjustment mechanism (OJ L 130, 16.5.2023). 

4 

 
 
  
 
With these reforms, emission reductions under the ETS Directive have been accelerated. In 
addition, the scope of emissions trading has been expanded to maritime transport under the 
existing system (see Chapter 3.1) and to buildings, road transport and small-emitting industry 
through  the  set-up  of  the  new  emissions  trading  system  (ETS  2)  from  2027.  The  EU ETS 
framework  is  further  strengthened  to  ensure  that  the  system  works smoothly  to  achieve  the 
higher  ambition.  At  the  same  time,  even  more  resources  from  emissions  trading  have  been 
mobilised to support accelerated, innovation-driven and socially fair decarbonisation – through 
auction revenue distributed to national budgets, the Innovation Fund and  the Modernisation 
Fund supplied by the EU ETS and the Social Climate Fund. The Social Climate Fund has been 
created alongside the ETS 2 to mitigate any social effects of carbon pricing in new sectors. 

Most changes will take effect from 1 January 2024, yet some apply already. The outcomes of 
the above-mentioned reforms are elaborated on throughout the report, including the underlying 
ongoing implementation. 

2.2. ETS Directive in the context of the REPowerEU Regulation  

To  address  the  root  causes  and  impact  of  the  energy  crisis  triggered  by  Russia’s  war  of 
aggression against Ukraine, the Commission put forward the REPowerEU plan13. It includes 
targeted reforms and investments to phase out the EU’s dependence on fossil fuel imports from 
Russia, ensure the security of the energy supply, promote energy efficiency and accelerate the 
clean energy transformation. To put the plan into action, Parliament and the Council adopted 
Regulation 2023/43514 (REPowerEU Regulation) in February 2023.  

The REPowerEU Regulation includes mobilising the Innovation Fund as one of the funding 
sources to implement the plan. Furthermore, it amends the ETS Directive to direct 27 million 
unallocated  allowances  from  the  Market  Stability  Reserve,  which  would  otherwise  become 
invalid, by 31 December 2030 to replenish the Innovation Fund. This is explained further in 
Chapters 5 and 8. 

3.  EU ETS coverage 

Since 2021, the EU ETS applies in the 27 EU Member States and the European Free Trade 
Association (EFTA) countries –  Iceland, Liechtenstein, and Norway (EU ETS countries) as 
well as to power plants in Northern Ireland15. Since January 2020, the EU ETS is also linked 
with Switzerland's emissions trading system. How this link works is described in Chapter 13. 

The EU ETS covers emissions from electricity and heat generation, energy-intensive industry 
and aviation in Europe. In 2022, these emissions represented 36% of EU’s total emissions – 
from 8 640 electricity and heat plants and manufacturing installations as well as 390 aircraft 
operators flying between airports in the European Economic Area (EEA)  and from the EEA 
to  Switzerland  and  the UK.  Most  installations  in  the  EU  ETS  emit  less  than  50 000  tonnes 

13 Communication from the Commission – REPowerEU Plan (COM(2022) 230 final). 

14  Regulation  (EU)  2023/435  of  the  European  Parliament  and  of  the  Council  of  27  February  2023  (OJ  L  63, 
28.2.2023). 

15 Under the Protocol on Ireland/Northern Ireland of the EU-UK Withdrawal Agreement. 

5 

 
 
 
carbon  dioxide  equivalent  (CO2eq)  per  year16  (70.7%).  Of  these,  4 793  are  classified  as 
installations with low emissions17. Most of the remaining installations emit between 50 000 
and  500 000  tonnes  CO2eq  per  year18  (21.9%  of  the  total),  and  only  a  fraction  emits  over 
500 000 CO2eq per year19  (7.4% of the total). ETS countries  reported that  219 installations 
closed in 2022, 133 of which were due to a reduction of capacity to below 20 megawatts of 
thermal input. This brings installations below the threshold for coverage under the EU ETS. 
Figure 1 shows the breakdown of installations in the EU ETS by level of emissions in 2022. 

Figure 1: Number of installations per emissions category in 2022 

To reduce the administrative burden, countries can exclude installations with emissions below 
25 000 tonnes CO2eq per year the EU ETS if alternative measures to reduce emissions are put 
in place20. Since 2021, it is also possible to exclude installations from the EU ETS that emit 

16 Category A installations. 

17 A subset within category A installations, with emissions below 25 000 tonnes CO2eq per year. 

18 Category B installations. 

19 Category C installations. 

20 Under Article 27 of the ETS Directive.  

6 

 
 
 
 
less than 2 500 tonnes CO2eq per year21 as well as reserve or back-up units that do not operate 
more than 300 hours per year22. In 2022, 15 countries opted to exclude installations from the 
system,  accounting  for  a  total  of  4.2 Mt CO2eq.  This  represented  0.32%  of  emissions  from 
installations included in the EU ETS.  

In aviation, most of the 390 regulated operators in 2022 were commercial operators (67% of 
the total)23. A total of 174 operators (45%) qualified as small emitters24, including 126 of the 
129 non-commercial aircraft operators. 

In addition to carbon dioxide (CO2) emissions, the EU ETS covers nitrous oxide (N2O) from 
nitric, adipic and glyoxylic acids  and glyoxal production and perfluorocarbons (PFCs) from 
primary  aluminium  production.  In  2022,  22  countries  reported  permits  for  ETS  activities 
releasing  non-CO2  emissions.  Only  Norway  declared  carbon  capture  and  storage  activities. 
Countries reporting non-CO2 emissions from ETS activities are shown in Table 1 in the Staff 
working document25.  

3.1. Maritime included in the scope of the EU ETS from 2024 

Under  the  revised  ETS  Directive,  the  EU  ETS  will  cover  greenhouse  gas  emissions  from 
maritime transport as of January 2024. Initially, it will only concern CO2 emissions and then 
CH4 (methane) and N2O emissions from 2026. Emissions from all large ships (of 5 000 gross 
tonnage and above) entering EU ports are included, regardless of the flag they fly, in respect 
of: 

•  50% of emissions from voyages starting or ending outside the EU (allowing the third 

country to decide on appropriate action for the remaining share of emissions); 

•  100% of emissions that occur between two EU ports and when ships are in EU ports.   

Maritime transport is a major emitter of CO2, generating around 3-4% of the EU’s total CO2 
emissions  (over  124  million  tonnes  of  CO2  in  2021)  when  considering  all  emissions  from 
voyages to and from the EU26. Its inclusion in the EU ETS ensures that the sector contributes 
to  the  EU’s  climate  objectives.  This  will  further  incentivise  energy  efficiency,  low-carbon 
solutions,  and  reductions  in  the  price  difference  between  alternative  fuels  and  traditional 
maritime fuels. 

21 Under Article 27a (1) of the ETS Directive. In each of the three years before notification to the Commission. 
Emissions from biomass are excluded. 

22 Under Article 27a (3) of the ETS Directive. 

23 An example of a commercial aircraft operator is a passenger airline providing services to the public. An example 
of a non-commercial aircraft operator is a privately owned aircraft. 

24 In line with Article 55 of the Regulation (EU) 2018/2066 (see footnote 91).  

25 SWD(2023) 346 
26 Report from the Commission – Fourth Annual Report from the European Commission on CO2 Emissions from 
Maritime Transport (period 2018-2021), 13.3.2023 (SWD(2023) 54 final).  

7 

 
 
 
The system builds on the provisions in place for other EU ETS sectors as well as Regulation 
2015/75727  for  monitoring  and  reporting  emissions  from  maritime  transport.  The  ETS 
obligations  for  the  maritime  sector  will  be  introduced  gradually.  During  an  initial  phase-in 
period, shipping will only be obliged to surrender allowances for a portion of their emissions 
as set out below. 

•  2025: for 40% of their emissions reported in 2024; 

•  2026: for 70% of their emissions reported in 2025; 

•  2027 onwards: for 100% of their reported emissions in 2026 and later years. 

This  phase-in  approach  does  not  undermine  the  environmental  integrity  of  the  EU  ETS  as, 
when  fewer  allowances  are  surrendered  compared  to  the  verified  emissions  from  maritime 
transport in 2024 and 2025, Member States will cancel a number of allowances corresponding 
to that difference. 

A reporting and review clause is provided for to monitor implementation of the rules applicable 
to the maritime sector, in particular to detect and address evasive behaviour at an early stage, 
and assess relevant developments in the International Maritime Organization.  

4.  Cap on emissions 

The cap in the EU ETS sets the maximum absolute volume of emissions that regulated entities 
can emit over a trading phase. It corresponds to the number of allowances issued for that period. 
The cap decreases annually to ensure that the EU meets its overarching emission reductions 
target. This also gives regulated entities certainty about the expected scarcity of allowances.  

Separate cap calculations apply to emissions from installations and aircraft operators. In 2022, 
the  cap  on  emissions  from  installations  was  1 528 579 492  allowances.  For  aviation, 
27 268 379 allowances were issued in 2022.  

In 2021-2023, the cap has been decreasing at a rate of 2.2% per year. For the cap calculation 
for installations, this is equivalent to 43 003 515 allowances per year. Table 1 shows the annual 
figures of the EU ETS cap since 2021.  

Table 1: Annual EU ETS cap figures for installations and aircraft operators 

Year 

2021 

2022 

Annual cap (installations) 

Annual cap (aviation) 

1 571 583 007 

1 528 579 492 

28 306 545 

27 268 379 

Under the revised ETS Directive, the cap on emissions is tightened to bring emissions down 
and in line with the EU’s 2030 climate target – by 62% by 2030 compared to 2005. To this 

27 Regulation (EU) 2015/757 of the European Parliament and of the Council on the monitoring, reporting and 
verification of carbon dioxide emissions from maritime transport, and amending Directive 2009/16/EC (OJ L 123, 
19.5.2015). 

8 

 
 
 
 
end, the reduction factor is increased to 4.3% per year in 2024-2027 and 4.4% per year from 
2028. In addition, the cap is reduced twice– by 90 million allowances in 2024 and by 27 million 
allowances in 2026.  

These adjustments already recognise that emissions from maritime transport will be included 
in the EU ETS from 2024. The 2024 cap is increased by 78.4 million allowances based on the 
sector’s  average  emissions  reported  for  2018  and  2019.  The  Commission  adopted  Decision 
2023/157528 to take account of the cap adjustments taking effect in 2024. 

Figure 2 illustrates changes in the cap throughout all EU ETS phases, including the forthcoming 
reductions. 

28 Commission Decision (EU) 2023/1575 of 27 July 2023 on the Union-wide quantity of allowances to be issued 
under the EU Emissions Trading System for 2024 (OJ L 192, 31.7.2023). 

9 

 
 
 
 
Figure 2: Emissions cap in the EU ETS compared with verified emissions (considering the 2023 revision of the ETS Directive, i.e. rebasing in 2024 and 2026, 
including the maritime transport sector in 2024 and the linear reduction factor of 4.3% in 2024-2027 and 4.4% from 2028). Aviation is not included. Due to 
changes in scope, the 2005-2007 figures are not directly comparable with the latest ones. From 2021, the EU ETS no longer covers installations in the UK, 
only electricity generators in Northern Ireland. Legend: bars (cap), light shaded bars in 2014-2016 (allowances backloaded from auctions), light shaded bars 
from 2019 (feeds of allowances to the Market Stability Reserve), dashed line (verified emissions). 

10 

 
 
 
 
 
 
 
 
5.  Auctioning of allowances 

Auctioning is the main method of distributing allowances in the EU ETS, accounting for up to 
57% of the cap29. The Auctioning Regulation30 sets rules to ensure that auctions take place in 
an  open,  transparent,  harmonised  and  non-discriminatory  way.  It  specifies  the  timing, 
administration and other aspects of auctioning emission allowances.  

In 2022, auctions continued to take place through the European Energy Exchange AG (EEX):  

•  as  the  common  auction  platform  for  25  Member  States  participating  in  a  joint 

procurement procedure;  
for  Poland,  which  opted  out  from  the  joint  procurement  procedure  but  has  not  yet 
appointed its own auction platform; 
for Iceland, Liechtenstein, and Norway, after the EEA Agreement was amended in 2019 
to  allow  them  to  participate  in  the  Joint  Procurement  Agreement  for  the  common 
auction platform;  
for the UK to auction allowances for electricity generators in Northern Ireland.  

• 

• 

• 

The EEX also auctioned for Germany as their ‘opt-out’ auction platform.  

Table 2 provides an overview of the annual volumes of allowances auctioned by the EEX since 
2021. 

Table 2: Total volumes of allowances auctioned (1 January 2021 to 30 June 2023) 

Year 

2021 

2022 

2023  
(until 30 June) 

General allowances 

Aviation allowances 

582 952 500 

482 389 000 

247 762 000 

3 785 500 

3 698 000 

2 326 500 

In total,  222  auctions  were held  in  2022, of which two  were  cancelled.  On 1  February, the 
auction  for  the  common  auction  platform  was  cancelled  due  to  a  technical  problem.  In 
accordance  with  Article 9  of  the  Auctioning  Regulation,  the  corresponding  volume  of 
allowances  was  distributed  over  the  subsequent  four  auctions.  On  2  March,  the  auction  for 
Poland  was  cancelled  as  the  total  volume  of  bids  fell  short  of  the  volume  of  auctioned 
allowances.  That  auction  was  cancelled  in  accordance  with  Article 7(5)  of  the  Auctioning 
Regulation, and the volume was also distributed over the subsequent four auctions. In the first 
half of 2023, 109 auctions were held. No auctions were cancelled during that period. 

29 In practice, the exact share varies as the volume of allowances auctioned has been reduced to contribute to the 
Market Stability Reserve, while the volume of allowances earmarked for free allocation has not changed. 

30  Commission  Regulation  (EU)  No 1031/2010  of  12 November  2010  on  the  timing,  administration  and  other 
aspects of auctioning of greenhouse gas emission allowances pursuant to Directive 2003/87/EC of the European 
Parliament and of the Council establishing a scheme for greenhouse gas emission allowances trading within the 
Community (OJ L 302, 18.11.2010). 

11 

 
 
 
 
From  July  2023,  auction  volumes  include  allowances  allocated  from  the  Market  Stability 
Reserve  to  the  Recovery  and  Resilience  Facility  under  the  REPowerEU  Regulation. 
Allowances auctioned under the REPowerEU Regulation will generate EUR 20 billion for the 
Facility by 31 August 202631. 

Figure 3 gives an overview of auction clearing prices in the EU carbon market in 2022 and the 
first half of 2023. The highest auction price in 2022 of EUR 97.51 was reached on 8 February. 
The lowest price of EUR 57.91 was recorded on 7 March 2022 during a period of increased 
market  volatility  triggered  by  Russia’s  full-scale  invasion  of  Ukraine.  The  average  price 
reached EUR 80.18 in 2022. The price range was narrower in the first half of 2023, between 
EUR 75.04 (17 January) and EUR 96.33 (28 February). 

The  auction  platform  regularly  publishes  detailed  results  of  each  auction  on  its  website32. 
Further information on the performance of auctions, including the participation, cover ratios 
and prices, can be found in the ETS countries’ auction reports 33 

2

O
C

t
/
€
e
c
i
r
P
n
o
i
t
c
u
A

120,00

100,00

80,00

60,00

40,00

20,00

0,00

Figure 3: Clearing prices in auctions of general allowances (1 January 2022 to 30 June 2023) 

31 Regulatory update, Revised 2023 auction calendar published, DG Climate Action, 23.7.2023. 

32 EEX, EU ETS Auctions. 

33 Auction reports, DG Climate Action, 30.6.2023. 

12 

 
 
 
 
 
 
 
 
6.  Free allocation of allowances 

While auctioning is the primary method for distributing allowances in the EU ETS, a significant 
volume of allowances is allocated to regulated entities for free to address the risk of carbon 
leakage34. Free allocation is a transitional measure primarily addressed to the industrial sector. 

A dedicated Carbon Leakage List identifies sectors at risk of carbon leakage that are eligible 
to receive free allocation at 100% of the relevant benchmark levels. The list for 2021-203035 
identifies  63  sectors  and  sub-sectors  covering  about  94%  of  industrial  emissions  in  the  EU 
ETS. 

Free  allocation  to  specific  sectors  is  based  on  performance  benchmarks.  These  benchmarks 
reflect  an  average  emissions  intensity  per  unit  of  product  of  the  most  efficient  10%  of 
installations in each sector. Benchmarks are reduced incrementally to increase the incentive for 
the sector to decarbonise and advance innovation. In 2021, the Commission updated the values 
of ETS benchmarks36, which apply in the first allocation period (2021-2025). The benchmarks 
will be updated for the second allocation period (2026-2030). According to the revised ETS 
Directive,  the  annual  reduction  rates  will  then  be  increased  to  stimulate  further  industrial 
transformation: the minimum  rate from  0.2% to  0.3% and the maximum  rate from 1.6% to 
2.5%. 

From  2021,  volumes  of  free  allocation  are  adjusted  when  changes  in  industrial  production 
occur37.  The  threshold  for  adjustments  is  set  at  a  15%  increase  or  decrease  in  production. 
Operators  are  required  to  submit  annual  reports  on  production  data  to  the  relevant  national 
authorities. Based on the data, adjustments may be made to the volume of free allocation issued. 
This added stringency38 has led to an increase in the number of annual adjustments to the free 
allocation volume. The average number of applications submitted in 2021 and 2022 was about 
3 600, around three times more than the annual average up to 2020. 

Initially, the free allocation for 2021-2025 had been set at 2 791 million allowances for 7 430 
installations.  With  an  estimated  carbon  price  of  EUR 85/tonne  CO2eq,  the  value  of  this 
allocation would amount to about EUR 47 billion every year during this period. By mid-2023, 
the  Commission  adopted  eight  decisions39  to  adjust  free  allocation  volumes,  resulting  in  a 

34 Carbon leakage may occur if ETS-regulated activities were moved to non-EU countries with less ambitious 
climate policies and were leading to an increase in overall greenhouse gas emissions. 

35 Commission Delegated Decision (EU) 2019/708 of 15 February 2019 supplementing Directive 2003/87/EC of 
the European Parliament and of the Council concerning the determination of sectors and subsectors deemed at 
risk of carbon leakage for the period 2021 to 2030 (OJ L 120, 8.5.2019). 

36  Commission  Implementing  Regulation  (EU)  2021/447  of  12 March  2021  determining  revised  benchmark 
values for free allocation of emission allowances for the period from 2021 to 2025 pursuant to Article 10a(2) of 
Directive 2003/87/EC of the European Parliament and of the Council (OJ L 87, 15.3.2021). 

37  Commission  Implementing  Regulation  (EU)  2019/1842  of  31 October  2019  laying  down  rules  for  the 
application  of  Directive  2003/87/EC  of  the  European  Parliament  and  of  the  Council  as  regards  further 
arrangements  for  the  adjustments  to  free  allocation  of  emission  allowances  due  to  activity  level  changes  
(OJ L 282, 4.11.2019). 

38 Until 2020, the threshold was set at 50% for production decreases while increases were only considered when 
linked to physical changes expanding the capacity. 

39 The EFTA Surveillance Authority also adopted decisions for Iceland, Liechtenstein and Norway. 

13 

 
 
 
reduction  of  90.4 million  allowances.  In  parallel,  however,  the  Commission  adopted  three 
decisions40 correcting the initial level of free allocation, adding 3.4 million allowances. This 
was necessary due to errors found in the data submitted by installations and to implement court 
rulings. Overall, the free allocation for 2021-2025 has been reduced by 87 million allowances 
so far compared to the initial decision.  

Adjustments to the level of free allocation are made from the New Entrants’ Reserve (NER). 
These adjustments also include changes in allocation due to installations opening or closing. 
The initial volume of the NER at the start of 2021 amounted to 331.3 million allowances. This 
included  unallocated  allowances  and  200  million  allowances  from  the  Market  Stability 
Reserve. 

Table 3 summarises the annual levels of free allocation in the first allocation period (initial and 
adjusted levels). 

Table 3: Free allocation in 2021-2025 (million allowances) 

Year 

2021 

2022 

2023 

2024 

2025 

Total 

Initial free 
allocation (EU-
27 + Iceland, 
Liechtenstein, 
and Norway) 

Actual free 
allocation 

Adjusted and 
corrected free 
allocation 

559.6 

558.9 

558.2 

557.5 

556.8 

2 791.1 

545.9 

543.0 

539.2 

538.4 

537.7 

2 704.1 

−13.7 

−15.9 

−19.0 

−19.1 

−19.1 

−87.0 

The revision of the ETS Directive aligns   free  allocation with  the strengthened EU ETS.  It 
extends the scope of the activities regulated by the system and of the benchmarks41 to remove 
disincentives for deploying new technologies, such as renewable hydrogen or hydrogen-based 
steel. In parallel, conditions are introduced for accessing free allocation in the form of energy 
audits and, for certain installations, climate neutrality plans. The implementing rules on free 
allocation are currently being revised. 

In certain ETS sectors (cement, aluminium, fertilisers, hydrogen, iron and steel), free allocation 
will  be  gradually  replaced  by  a  carbon  border  adjustment  mechanism  (CBAM)  from  2026. 
Regulation 2023/95642 (CBAM Regulation) was adopted as one of the Fit for 55 reforms to 
mitigate  the  risk  of  carbon  leakage  as  the  EU  ramps  up  its  climate  ambition.  Importers  of 
products in CBAM sectors will incur a charge for the embedded emissions equivalent to what 

40 The EFTA Surveillance Authority also adopted decisions for Iceland, Liechtenstein and Norway. 

41 Annex I to the ETS Directive – activities in the scope of the EU ETS.  

42 See footnote 11.  

14 

 
 
 
EU  producers  pay  under  the  EU  ETS.  A  transitional  period  beginning  in  2023  gradually 
introduces the new regime43. The revenue from phasing out free allowances for CBAM sectors 
will be used to increase the Innovation Fund's budget.  

7.  Revenues from emissions trading 

The EU ETS generates substantial revenue that is used to advance climate action. This includes 
financing investments in energy transformation, industrial decarbonisation and technological 
innovation as well as social measures in support of the green transition. This way, ETS sectors’ 
exposure to  the carbon price  can also  be reduced  over time. A higher carbon price leads to 
higher revenue. 

The revenue from auctioning allowances in the EU ETS goes predominantly to Member States’ 
budgets. In addition, a portion of allowances is auctioned and funds the Innovation Fund and 
the Modernisation Fund. The Innovation Fund succeeded the NER 300 programme, which was 
funded by the EU ETS up to 2020. Tables 2 and 3 in the Staff working document44 include a 
breakdown of the 2022 ETS revenue per EU ETS country and Table 4 shows revenue generated 
in 2022 for the Innovation Fund and Modernisation Fund. The Staff working document45 also 
includes  a  summary  of  NER 300  implementation  and  projects  supported  through  its  funds 
(Table 5). 

In 2022, the EU ETS generated a total of EUR 38.8 billion in auction revenue, EUR 7.7 billion 
more  than  in  2021.  Of  this  amount,  EUR 29.7  billion  was  distributed  directly  to  Member 
States46. They reported that they spent 76% of this revenue on average on climate- and energy-
related projects – the same as in 2021 and in line with the 75% average in 2013-2020. About 
25% of Member State revenue is earmarked for specific climate and energy actions, 27% goes 
to dedicated environmental funds and 48% goes to national budgets. Member States have also 
continued to use their revenue to address the social impact of the energy crisis. A more detailed 
overview of Member States’ reporting on the use of their ETS revenue in 2022 is available in 
the 2023 Climate Action Progress Report47. 

Before the latest revision, the ETS Directive required that Member States use at least 50% of 
their  auction  revenue48  and  all  revenue  from  aviation  allowances  for  climate-  and  energy-
related purposes. The revised Directive introduces an obligation for Member States to spend 
all revenue from the EU ETS49 (or an equivalent amount) on the green transition, including 
social measures. In the context of the extended scope, Member States are also encouraged to 

43 Commission adopts detailed reporting rules for the Carbon Border Adjustment Mechanism’s transitional phase, 
DG Taxation and Customs Union, 17 August 2023. 

44 SWD(2023) 346 
45 SWD(2023) 346 
46 The remaining difference accounts for the revenues pooled under the Innovation and Modernisation Funds as 
well as the revenues distributed to Iceland, Liechtenstein and Norway plus the UK in respect of Northern Ireland. 

47 To be adopted; COM(2023) 653 final. 

48 Including allowances distributed for solidarity and growth. 

49 The same obligation will apply to revenue generated from the new ETS 2 for buildings, road transport and small 
emitting industries when launched. 

15 

 
 
 
support  the  decarbonisation  of  maritime  transport  and  marine  biodiversity  protection.  The 
revised spending rules already entered into force on 5 June 2023; next year’s report will cover 
this.  

7.1. Indirect carbon costs 

Member States can grant State aid to certain electricity-intensive industries for carbon costs 
arising  from  indirect  emissions,  specifically  from  high  electricity  prices  due  to  energy 
companies passing on the cost of buying allowances to consumers. The Commission adopted 
EU ETS State aid guidelines to harmonise implementation of this aid between Member States 
and minimise competition distortions  in the  single market.  These guidelines  first  applied to 
indirect  costs incurred  in 2013-202050. The guidelines  were  revised in  2020 to  cover 2021-
203051. 

In 2022, Member States paid for indirect costs based on the revised State aid guidelines for the 
first  time.  In  practice,  this  means  that  they  had  notified  schemes  for  the  new  period  to  the 
Commission for State aid assessment, which were subsequently approved as compatible with 
the single market.  

In  contrast  to  2021,  Lithuania  stopped  its  indirect  cost  compensation  in  2022.  However, 
Slovenia  and  Austria  introduced  new  schemes,  but  will  only  start  payments  in  2023.  This 
means that in 2022, 13 Member States paid industry for indirect carbon costs that installations 
incurred in 2021. Portugal can be added to this list, but its scheme was adopted only at the end 
of 2022, which means that payments occurred later and no data is available yet52.  

Within  three  months  after  the  end  of  each  year,  Member  States  with  an  indirect  cost 
compensation scheme in place must publish the total compensation amounts paid out, including 
a  breakdown  per  recipient  sector  and  subsector.  Table  4  summarises  the  data  published  by 
Member States on the compensation paid out in 2022. These compensation amounts are also 
compared with 2021 auction revenue53. 

50  Guidelines  on  certain  State  aid  measures  in  the  context  of  the  greenhouse  gas  emission  allowances  trading 
scheme post-2012 (OJ C 158, 5.6.2012). 

51 Guidelines on certain State aid measures in the context of the system for greenhouse gas emission allowances 
trading scheme post-2021 (OJ C 317, 25.9.2020). 

52 See State aid case SA.100103. The budget of the Portuguese scheme is EUR 25 million.  

53 Excluding revenues from auctioning aviation allowances. 

16 

 
 
 
Table 4: Amounts paid out in 2022 for indirect costs incurred in 2021 

Member State 

Belgium (FL) 

Belgium (WL) 

Czechia 

Germany 

Greece55 

Spain 

Finland 

France 

Italy 

Luxembourg 

Netherlands 

Poland 

Romania 

Slovakia 

Amount paid  
for indirect costs  
incurred in 2021  
(million EUR)] 

Number  
of recipients 
 (installations) 

Auction  
revenues  
in 202154  
(million EUR) 

Share of  
auction revenues 
 spent on  
indirect costs 

75.2 

14.2 

30.3 

806 

111.6 

244 

63.3 

300.2 

146.8 

12 

59.8 

167.6 

126 

1 

37 

15 

27 

676 

52 

211 

50 

275 

527.3 

601.9 

5 270.9 

1 003.9 

2 452.4 

404.6 

1 445.9 

 229 

2 495.8  

4 

59 

92 

29 

7 

7.3 

894 

4 966.4 

480.1 

275.8 

17.0% 

5.0% 

15.3% 

11.1%  

10.0% 

15.6% 

20.7% 

5.9% 

176.7% 

6.7% 

3.4% 

26.2% 

0.0% 

The  total  indirect  cost  payments  by  these  13  Member  States  in  2022  amounted  to  around 
EUR 2.16 billion. This is less than the EUR 2.38 billion disbursed in 2021. The revised ETS 
Guidelines  reduced  the  number  of  sectors  eligible  for  compensation.  The  number  of 
installations that received aid also decreased: from over 2000 in 2021, to around 1750 in 2022. 
The  revised  ETS  Guidelines  also  updated  the  emission  factors  that  Member  States  use  to 
calculate  the  maximum  aid  amount,  resulting  in  lower  payments  per  megawatt  hour  of 
benchmarked consumption. On the other hand, the inclusion of the refining sector as well as 
the introduction of a possibility to limit the maximum own contribution to indirect costs for 
very electro-intensive industries (i.e., to 1.5 % of beneficiary’s gross value added) have the 
opposite effect of increasing the overall aid amount.  

54 Excluding revenues from the auctioning of aviation allowances. 
55 Greece’s figures are provisional. Given that its compensation scheme was approved only in May 2023, the 
disbursement exercise had not been finalised yet at the time of reporting. 

17 

 
 
 
Under the new schemes implemented by Member States, beneficiaries should re-invest part of 
the aid in projects that lower their direct or indirect carbon footprint and hence their exposure 
to carbon leakage risk. 

The carbon price used to evaluate indirect costs incurred in 2021 (calculated as the average 
futures price for that year registered in 2020) was EUR 25.09, almost equal to the EUR 25.20 
used for indirect costs incurred in 2020. The compensation schemes typically have a budget 
calculated for the whole application period (which for most Member States covers 2021-2030).  

The indirect cost payments also decreased in relative terms. The total payments for indirect 
costs in 2022 were 10.4% of 2021 auction revenue collected by the 13 Member States. In 2021, 
they spent, on average, 19.2% of their auction revenue on indirect carbon costs. Here, the main 
factor is not the reduced compensation, but the increased auction revenues in 2021 compared 
to 2020.  

Member States that spend more than 25% of their auction revenue on indirect costs in any year 
are also required to publish a report explaining why they exceeded this threshold. In 2022, most 
Member States stayed well below this threshold. The increase in auction revenue is also the 
main  driver  here.  Nevertheless,  two  Member  States  spent  more  than  25%  of  their  auction 
revenue on indirect cost payments: Luxembourg and Romania.  

Luxembourg’s expenditure far outweighed its total auction revenue. In large part, this was due 
to a drop in the country’s auction volume caused primarily by its use of ETS allowances for 
offsetting emissions in the sectors covered by the Effort Sharing Regulation (‘ESR flexibility’). 
The  net  effect  is  that  Luxembourg  received  less  than  half  the  amount  of  revenues  in  2021 
compared to  2020. In absolute terms,  Luxembourg’s 2022 compensation actually  decreased 
compared to 2021. Romania, by contrast, only slightly exceeded the threshold and explained 
this was partly the result of the economic recovery, which had led to an increase in industrial 
production and electricity consumption.  

7.2. Innovation Fund 

Funded  entirely  by  the  EU  ETS,  the  Innovation  Fund  is  one  of  the  world’s  largest  funding 
programmes  for  deploying  low-  and  zero-carbon  innovative  solutions  and  technologies  in 
energy,  industry  and  net-zero  mobility.  The  Fund  provides  grants  for  projects  aimed  at 
commercially deploying innovative low-carbon technologies and bringing to market industrial 
solutions to decarbonise Europe and support the transition to climate neutrality. 

The Commission reports in more detail on implementation of the Innovation Fund separately. 
The  second  Progress  Report  on  implementation  of  the  Innovation  Fund  is  expected  in  Q4-
202356. 

In  terms  of  concrete  results  so  far,  16  large-scale  and  16  small-scale  projects  signed  grant 
agreements following the second round of calls for proposals concluded in 2022. Over EUR 1.8 
billion will fund innovation, including in the cement, hydrogen, chemicals and manufacturing 

56  Report  from  the  Commission  to  the  European  Parliament  and  the  Council  on  the  implementation  of  the 
Innovation Fund (COM/2022/416 final). 

18 

 
 
 
sectors, and advance decarbonisation in eight ETS countries57. About EUR 60 million will fund 
small-scale innovation in several hard-to-abate sectors, including glass, cement, energy storage 
and renewables58. 

With projects awarded support in Czechia, Slovenia, Lithuania and Cyprus, the sectoral and 
geographical  balance  of  the  Innovation  Fund  improved.  By  June  2023,  the  total  Innovation 
Fund portfolio counted 69 projects under implementation with an ETS contribution of EUR 3.1 
billion59. When completed, it is estimated that these projects will save around 215 Mt CO2eq 
of emissions in their first 10 years of operation. 

The incentive from the EU ETS carbon price for these projects is much larger than the amount 
of  Innovation  Fund-sourced  funding.  For  example,  the  carbon  price  benefit  to  companies’ 
business cases from the projects supported by the Innovation Fund so far is around EUR 17.3 
billion  (carbon  costs  avoided  due  to  lower  emissions).  This  incentive  clearly  exceeds  the 
Innovation Fund support for these projects of EUR 3.1 billion. This reflects the EU ETS logic 
whereby carbon price is the main long-term incentive, while the Innovation Fund supplements 
this incentive to accelerate change60. 

In parallel,  18 unsuccessful projects  from the second round of  calls (both large- and small-
scale)  were  selected  for  project  development  assistance  under  the  Innovation  Fund.  This 
support amounts to EUR 6.87 million and is provided by the European Investment Bank (EIB). 
Since the beginning of the programme, 43 projects have been awarded project development 
assistance, creating a strong pipeline of future good quality applications.  

The  third  call  for  large-scale  projects  focused  specifically  on  areas  linked  to  the  EU’s 
REPowerEU plan. In July 2023, 41 projects61 were pre-selected to prepare grant agreements 
for  an  unprecedented  Innovation  Fund  contribution  of  EUR 3.6 billion.  The  agreements  are 
expected  to  be  signed  by  the  end  of  2023.  The  third  small-scale  call,  with  a  budget  of 
EUR 100 million closed on 19 September 2023 with 72 proposals received..  

The revision of the ETS Directive brings important changes to the Innovation Fund. The Fund 
is increased from 450 to around 530 million allowances, the sale of which is expected to pool 
about EUR 40 billion in revenue available until 203062. More sectors are included in the scope 
of the Fund - maritime, buildings and road transport. Also, new elements are introduced in the 
Fund’s coverage to better align it with market needs,  including a category of medium-scale 
projects and funding mechanisms such as competitive bidding procedures (auctions). While 
the Fund remains focused on breakthrough innovation, it is expanded to scaling up innovative 
technologies  and  the  auctions  should  aid  this.  In  view  of  the  revision,  the  Innovation  Fund 

57 The projects will contribute to the decarbonisation efforts of six Member States (Bulgaria, France, Germany, 
the Netherlands, Poland, and Sweden), plus Iceland and Norway. 

58 16 grants from the EU’s Innovation Fund awarded to projects across Europe, DG Climate Action, 6 June 2023. 

59 Updated portfolio of projects signed under the Innovation Fund. 

60 Recital 20 of Directive 2009/29/EC, reaffirmed in recital 14 of Directive (EU) 2018/410. 

61 EU invests €3.6 billion of emissions trading revenues, DG Climate Action, 13 July 2023.  

62 At an estimated carbon price of EUR 75/tonne of CO2. 

19 

 
 
 
Regulation 2019/85663 has undergone an amendment. It is expected to enter into force at the 
beginning of November 2023.  

The  fourth  call  for  proposals,  covering  small-,  medium-  and  large-scale  projects,  with  a 
tentative budget of EUR 4 billion as well as the first auction for renewable hydrogen with a 
budget of EUR 800 million will be launched before the end of 2023, under the revised rules. 
The pilot auction and the following one are open to Member States to assign to them national 
budgets in order to support additional projects – this is the concept of ‘Auction as a Service’ 
outlined in the European Hydrogen Bank Communication64. 

7.3. Modernisation Fund 

The Modernisation Fund is a solidarity programme financed from the EU ETS. It supports 10 
lower-income Member States65 and from 2024, 13 lower-income Member States in meeting 
the 2030 climate and energy targets by helping deploy projects that modernise energy systems 
and improve energy efficiency. Its budget comes from auctioning a share of the EU ETS cap; 
it is allocated between the beneficiary Member States according to a fixed key66.  

Member  States  submit  investment  proposals  they  select  to  be  assessed  by  the  European 
Investment Bank. They are, however, required to use most of their resources under the Fund 
on priority investments that help advance their energy transformation. The Commission takes 
a  disbursement  decision  once  an  investment  is  confirmed  as  a  priority  by  the  EIB  or 
recommended  for  financing  by  the  Fund’s  Investment  Committee  as  a  non-priority. 
Disbursement  decisions  are  issued  in  two  cycles  every  year,  covering  investments  in  all 
beneficiary Member States. 

Total  disbursements  from  the  Modernisation  Fund  since  January  2021  amount  to  around 
EUR 7.5 billion, benefiting all eligible Member States. Table 5 presents the amounts disbursed 
per Member State.  In June 2023, the Commission adopted the  fifth disbursement decision67 
under the Modernisation Fund. On this basis, the EIB made payments for a total of EUR 2.4 
billion to seven beneficiary Member States68 to finance 31 investment proposals. Submissions 

63 Commission Delegated Regulation (EU) 2019/856 of 26 February 2019 supplementing Directive 2003/87/EC 
of the European Parliament and of the Council with regard to the operation of the Innovation Fund  (OJ L 140, 
28.5.2019). 

64   Communication from the Commission to the European Parliament, the Council, the European Economic and 
Social Committee and the Committee of the Regions – European Hydrogen Bank, 16.3.2023 (COM(2023) 156 
final). 

65  The  first  beneficiary  Member  States  were  Bulgaria,  Croatia,  Czechia,  Estonia,  Hungary,  Latvia,  Lithuania, 
Poland,  Romania  and  Slovakia.  Greece,  Portugal  and  Slovenia  were  added  in  the  2023  revision  of  the  ETS 
Directive. 

66 Annex IIb to the ETS Directive – Modernisation Fund allocation key.  

67  Commission  Decision  of  30.5.2023  on  the  disbursement  of  revenues  from  the  Modernisation  Fund  under 
Directive 2003/87/EC of the European Parliament and the Council  - First biannual disbursement cycle of 2023 
(C(2023) 3643 final). 

68  The  fifth  disbursement  decision  under  the  Modernisation  Fund  authorised  payments  to  Romania 
(EUR 1.1 billion),  Czechia  (EUR  1 billion),  Bulgaria  (EUR  197 million),  Poland  (EUR 47 million),  Croatia 
(EUR 88 million), Latvia (EUR 5 million) and Lithuania (EUR 1 million). 

20 

 
 
 
for another round of proposals under the Modernisation Fund closed on 15 August 2023 for 
non-priority projects and on 12 September 2023 for priority projects.  

Table 5: Total disbursements from the Modernisation Fund (1 January 2021 to 30 June 2023) 

Beneficiary Member State 

Disbursed amounts since 2021 
(million EUR) 

Bulgaria 

Czechia 

Estonia 

Croatia 

Hungary 

Lithuania 

Latvia 

Poland 

Romania 

Slovakia 

TOTAL 

196.6 

2 677.2 

87.0 

210.0 

108.6 

114.0 

5.0 

1 036.2 

2 558.2 

519.5 

7 512.2 

The revision of the ETS Directive brings important changes to the Modernisation Fund’s size 
and governance. The size of the Fund is increased with 110 million allowances added to the 
original  640 million. This top-up is  shared between 13 beneficiary Member States  – the 10 
original beneficiaries plus Greece, Portugal and Slovenia. Even more ETS resources under the 
Fund are allocated to priority resources, while the list of priorities is broadened. In view of the 
revision, the Modernisation Fund Regulation 2020/100169 is being amended. It is scheduled for 
adoption in Q4 2023. The amended Regulation would enter into application on 1 January 2024, 
for the new rules to apply already in the first disbursement cycle that year. 

8.  Emission reductions in the EU ETS  

In 2022, overall emissions in the EU ETS amounted to 1 362.1 million tonnes CO2eq (down 
from 1 364.9 million tonnes CO2eq in 2021). Emissions from installations accounted for 1 313 
million  tonnes  CO2eq,  1.8%  less  than  in  2021.  Emission  reductions  were  driven  mainly  by 
industry  installations  (−6.5%  in  2022).  Emissions  from  electricity  and  heat  generation 

69 Commission Implementing Regulation (EU) 2020/1001 of 9 July 2020 laying down detailed rules for the 
application of Directive 2003/87/EC as regards the operation of the Modernisation Fund supporting investments 
to modernise the energy systems and to improve energy efficiency of certain Member States (OJ L 221, 
10.7.2020). 

21 

 
 
 
increased for the second year in a row (+2.4% in 2022). This was mainly due to the energy 
crisis in Europe and the subsequent higher use of fossil fuels in electricity generation. 

Emissions  from  industrial  installations  fell  by  6.5%  in  2022  compared  to  2021.  Significant 
decreases  could  be  observed  in  the  production  of  cement  clinker,  pig  iron  or  steel,  bulk 
chemicals,  lime  and  the  calcination  of  dolomite/magnesite  and  ammonia.  An  increase  in 
emissions could be seen in the mineral oil refining sector. Table 66 shows the trend in ETS 
emissions from installations in recent years. 

Table 6. Verified emissions from installations in the EU ETS [million tonnes]. 

Year 

2019 

2020 

2021 

2022 

Verified emissions 
from stationary 
installations 

Change year-on- 
year 

Verified emissions 
from electricity 
and heat 
generation 

Change year-on- 
year 

Verified emissions 
from industrial 
production 

Change year-on- 
year 

1 530 

1 356 
(1.253 UK excluded) 

1 337 

1 313 

−9.1% 

−11.4% 

−1.4% 
(6.6% UK excluded) 

−1.8% 

822 

696 
(653 UK excluded) 

708 

725 

−14.7% 

−15.3% 

1.6% 
(8.4% UK excluded) 

2.4% 

708 

660 
(601 UK excluded) 

629 

588 

−1.6% 

−6.9% 

−4.7% 
(4.6% UK excluded) 

−6.5% 

Figure 4 and Figure 5 illustrate the trend in emissions from fossil fuel combustion by EU ETS 
installations – in total and by fuel type, respectively. Altogether, emissions are on a downward 
trend. However, the long-term trend of hard coal replacement by natural gas reversed in 2022, 
linked to the high increase in the price of natural gas. Biomass emissions are not covered under 
the EU ETS; thus, they are not included in the emission values in the other sections of this 
report. The figure also shows a trend of an increasing use of biomass by ETS installations, with 
16.7%  on  top  of  the  ETS  installation  emissions  in  2022.  Until  2022,  emissions  from  the 
combustion of biomass were generally zero-rated. 

22 

 
 
)

2

O
C

t

M

(

s
n
o
i
s
s
i
m
E

 1,60

 1,40

 1,20

 1,0

 ,80

 ,60

 ,40

 ,20

 -

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

Figure 4: Trend in total emissions from fossil fuel combustion in the EU ETS 

120%

100%

8,2% 8,9% 8,8% 9,1% 9,3% 10,9% 12,9% 13,7% 15,6% 15,7%
9,0% 6,0% 5,7% 6,3% 6,9% 7,2% 6,2% 6,8% 6,3% 6,0%

Zero rated biomass

Other fossil fuels˟

80%

3,6%
5,8%

4,0% 3,6% 3,8% 4,0% 4,1% 4,3% 3,9% 4,3% 4,0%
6,4% 6,6% 6,5% 6,8% 7,2% 7,7% 8,4% 7,5% 8,2%

60%

26,6% 30,9% 30,5% 28,6% 28,9% 28,7% 26,3% 23,3% 24,5% 24,2%

40%

20%

0%

22,7% 21,4% 21,6% 24,0% 25,5% 25,6% 31,3% 34,8% 32,9% 29,9%

24,7% 24,2% 24,9% 24,1% 21,3% 20,6% 17,0% 15,6% 17,3% 20,3%

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

LPG

Peat

Coke oven gas

Petroleum coke

Coke

Fuel oil

Blast furnace gas

Refinery gas

Lignite

Natural gas

Hard coal

Figure  5:  Trend  in  the  share  of  emissions  of  each  fuel  type  (%  of  total  fuel  emissions  in  ETS 
installations, labels not shown if fuel never reaches a share above 3% of the total)  

[*] not covered by the other specified fuels 

23 

 
 
 
 
 
 
From 1 January 202370, new sustainability and emissions savings criteria under the Renewable 
Energy Directive71 apply to emissions from zero-rated biomass in the EU ETS. They include 
stricter criteria on biofuels and bioliquids and new criteria for solid and gaseous biomass. 

Biomass  fuels  that  meet  the  applicable  sustainability  criteria  and  greenhouse  gas  savings 
criteria or that are not covered by these criteria can be considered zero-rated. This means that 
their  CO2  emissions  do  not  count  as  fossil  CO2.  Operators  do  not  need  to  surrender  ETS 
allowances  for  these  zero-rated  emissions.  Therefore,  in  Figure  5,  the  zero-rated  biomass 
emissions are shown on top of the fossil fuel emissions. 

Figure 6 demonstrates how zero-rated emissions from biomass are split between Category A, 
B, and C installations in the EU ETS. The split excludes the absorption phase and the net value 
of emissions. The zero-rated emissions from biomass were 173 Mt CO2eq,  in 2022, and similar 
to the previous year. 

Emissions  from  non-zero-rated  biomass  remained  minimal  at  around  1.3 Mt CO2eq, 
accounting for just under 0.1% of total ETS emissions from stationary installations. Whilst this 
is almost the same share as in 2021, it is expected to increase due to the requirements for zero-
rated  biomass  becoming  stricter,  particularly  after  2023.  Until 1 January 2023,  national 
authorities may allow installations to zero-rate emissions from biomass without demonstrating 
compliance with the Renewable Energy Directive II criteria for sustainability and emissions 
savings. 

)

2

O
C

t

M

(

s
n
o
i
s
s
i
m
e

s
s
a
m
o
i
B

250

200

150

100

50

0

120.0 Mt

122.4 Mt

122.5 Mt

123.5 Mt

18,96 

19,24 

17,62 

13,56 

127.6 Mt

14,07 

48,10 

45,29 

44,19 

46,43 

50,89 

143.2 Mt

17,16 

150.3 Mt

19,59 

52,78 

51,38 

172.4 Mt

173.3 Mt

142.0 Mt

24,60 

26,40 

21,66 

48,48 

58,34 

58,50 

52,91 

57,85 

60,73 

63,47 

62,65 

73,25 

79,36 

71,87 

89,42 

88,44 

2 0 1 3

2 0 1 4

2 0 1 5

2 0 1 6

2 0 1 7

2 0 1 8

2 0 1 9

2 0 2 0

2 0 2 1

2 0 2 2

Category A

Category B

Category C

Figure 6: Annual emissions of ETS installations, originating from zero-rated biomass, from 2013 to 
2020 (million tonnes CO2eq) 

70 Article 38(6) of the Monitoring and Reporting Regulation. As above, Regulation (EU) 2018/2066 amended in 
2020 by Regulation (EU) 2020/2085 and in 2022 by Regulation (EU) 2022/388. See consolidated text. 

71 Directive (EU) 2018/2001 of the European Parliament and of the Council of 11 December 2018 on the 
promotion of the use of energy from renewable sources (recast) (OJ L 328, 21.12.2018). See consolidated text. 

24 

 
 
 
 
 
 
 
 
 
9.  Balancing supply and demand in the EU carbon market 

The  Market  Stability  Reserve  (MSR)  was  created  as  a  rule-based,  long-term  solution  to  a 
structural imbalance between the supply of and demand for allowances in the EU ETS at the 
start of phase 3. In 2013, the EU carbon market had a surplus of 2.1 billion allowances (after 
providing for the use of 1.6 billion international credits for compliance in the EU ETS).  

The MSR adjusts the supply of allowances in the EU ETS according to pre-set thresholds of 
the  total  number  of  allowances  in  circulation  (TNAC).  Based  on  the  level  of  the  TNAC, 
allowances are either withdrawn72 from auctions and placed in the Reserve or released from 
the Reserve and auctioned. This way, the MSR fosters balance and resilience to future supply-
demand  shocks,  allowing  the  EU  carbon  market  to  function  smoothly.  The  Reserve  began 
operating in 2019 and has since withdrawn allowances from circulation. 

The Commission publishes the TNAC annually. It is calculated for the preceding year, while 
the  supply  adjustments  follow  the  publication  over  a  12-month  period  and  according  to  a 
specific key. On 15 May 2023, the Commission published the Communication on the TNAC 
in 202273. It totalled 1.13 billion allowances – a decrease compared to 2021 yet still above the 
threshold activating the Reserve. As a result, 272 million allowances (24% of the TNAC) are 
being withdrawn from auctions from September 2023 to August 2024. Figure 7 illustrates the 
trend in the surplus of allowances in the EU ETS since 2013. ETS countries’ contributions to 
the MSR since 2019 are presented in the Table 6 in the Staff working document74. 

2,08

2,09

1,82

1,68

1,65

1,65

1,58

1,45

1,39

1,13

]
s
n
o
i
l
l
i
b
[

s
e
c
n
a
w
o
l
l

A

2,5

2,0

1,5

1,0

0,5

0,0

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

Figure 7: Surplus of allowances in the EU ETS (2013-2022) 

As of 2023, the MSR invalidates allowances in its holdings above a certain threshold75. The 
Commission  reported  on  this  in  the  Communication  on  the  TNAC  in  2022.  The  applicable 

72 The MSR withdraws 24% of the TNAC when it exceeds 833 million allowances.  

73 Communication from the Commission Publication of the total number of allowances in circulation in 2022 for 
the purposes of the Market Stability Reserve under the EU Emissions Trading System established by Directive 
2003/87/EC (OJ C 172, 15.5.2023). 

74 SWD(2023) 346 
75 Under Article 1(5a) of the MSR Decision. 

25 

 
 
 
 
 
threshold was the 2022 auction volume (486 million allowances). On 31 December 2022, the 
MSR contained over 3 billion allowances. As a result, 2.5 billion allowances became invalid 
on 1 January 2023. The remaining allowances correspond to those placed in the Reserve via its 
intakes since 2019. From this remaining volume, 27 million allowances were taken under the 
REPowerEU Regulation to be auctioned to supply the Innovation Fund. The calculation of the 
TNAC in 2023 will reflect this. 

Important  changes  have  been  made  to  strengthen  the  Reserve  as  part  of  Fit  for  55  –  in  the 
revision of the ETS Directive and the MSR Decision. They will take effect in 2024. Chiefly, 
the MSR intake rate of 24% is maintained and the invalidation threshold is fixed at 400 million 
allowances. The intake rate mechanism is also adapted to mitigate threshold effects. When the 
TNAC is between 833 and 1 096 million allowances, the intake rate mechanism will not be 
activated; instead, a smaller share of allowances will be deducted from auction volumes and 
placed in the Reserve. Furthermore, from 2024, the net demand from aviation will be included 
in the TNAC calculation. The Communication on the TNAC in 2023 will account for these 
changes. It is due to be published by 1 June 2024.  

10.  Aviation  

The EU ETS has regulated emissions from the aviation sector since 2012. Legally, the system 
covers  all  outgoing  flights  and  all  incoming  flights  to  the  EEA.  In  2013,  however,  the  EU 
temporarily limited ETS obligations to flights within the EEA to support the development of a 
global market-based measure to reduce aviation emissions by the International Civil Aviation 
Organization (ICAO)76. The ETS Directive coverage has been extended three times since, as 
explained below. 

First,  as  of  1 January  2020,  the  EU  ETS  covers  emissions  from  outgoing  flights  to 
Switzerland77. The Swiss ETS applies to flights departing to EEA airports. This ensures a level 
playing field in both route directions. Second, as of  1 January 2021, the EU ETS applies to 
outgoing flights to the UK. The UK ETS applies to flights departing to EEA airports, which 
maintains the carbon pricing coverage of aviation emissions despite the UK’s departure from 
the EU. 

The third scope extension will take place on 1 January 2024 when emissions from most flights78 
to  and  from  the  EU’s  nine  outermost  regions  will  be  covered  by  the  EU  ETS  as  well  as 
departing flights from the outermost regions to Switzerland and the UK. Altogether, this will 
lead to an extension of ETS carbon pricing coverage of around 7%. Switzerland is also planning 
to cover emissions from flights departing to the outermost regions in its ETS from the same 
date. 

76  Decision  No 377/2013/EU  of  the  European  Parliament  and  of  the  Council  of  24 April  2013  derogating 
temporarily  from  Directive  2003/87/EC  establishing  a  scheme  for  greenhouse  gas  emission  allowance  trading 
within the Community (OJ L 113, 25.4.2013). 

77 Adjusted verified emissions, excluding incoming flights incoming from the UK: 21.5 Mt in 2020 and 55.8 Mt 
in 2019. 

78 A temporary derogation from the EU ETS is provided until 2030 for emissions from flights between an 
aerodrome in an outermost region in one Member State and an aerodrome in the same Member State. 

26 

 
 
 
In 2022, around 27 million aviation allowances were issued in line with the updated scope of 
the  EU  ETS.  Free  allocation  amounted  to  23.1  million  allowances.  Aircraft  operators 
administered by national administrators in the EEA received a little less than 0.4 million Swiss 
aviation  allowances  for  free  under  the  Swiss  ETS.  Approximately  3.7  million  aviation 
allowances were auctioned in 2022.  

Emissions from aircraft operators increased significantly in 2022 compared to 2021. In 2022, 
emissions amounted to 49.1 million tonnes (including 0.5 million tonnes under the Swiss ETS), 
up from 27.9 million tonnes in 2021. This was still almost 30% lower than the 68.2 million 
tonnes emitted in 2019. Since 2021, however, the EU ETS no longer covers incoming flights 
from  the  UK.  Without  these,  the  EU  ETS  aviation  emissions  are  closer  to  2019  levels, 
confirming the return to pre-COVID 19 emission levels79. 

Table  7  sets  out  verified  emissions  from  aircraft  operators,  along  with  the  volumes  of 
allowances allocated for free and auctioned in the aviation sector since 2019. 

79 European Aviation Overview 24-30 May, Eurocontrol, 1.6.2023. 

27 

 
 
 
Table 7: Aviation in the EU ETS – verified emissions, volumes of allowances allocated for free and 
auctioned 

Year 

Verified emissions 
(million tonnes CO2eq) 

Change year-on- 
year80,81 

Free allocation (EU27 + 
Iceland, Liechtenstein, 
and Norway + UK + 
Switzerland) 82,71,72 

Free allocation from the 
special reserve for new 
entrants and fast-
growing operators 

Volumes of allowances 
auctioned 

2019 

68.2 

2020 

25.2 

2021 

27.9 

2022 

49.1 

1% 

−63% 

30% 

75% 

31.383 

32.5 

24.0 

23.1 

1.0 

5.5 

0.8 

9.2 

0.3 

3.8 

0.25 

3.7 

The ICAO Assembly adopted a resolution on the Carbon Offsetting and Reduction Scheme for 
International  Aviation  (CORSIA)  in  October  2016.  This  resolution  was  reconfirmed  in  the 
2019  and  2022  revisions.  Its  main  objective  is  to  offset  CO2  emissions  from  international 
aviation above a certain baseline. The scheme launched in 2021 and is voluntary for all states 
until 2026. As of 2027, it should be no longer voluntary for major aviation countries. It is not 
yet  clear if  all obliged countries will apply  it after that  – some have expressed reservations 
about  the  scheme  (e.g.,  China)84.  Participating  states  should  oblige  airlines  based  in  those 
countries to offset their emissions above a baseline set at 85% of 2019 levels by purchasing 
and cancelling international credits. To facilitate progress at ICAO the limitation of the intra-
European  scope  of  the  EU  ETS  for  aviation  was  extended  until  the  end  of  2026  as  third 

80

 Considering the updated scope of aviation in the EU ETS (without incoming flights from the UK). 

81 Switzerland included in 2020, 2021 and 2022 data only. 

82 These numbers do not take into account all closures of aircraft operators and free allowances from the special 
reserve  for new  entrants and fast-growing operators, nor returns in  2012 due to the change in scope. Sources: 
EUTL, DG Climate Action. 

83

 Taking  into account the numbers withheld due  to closures of aircraft operators, the real allocation for 2019 
would be 4 million below the figure provided (see footnote 8 in Notice C/2020/8643, OJ C 428, 11.12.2020). The 
allocation for the UK (4.31 million allowances of the total for 2019) was suspended in 2019 due to the safeguard 
measures adopted by the Commission to protect the environmental integrity of the EU ETS in cases where EU 
law ceases to apply to a Member State withdrawing from the EU. The allocation resumed in 2020. 

84  Impact  assessment  report  accompanying  the  Proposal  for  a  Directive  of  the  European  Parliament  and  the 
Council amending Directive 2003/87/EC as regards aviation's contribution to the Union’s economy-wide emission 
reduction target and appropriately implementing a global market-based measure (SWD(2021) 603, 14.7.2021, 
p.9). 

28 

 
 
 
countries should be applying CORSIA from 2027. Furthermore, the EU ETS revision sets out 
that the system will apply to flights involving countries that do not apply CORSIA as of 2027. 

The revised ETS Directive advances the implementation of the polluter pays principle in the 
aviation sector. Free allowances for aircraft operators will be gradually phased out by the end 
of 2025. At the same time, 20 million allowances (with an estimated current market value of 
around  EUR 1.6  billion)  are  earmarked  to  further  support  the  uptake  of  eligible  alternative 
fuels. This would increase the existing incentive the EU ETS gives to alternative fuels over 
fossil fuels, where zero rating gives a financial incentive of around EUR 300 per tonne of fuel. 
The ongoing revision of the Energy Taxation Directive is expected to increase this incentive 
further. 

Recognising that non-CO2 aviation effects can no longer be ignored85, a dedicated monitoring, 
reporting and verification (MRV) framework has been introduced and will start on 1 January 
2025. The Innovation Fund has been expanded to support reducing the overall climate impact 
of aviation. Based on the results of the MRV of non-CO2 aviation effects, the Commission will 
submit a report by the end of 2027. It will then, where appropriate, draft a legislative proposal, 
with  an  accompanying  impact  assessment,  setting  out  how  to  mitigate  those  effects  by 
expanding the scope of the EU ETS for aviation to non-CO2 effects. 

In  2026,  the  Commission  will  assess  if  CORSIA  has  been  strengthened  and  if  it  is  being 
implemented by major countries outside Europe. Based on the outcome of this assessment, the 
Commission  should  either  make  a  legislative  proposal  to:  (i)  limit  the  scope  of  EU  ETS  to 
flights  departing  EEA  airports,  with  the  deduction  of  any  costs  incurred  from  CORSIA 
offsetting on these routes, and exempt incoming flights; or (ii) only apply ETS carbon pricing 
to intra-European flights and routes involving countries that do not apply CORSIA from 2027.  

11.  Market oversight 

The EU carbon market is subject to robust market oversight rules enshrined in EU financial 
markets.  Both  spot  and  derivatives  in  emissions  allowances  are  classified  as  financial 
instruments  under Directive  2014/65/EU86.  This  classification is  also  reflected in  secondary 
legislation, including the Auctioning Regulation, which oversees the primary market (auctions 
of allowances).  

Supervision of the EU carbon market is shared between the financial authorities of all Member 
States87, under the coordination of the European regulator, the European Securities and Markets 
Authority (ESMA). They monitor market participants’ behaviour through extensive reporting 

85 The overall impact of global aviation on climate is considerably higher than the CO2 component alone, which 
the EU ETS currently regulates. The overall impact of aviation is estimated to be two to four times that of CO2 
emissions  when  the  non-CO2  effects  are  considered.  Addressing  these  emissions  is  relevant  as  the 
Intergovernmental Panel on Climate Change (IPCC) has singled out international aviation (and shipping), in its 
Sixth Assessment Report on mitigation of climate change, as sectors with climate goals that fall short of what 
would be required to curb global temperature increase in line with the Paris Agreement. 

86 Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial 
instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (OJ L 173, 12.6.2014).  

87  The  list  of  national  competent  authorities  responsible  under  the  Market  Abuse  Regulation  can be  found  on 
ESMA’s website. 

29 

 
 
 
and transparency requirements. In addition,  Regulation 596/201488 on market  abuse  obliges 
market  participants  to  report  suspicious  orders  and  transactions  immediately.  National 
authorities in turn have the power to respond with remedial action or penalties if they identify 
market abuse. 

In the light of the energy crisis and ETS price rise, ESMA published an in-depth inquiry into 
the functioning of the EU carbon market on 22 March 202289. The report provided a detailed 
analysis of the market, concluding that it functioned properly and that price movements were 
in line with market fundamentals. In addition, ESMA proposed several recommendations to 
further improve the transparency and integrity of the EU carbon market. 

Furthermore, the Commission conducted a market survey on the participation of operators in 
auctions and secondary markets in the second half of 2022. The survey, to which more than 
900  operators  responded,  confirmed  the  important  role  of  financial  entities  in  the  orderly 
functioning of the EU carbon market.  Overall, operators were positive about the current set-
up for acquiring emission allowances  through auctions and secondary market  trading. Most 
operators use financial intermediaries to acquire emission allowances and comply with their 
obligations. The main reasons operators give for using intermediaries are the limited need for 
allowances, cost efficiency and a limited knowledge of financial markets. 

Against this background, the revised ETS Directive includes several  amendments to further 
improve the EU carbon market’s transparency. ESMA has been requested to conduct a periodic 
assessment of the functioning of EU carbon markets and include it in their regular report on 
trends, risks and vulnerabilities in financial markets. On 31 August 2023, ESMA reported in 
its  second  Report  on  trends,  risks  and  vulnerabilities  of  2023  that  the  EU  carbon  market 
remained stable in 2023 and continued to operate in line with market fundamentals.  

As part of the EU ETS reform, the Commission also committed to introducing several changes 
in the EU ETS implementing legislation to further improve the carbon market’s transparency. 
These changes, amending the Auctioning Regulation and Registry Regulation, are in line with 
recommendations  of  the  ESMA  report.  To  facilitate  market  monitoring,  national  competent 
authorities and ESMA will receive detailed data for each auction and will be allowed to have 
regular  access  to  Union  Registry  data.  Furthermore,  changes  will  be  made  to  facilitate  the 
identification of purely bilateral transactions in the Union Registry. The work on amending the 
Auctioning and Registry Regulations to implement these commitments is ongoing.  

On 5 July 2023, the International Organization of Securities Commission (IOSCO)  published 
its report on compliance carbon markets90. It is an international body that brings together the 
world’s securities regulators and is recognised as the global standard setter for the securities 
sector. The report, based upon the lessons learned from the existing compliance carbon markets 

88 Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse 
(market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and 
Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC (OJ L 173, 12.6.2014). 

89 ESMA70-445-38, ESMA Final report on emission allowances, 28.3.2022.  

90 FR09/23 - Compliance Carbon Markets, IOSCO, Final Report, 5.7.2023.  

30 

 
 
 
and good practices in commodity derivatives markets, assessed both primary and secondary 
markets spot as well as derivatives trading across jurisdictions.  

The IOSCO report points to best practices applicable in the EU carbon market. These include 
the Market Stability Reserve to limit the risk of oversupply of allowances, the classification of 
emission  allowances  and  derivatives  as  financial  instruments,  the  application  of  a 
comprehensive  market  oversight  framework  to  commodities  markets  including  rules  on 
transparency  and  transaction  reporting,  market  abuse,  anti-money  laundering  and  effective 
supervision  by  competent  authorities.  The  report  makes  12  recommendations  to  assist 
jurisdictions  in  setting  up  compliance  carbon  markets,  broadly  in  line  with  the  current 
regulatory framework governing the EU carbon market.  

12.  Framework for the monitoring and reporting of emissions 

A  smoothly  functioning  and  environmentally  credible  EU  ETS  is  ensured  through  a  robust 
framework  of  monitoring,  reporting,  verification  and  accreditation  requirements.  These 
requirements  are  harmonised 
in  Regulation  2018/2066  (Monitoring  and  Reporting 
Regulation)91 and Regulation 2018/2067 (Accreditation and Verification Regulation)92. Every 
year, countries report on implementation of these Regulations and the ETS Directive.  

12.1. 

Monitoring and reporting 

The system to monitor emissions in the EU ETS relies on a building-block approach. It gives 
operators a high degree of flexibility thus ensuring both the cost-efficiency and reliability of 
emissions  data.  Operators  may  use  several  monitoring  methods  (‘calculation-based’  or 
‘measurement-based’ and by exception the ‘fall-back approach’), including a combination of 
methods for individual parts of an installation. For aircraft operators, only calculation-based 
approaches  are  allowed,  with  fuel  consumption  being  the  central  flight  parameter.  The 
Monitoring and Reporting Regulation requires both installations and aircraft operators to have 
a  monitoring  plan  approved  by  the  national  competent  authority.  This  prevents  them  from 
making an arbitrary selection of monitoring  methods and temporal  variations. In 2022, five 
ETS countries93 continued to allow installations to use simplified monitoring plans in low-risk 
cases94.  For  aviation,  only  Belgium  reported  using  this  provision  for  operators  with  low 
emissions.  

91  As  above,  Regulation  (EU)  2018/2066  amended  in  2020  by  Regulation  (EU)  2020/2085  and  in  2022  by 
Regulation (EU) 2022/388. See consolidated text. 

92 Commission Implementing Regulation (EU) 2018/2067 of 19 December 2018 on the verification of data and 
on the accreditation of verifiers pursuant to Directive 2003/87/EC of the European Parliament and of the Council, 
OJ L 334, 31.12.2018. The regulation was amended in 2020 by Commission Regulation (EU) 2020/2084. See 
consolidated text. 

93  These  Member  States  were  Denmark,  Finland,  Hungary, Lithuania,  and  the  Netherlands.  Croatia  no  longer 
reports using simplified reporting. 

94  Pursuant  to  Article 13  of  the  Monitoring  and  Reporting  Regulation  (Commission  Implementing  Regulation 
(EU) 2018/2066 of 19 December 2018 on the monitoring and reporting of greenhouse gas emissions pursuant to 
Directive 2003/87/EC of the European Parliament and of the Council and amending Commission Regulation (EU) 
No 601/2012 (OJ L 334, 31.12.2018). The Regulation was amended in 2020 by Commission Regulation (EU) 
2020/2085 and in 2022 by Commission Regulation (EU) 2022/388. See consolidated text). 

31 

 
 
 
The legal requirements for emission monitoring are effectively met by most installations. Most 
installations used the calculation-based methodology95 to calculate their emissions. Only 145 
installations (1.7%) in 22 countries reported using continuous emissions measurement systems 
(CEMS),  nine  installations  fewer  than  in  2021.  Of  these,  91  installations  used  CEMS  to 
measure CO2 emissions, 45 for N2O and 9 for both gases. CEMS is used most frequently in 
Germany  and  Czechia.  In  34  installations,  the  measured  emissions  also  contained  biogenic 
CO2. Of the installations using CEMS, 69 used the methodology for more than 95% of their 
emissions, the other 76 used a combination of CEMS and a calculation-based methodology. 

Only  11  countries  reported  using  the  fall-back  approach;  this  was  used  for  27  installations 
covering approximately 2.6 million tonnes CO2eq (4 fewer installations than in 2021 but 0.16 
million  tonnes  CO2eq  more  in  emissions’  terms).  One  installation  in  the  Netherlands  is 
responsible for 60% of the overall emissions reported using the fall-back methodology due to 
its complex set-up.  

Most installations met the minimum required tier defaults96 of the Monitoring and Reporting 
Regulation in 2022. Only 96 category C installations (up from 89 in 2021) were reported to 
have deviated in at least one parameter from the requirement to apply the highest tiers for major 
source  streams.  They  were  located  in  17  different  countries  (down  from  18  in  2021)    and 
represented 15.1% of category C installations. These deviations are only authorised when the 
operator  demonstrates  that  meeting  the  highest  tier  is  not  technically  feasible  or  incurs 
unreasonable  costs.  Once  these  conditions  no  longer  apply,  the  operator  must  improve  the 
monitoring system accordingly. 

The  Monitoring  and  Reporting  Regulation  has  been  amended  to  the  take  the  revised  ETS 
Directive  into  account97.  The  updated  rules  will  apply  as  of  1 January 2024  when  the  next 
monitoring cycle begins. Among other, they reflect one new development under the revised 
ETS Directive – that installations for the incineration of municipal waste will begin to monitor 
and report their emissions under the EU ETS from 2024. The second revision of the Regulation 
with additional amendments will start towards the end of 2023.   

12.2. 

Accreditation and verification 

Verifiers of emissions monitoring in the EU ETS must be accredited by a national accreditation 
body  to  carry  out  assessments  in  compliance  with  the  Accreditation  and  Verification 
Regulation.  Accredited  verifiers  can  operate  with  mutual  recognition  across  all  EU  ETS 
countries, taking full advantage of the single market and ensuring sufficient service availability. 

95 The main reason for this is that the measurement-based methodology involves significant resources and know-
how, which many smaller operators lack. 

96 The Monitoring and Reporting Regulation requires all operators to meet certain minimum tiers. Larger emission 
sources are required to meet higher tiers (involving more reliable data quality), while less strict requirements apply 
to smaller sources for cost-efficiency reasons. 

97  Commission  Implementing  Regulation  (EU)  2023/2122  of  17  October  2023  amending  Implementing 
Regulation  (EU)  2018/2066  as  regards  updating  the  monitoring  and  reporting  of  greenhouse  gas  emissions 
pursuant to Directive 2003/87/EC of the European Parliament and of the Council (OJ L, 2023/2122, 18.10.2023). 

32 

 
 
 
A detailed overview of accreditation and verification aspects in 2022 is included in Table 8 in 
the Staff working document98. 

In 2022, there were 110 accredited verifiers for installations and 23 for aircraft operators. In 
addition, 28 countries reported that at least one foreign verifier was active in their territory in 
2022,  and  6  countries  reported  having  only  foreign  verifiers.  This  shows  that  the  mutual 
recognition of verifiers among countries continues to work successfully. 

Verifiers’ compliance with the Accreditation and Reporting Regulation is found to be high. For 
2022,  only  Norway  and  France  reported  verifier  suspensions  (two  in  Norway  and  one  in 
France) and only Romania reported withdrawing a verifier’s accreditation (in one case). By 
comparison, in 2021, there were two suspensions and one withdrawal.  

In a parallel to the revision of the Monitoring and Reporting Regulation, the Accreditation and 
Verification  Regulation  is  under  revision  with  adoption  planned  in  Q1 2024  -  ahead  of  the 
submission deadline for verified baseline data reports on 30 May 2024.  

12.3. 

Competent authorities 

The  organisation  of  national  competent  authorities  for  implementing  the  EU  ETS  differs 
between  countries.  In  some  countries,  it  involves  several  local  authorities;  in  others, 
implementation  is  more  centralised.  Countries  choose  these  approaches  based  on  cost-  and 
time-effectiveness. An overview of the EU ETS coordination is presented in Tables 9 and 10 
in the Staff working document99. 

All  ETS  countries  reported  having  at  least  one  central  competent  authority  involved  in 
implementing  the  EU  ETS  in  2022.  In  15  countries,  only  central  competent  authorities  are 
involved. Countries reported using different tools to coordinate work between authorities, such 
as a central competent authority responsible for the monitoring, reporting, accreditation and 
verification  work  (12  countries)  or  playing  a  coordinating  role100  (nine  countries),  binding 
instructions and guidance by a central competent authority to local authorities (five countries), 
joint  training  for  competent  authorities  (seven  countries)  and  regular  working  groups  or 
meetings  between  authorities (12 countries).  In 2022,  14 countries  did  not  use  any of these 
tools; these countries have a more centralised organisation so need fewer coordination tools. 

In  2022,  16  countries  did  not  charge  administrative  fees  to  installation  operators  for  the 
permitting and approval of monitoring plans (up from 15 countries in 2021). Aircraft operators 
in 17 countries also did not pay any fees (18 countries in 2021). Charges varied significantly 
by country and type of service – from about EUR 18 to EUR 8 442 for a permit and approval 
of  a  monitoring  plan  for  installations,  and  from  about  EUR 2  to  EUR 4 100  for  aircraft 
operators.  15  countries  reported  charging  administrative  fees  of  different  amounts  for  the 
approval of monitoring methodology plans or significant changes. 

98 SWD(2023) 346 
99 SWD(2023) 346 
100 Where regional/local authorities are responsible for MRV work, the central competent authority also reviews 
relevant documents (such as monitoring plans) to monitor the quality of MRV processes. 

33 

 
 
 
12.4. 

Compliance in the EU ETS 

Compliance  with  the  EU  ETS  is  checked  in  annual  cycles.  For  every  year  of  operation, 
operators must submit an annual emission report by 31 March the following year. Once the 
report is checked, operators must surrender the agreed number of allowances by 30 April the 
same year. For each tonne of CO2 emitted for which no allowance was surrendered on time, 
the  EU  ETS  Directive  imposes  a  penalty  of  EUR 100101.  This  is  on  top  of  the  cost  of 
surrendering allowances due. Other penalties may also apply to infringements in implementing 
the  EU  ETS  based  on  national  rules.  A  detailed  overview  of  compliance  in  the  EU  ETS  is 
presented  in  Tables  11  to  13  in  the  Staff  working  document102.  The  revision  of  the  ETS 
Directive includes adjustments to the compliance calendar. From 2024 onwards, the deadline 
to surrender allowances will be moved from 30 April to 30 September. 

In the 2022 compliance cycle, the level of compliance with the EU ETS remained very high. 
In most years, operators responsible for over 99% of emissions from installations and aviation 
met their legal obligations on time. The efficiency of the compliance system has improved with 
a broader uptake of electronic reporting. In 2022, 12 countries used automated IT systems and 
electronic  templates  for  monitoring  plans,  emission  reports,  verification  reports  and/or 
improvement reports. Eight countries also use automated IT systems to manage the workflow 
for  monitoring  methodology  plans,  annual  activity  level  reports  and  other  information 
exchanges on allocation data. 

Following the COVID-19 pandemic and restrictions on physical contact, six countries (18 in 
2021) allowed verifiers to carry out virtual site visits103. For 31 installations and 25 aircraft 
operators, virtual site visits were approved by the applicable competent authority. 

Competent authorities carry out different compliance checks on installations’ annual emissions 
reports.  In  2022,  all  competent  authorities  checked  the  completeness  of  the  reports  from 
installations,  and  most  did  so  for  reports  from  aircraft  operators.  The  exceptions  are  the 
competent  authorities  in  Hungary  and  Latvia  (with  one  and  two  aircraft  operators, 
respectively), as well as Liechtenstein and Northern Ireland because they do not administer any 
aircraft operators. 

Competent  authorities  in  12  countries  made  conservative  estimates  for  61  installations 
(approximately 0.7% of all installations), down from 55 in 2020. Such estimates are made if 
annual emissions reports were not submitted in time, a negative verification opinion was issued, 
or  an  emissions  report  did  not  comply  with  the  Regulation104.  All  the  emissions  of  30 
installations  were  estimated  conservatively.  For  11  installations,  a  conservative  estimation 

101 The penalty is indexed for inflation. 

102 SWD(2023) 346 
103 Article 34a of the Accreditation and Verification Regulation allows the verifier to carry out a virtual site visits 
if  a  force  majeure  situation  prevents  the  verifier  from  going  to  the  site.  This  is  only  allowed  subject  to  the 
competent authority’s approval and if certain conditions have been met. 

104 Under Article 70 of the Monitoring and Reporting Regulation. 

34 

 
 
 
 
covered  only  part  of  emissions,  and  20  installations  were  estimated  to  have  generated  no 
emissions. 

In total, 1.0 Mt emissions were estimated conservatively (up from 0.8 Mt in 2021) out of 2.4 
Mt  reported  by  the  61  installations  (down  from  4.9  Mt  in  2021).  Typically,  conservative 
estimates were made because emissions reports had not been fully in line with the Monitoring 
and Reporting Regulation requirements or because they had been submitted after the deadline. 
Conservative estimates for aviation were reported by five countries (one fewer than in 2021) 
concerning 33 aircraft operators (five more than in 2021) and 0.14 Mt emissions (also 0.14 Mt 
in  2021).  One  airline  administered  by  Denmark  accounted  for  85%  of  the  conservative 
estimates for aviation because they had submitted their emission report after the deadline. 

Competent authorities’ checks remain important to supplement verifiers’ work. In addition to 
checking emissions reports, 18 countries reported that they had carried out on-site inspections 
at  installations.  Three  countries105  reported  on-site  inspections  for  aviation  (no  countries 
reported these inspections in 2021). These numbers decreased during the COVID-19 pandemic, 
but are expected to increase again. 

In  2022,  40  installation  operators  in  10  countries  were  fined  for  not  surrendering  sufficient 
emission allowances to cover their reported emissions (excess emissions). For aviation, excess 
emissions penalties were reported by six countries for nine aircraft operators. 13 countries106 
reported 66 infringements, which resulted in penalties, formal warnings or formal notices, aside 
from excess emissions cases. A total of 21 fines were reported (either issued or to be issued 
e.g., due to ongoing legal proceedings), amounting to EUR 65.6 million. This includes aviation, 
with eight infringements in five countries, leading to three fines, for a total of EUR 325 000. 

The most common infringements reported for 2022 were a failure to submit an emissions report 
(16 cases) or an activity level report (four cases) in due time, a failure to notify changes or 
update the monitoring plan (nine cases) and operation without an emissions permit (six cases).  

13. Link between the EU ETS and the Swiss ETS 

Since  2020,  the  EU  ETS  and  the  Swiss  ETS  have  been  linked  through  an  international 
agreement between the EU and the Swiss Confederation. This means that allowances issued in 
one  system  can  be  surrendered  for  emissions  generated  in  either  of  the  two  systems.  With 
access to a larger market, operators can make cost-efficiency gains and have more options for 
emissions  abatement.  The  Linking  Agreement107  sets  out  the  conditions  and  requirements 
under  which  the  two  systems  are  linked.  It  also  establishes  a  mechanism  to  ensure  that  the 
linking conditions of Article 25 of the ETS Directive are respected.  

Including  aviation  in  the  Linking  Agreement  was  a  crucial  requirement  for  the  EU.  Under 
Article 6 of the Agreement, Switzerland applies the same approach to the rules on coverage, 

105 A further two countries (Liechtenstein and Northern Ireland) do not administer any aircraft operators. 

106  The  13  countries  are  Czechia,  Denmark,  Spain,  Finland,  France,  Hungary,  Ireland,  Netherlands,  Norway, 
Poland, Sweden and Romania. 

107 Agreement between the European Union and the Swiss Confederation on the linking of their greenhouse gas 
emissions trading systems (OJ L 322, 7.12.2017). 

35 

 
 
 
cap and allocation as the EU ETS. In line with Article 7 of the Linking Agreement, this will 
continue under the revised ETS Directive. Swiss domestic flights and flights departing to EEA 
airports are covered by the Swiss ETS, while flights departing to Switzerland fall under the EU 
ETS. This arrangement safeguards the environmental integrity of both systems. Both the EU 
ETS and the Swiss ETS have applied the same approach to flights with the UK since Brexit, 
covering only departing flights to the UK.  

Tables 16 and 17 in the Staff working document108 show key figures for both systems in 2022 
–  auctioned  allowances,  free  allocation  and  verified  emissions  for  installations  and  aircraft 
operators. When compared, they demonstrate that the compatibility of the two systems is not a 
matter of size but of qualitative requirements, level playing field conditions and measures to 
safeguard market integrity. 

To implement the Linking Agreement and promote efficiency gains, a direct technical link was 
created between both systems’ registries. This allows regulated entities to transfer allowances 
from an account in one system to an account in the other. The transfers are scheduled, generally 
taking place twice a month. From 2023, the registry link between the two emissions trading 
systems will gradually develop into a permanent feature. This will improve market liquidity 
and  the  execution  of  transactions  between  the  two  linked  systems  as  though  they  were  one 
market. Market participants will be able to act as if they were in one market, subject only to 
the  individual  regulatory  rules  of  the  EU  and  Switzerland.  A  permanent  link  should  be 
implemented in 2024 at the latest. 

Table 18 in the Staff working document109 presents the effects of the EU ETS and Swiss ETS 
link in 2022. It shows to what extent regulated entities in both systems used allowances issued 
in the other system for compliance. 

In  total,  regulated  entities  in  the  EU  ETS  (both  installations  and  aircraft  operators)  used 
971 170 allowances issued under the Swiss ETS for compliance in 2022. This is nearly 83 200 
allowances more than 2021 and almost 378 000 allowances more than in 2020, signifying an 
increasing trend in the use of the flexibility that the link between the EU ETS and the Swiss 
ETS provides. This was achieved despite the fact that EU aircraft operators used fewer aviation 
allowances issued under the Swiss ETS in relative terms (0.7% in 2022 compared to 1.5% in 
2021). However, this was partly compensated by an increased use of Swiss general allowances 
(0.1% in 2022 compared to close to zero in 2021). 

The  number  of  Swiss  general  allowances  used  for  compliance  by  installations  in  the  EU 
remained stable at 394 722. More impressively, the number of Swiss ETS aviation allowances 
used for compliance by EU ETS installations almost tripled in the same period, increasing from 
63 410 in 2021 to 173 650 in 2022. The increased use of aviation allowances for compliance 
signals rising awareness and acceptance of the EU ETS and Swiss ETS link. In relative terms, 
general  allowances  issued  under  the  Swiss  ETS  accounted  for  less  than  0.03%  of  the  total 
surrendered in the EU ETS in 2022. However, this accounted for a bigger share of almost 9.7% 
of all Swiss ETS general allowances allocated for free and auctioned that year. 

108 SWD(2023) 346 
109 SWD(2023) 346 

36 

 
 
 
In  the  Swiss  ETS,  installations  used  a  lower  share  of  EU  ETS  general  allowances  for 
compliance in 2022 (6.2%) compared to 2021 (8.2%). In both years, installations in the Swiss 
ETS did not use EU ETS aviation allowances for compliance.  

Table 18 in the Staff working document110 aggregates the volume of allowances (both general 
and aviation) transferred on behalf of market participants between the EU ETS and the Swiss 
ETS since 2020. So far, 2022 had the highest number of aggregate total transfers. The current 
historical balance shows an outflow of 502 106 allowances from the EU ETS to the Swiss ETS. 
It should, however, be noted that the figures may include re-transfers of the same allowances. 

14. EU ETS in the context of the EU’s climate and energy governance  

The EU ETS operates within the broader context of the EU’s climate and energy governance, 
including Directive 2023/1791 (Energy Efficiency Directive)111. It has also been revised as part 
of Fit for 55. The aim of the Directive is to achieve energy savings by laying down targets and 
obligations for Member States and companies. The carbon price signal of the EU ETS interacts 
with policy measures and actions implemented to that end.  

The  revised  Energy  Efficiency  Directive  introduces  new  rules  to  reduce  final  energy 
consumption at EU level by 11.7% in 2030. All Member States will contribute to achieving 
this target. They will set indicative national contributions and paths to reach the target in their 
integrated  national  energy  and  climate  plans  (NECPs)  under  Regulation 2018/1999112 
(Governance Regulation).  

The carbon price signal of the EU ETS feeds into the appraisal of energy efficiency-related 
investments and measures in the sectors covered. Member States also use auction revenue from 
the  EU  ETS  to  fund  energy  efficiency  improvements.  In  2022,  they  reported  spending 
EUR 4.8 billion  to  fund  projects  related  to  energy  efficiency.  This  included  not  only 
investments  in  the  thermal  modernisation  of  buildings,  energy  efficiency  advice  as  well  as 
research and development, all with the objective to reduce energy consumption, but also social 
support measures in light of the energy crisis.  

NECPs  set  out  how  Member  States  intend  to  address  not  only  energy  efficiency,  but  also 
renewables’ deployment, emission reductions, industrial diversification, interconnections and 
research and innovation in the context of EU climate and energy targets.  They may include 
measures to promote decarbonisation of EU ETS sectors, ways of using ETS revenue for the 
green and just transformation and plans to cancel ETS allowances in view of a scheduled phase 
out of fossil fuels for electricity generation.  

110 SWD(2023) 346 
111 Directive (EU) 2023/1791 of the European Parliament and of the Council of 13 September 2023 on energy 
efficiency and amending Regulation (EU) 2023/955 (recast) (OJ L 231, 20.9.2018). 

112  Regulation  (EU)  2018/1999  of  the  European  Parliament  and  of  the  Council  of  11  December  2018  on  the 
Governance of the Energy Union and Climate Action, amending Regulations (EC) No 663/2009 and (EC) No 
715/2009  of  the  European  Parliament  and  of  the  Council,  Directives  94/22/EC,  98/70/EC,  2009/31/EC, 
2009/73/EC, 2010/31/EU, 2012/27/EU and 2013/30/EU of the European Parliament and of the Council, Council 
Directives  2009/119/EC  and  (EU)  2015/652  and  repealing  Regulation  (EU)  No  525/2013  of  the  European 
Parliament and of the Council (OJ L 328, 21.12.2018).  

37 

 
 
 
Under  Article 14  of  the  Governance  Regulation,  Member  States  were  expected  to  have 
submitted  their  draft  updated  NECPs  to  the  Commission  by  the  end  of  June 2023.  These 
updated  plans  should  take  into  account  the  more  ambitious  EU  climate  targets  under  the 
Climate Law and amendments to key pieces of the EU energy and climate legislation under 
Fit for 55. By December 2023, the Commission will consolidate an EU-wide assessment of the 
updated NECPs and issue country-specific recommendations. In the final updated plans, due 
by the end of June 2024, Member States will be expected to have addressed the Commission’s 
recommendations. 

15.  Conclusions and outlook  

In the ETS sectors, 2022 was marked by the effects of the energy crisis in Europe. Emissions 
from electricity and heat generation grew due to an increased use of coal prompted by higher 
prices  of  natural  gas.  An  overall  reduction  in  emissions  from  ETS  installations  was  driven 
mainly by the manufacturing industry, affected by higher fuel and energy prices.  

Despite the disruption caused by the energy crisis in the ETS sectors, the EU ETS has continued 
to function smoothly. Emissions from installations remained on a downward trend compared 
to the pre-pandemic-2019 level. Auctions of allowances continued as planned. Except for a 
short-term dip coinciding with the start of Russia’s full-scale invasion of Ukraine, the carbon 
price signal remained robust. 

The Market Stability Reserve continued to remove the surplus of allowances from the EU ETS, 
fostering a balanced and resilient carbon market. The Reserve also invalidated over 2.5 billion 
allowances  of  the  historical  surplus.  This  is  more  than  all  the  international  credits  used  for 
compliance in the EU ETS to date. 

A strong carbon price signal in 2022 led to higher EU ETS auction revenue – nearly EUR 39 
billion.  This  revenue  was  mainly  distributed  to  Member  States  that  have  largely  used  it  to 
support climate and energy action, including measures to address the effects of the energy crisis 
and help people and businesses. On top of this, disbursements from the Modernisation Fund 
have helped advance the modernisation of the energy sector in all beneficiary Member States, 
and  the  Innovation  Fund  has  directed  significant  resources  to  energy  and  industry 
transformation. 

The EU ETS remains a crucial vehicle for the green transition. In addition to pricing carbon, 
in  the  short-term,  it  will  help  fund  measures  under  the  REPowerEU  plan  to  boost  energy 
savings, diversify energy supplies and accelerate the deployment of renewable energy. With 
the  revision  of  the  ETS  Directive,  the  system  is  strengthened  to  create  incentives  for  far-
reaching, long-term decarbonisation and discourage carbon lock-in. With the EU ETS scope 
extended to the maritime sector from 2024 and ETS 2 for buildings, road transport and small-
emitting  industry  launching  in  2027,  carbon  pricing  will  cover  three  quarters  of  the  EU 
economy. In addition, the system leverages more resources to support people and businesses 
in the green transition. 

38