EU ETS – Emissions Trading System in the European Union

Date of publication: 2025-11-08 / Reading time: 9 minutes / Author: Karolina Kozak

The European Union Emissions Trading System (EU ETS) is one of the key climate policy instruments of the European Union, aimed at the gradual reduction of greenhouse gas emissions. By promoting innovation and cost efficiency, the EU ETS has become one of the most important components of the EU’s strategy to combat climate change. For Polish companies, particularly those in energy-intensive industries, the EU ETS presents both a challenge and an opportunity for growth towards sustainable development and pro-environmental innovation.

What is the EU ETS?

The European Union Emissions Trading System is the cornerstone of the EU's climate policy, aimed at reducing greenhouse gas emissions in an efficient manner. It was launched in 2005 and has become one of the largest and most effective market-based climate protection mechanisms in the world. The EU ETS operates on a "cap and trade" principle – it sets a limit on greenhouse gas emissions for companies and then allows trading of emission allowances. This model aims to gradually reduce emissions by forcing companies to take pro-environmental actions and invest in innovative emission-reducing technologies.

Basic principles of the EU ETS

The EU ETS operates on the emissions allowance market (so-called EU Allowances, EUA). Within the system, an annual pool of emission allowances is set, which is allocated to companies covered by the system. Companies that do not exceed their allowances can sell the surplus to other entities that have exceeded their emission limits. This system encourages companies to reduce emissions, as the less they emit, the more room they have to sell allowances and generate additional revenue. At the same time, companies that fail to meet the required threshold must bear high costs of purchasing allowances, which discourages exceeding greenhouse gas emission limits.

Goals of the EU ETS

The EU ETS has three main goals:

reduction of greenhouse gas emissions – the system aims to gradually limit CO₂ emissions in the European Union, in line with the EU’s ambitious climate protection goals.
promotion of pro-environmental innovation – by creating a market for emission allowances, the system encourages companies to implement new technologies that allow for the reduction of greenhouse gas emissions.
enabling the achievement of the European Union’s climate goals – the EU ETS is a step toward combating climate change, including reaching carbon neutrality by 2050.

Legal regulations of the EU ETS

The legal provisions regulating the EU ETS were introduced in Directive 2003/87/EC, which created the legal framework for the emissions trading system. Between 2005 and 2007, the system mainly covered the energy industry and some industrial sectors such as steel or cement production. However, with the EU’s growing climate ambitions, the system was expanded and its rules were reformed.

In 2021, another reform of the EU ETS came into force, aimed at an even deeper reduction of emissions. Additional sectors of the economy were included in the system, and the EU’s “Fit for 55” policy target for 2030 sets a goal of reducing greenhouse gas emissions by at least 55% compared to 1990 levels.

Since October 1, 2023, a system known as CBAM has also been in place, aiming to balance the charges imposed by the EU ETS on European companies on the global market. The EU ETS requires European companies to purchase emission allowances, while CBAM obliges importers of products from outside the EU to pay fees to level the playing field and eliminate competitive advantages and the relocation of production to countries with more lenient emission regulations.

EU ETS and industry in Poland

In Poland, the EU ETS has a significant impact on industrial enterprises, especially those operating in energy-intensive sectors such as energy, steel, cement, or chemical industries. The system forces companies to take actions to reduce CO₂ emissions, as a lack of sufficient allowances requires purchasing them on the market and generates additional costs.

Energy industry

The energy industry is one of the largest emitters of CO₂ in Poland, and therefore the EU ETS has the greatest impact on this sector as well. Year by year, energy companies must reduce emissions by implementing more efficient energy generation technologies and investing in renewable energy sources. Despite the ongoing transformation, Poland still relies heavily on coal-based energy, which generates higher costs related to emission allowances, passed on to the end user in the form of increased energy prices.

Heavy industry

Heavy industry, such as the production of steel, cement, or chemicals, also faces challenges arising from the EU ETS. Companies that generate large amounts of emissions must invest in technologies that enable their reduction. Many companies in Poland strive to implement carbon capture and storage (CCS) technologies and improve the energy efficiency of their facilities.

Advantages of the EU ETS

Increased cost efficiency in emission reduction

The “cap and trade” system allows for a flexible approach to emission reduction. Companies that can reduce emissions at a lower cost can sell their allowances, while those struggling to reduce emissions can purchase them. This mechanism supports the efficient allocation of emission allowances among companies, encouraging innovative and pro-environmental solutions.

Incentive for innovation

The EU ETS challenges companies to reduce emissions, which motivates investments in technologies that reduce CO₂ emissions. Such investments may include the development of renewable energy sources, improving energy efficiency, or developing CCS technologies.

Transparency and predictability

The EU ETS is a market-based system, which means companies can predict the costs associated with emissions and monitor the emission allowance market, making it easier to make investment decisions. Starting from 2034, the free allocation of allowances will be phased out, meaning all companies will have to pay for their emissions.

Disadvantages of the EU ETS

High costs for companies

Companies that do not invest in emission-reducing technologies will incur high costs related to the need to purchase emission allowances. For many companies, especially those operating in energy-intensive sectors, this can pose a significant financial burden, which, combined with economic downturns, may deepen financial problems.

Risk of manipulation

The emission allowances market, like any other market, is susceptible to manipulation. For example, greenhouse gas emission reports can be falsified by companies to avoid increasingly high charges for allowances.

Limited effectiveness in the long term

Despite reforms, some critics argue that the EU ETS is not ambitious enough in the long term. Certain sectors, such as agriculture, are still excluded from the system, which may weaken its effectiveness. Changes are planned in this area to include other sectors in the system. Additionally, the requirement to purchase allowances will mostly affect smaller companies, while global giants will still be able to afford high emissions.

Summary

The European Union Emissions Trading System is the foundation of the EU's climate policy and has a huge impact on how Polish companies, especially those in energy-intensive sectors, approach greenhouse gas emissions. The EU ETS poses serious challenges to companies. Polish entrepreneurs must invest in new technologies and improve energy efficiency not only to reduce emission costs but also to enhance their market competitiveness. In the long term, successful adaptation to EU ETS requirements may bring not only financial benefits but also a positive image and greater acceptance in international markets.