What is ETS2 and Why Does It Matter for Your Building?

A clear guide to the new EU carbon pricing system and how it will affect your building's energy costs.

Change is on the horizon for anyone who owns or manages a building in the European Union. A new piece of legislation, known as the Emissions Trading System 2 (ETS2), is set to reshape the landscape of energy costs. While it may sound like a complex piece of policy, its impact will be felt directly in the heating and transport bills of consumers across the EU.

This article breaks down the fundamentals of ETS2: what it is, what it aims to achieve, and why it's a critical development for homeowners and property managers to understand now.

What is the EU Emissions Trading System 2 (ETS2)?

The ETS2 is a new carbon pricing mechanism established by the EU in 2023. It operates as a ‘cap and trade’ system, which puts a price on carbon dioxide (CO2) emissions. It is important to note that this is a separate system from the original EU ETS, which has been in place since 2005 and covers large industrial installations and the power sector.

The new ETS2 specifically targets CO2 emissions generated from the combustion of fuel in three main areas:

  • Buildings (both residential and commercial)
  • Road transport
  • Additional sectors, primarily smaller industries not covered by the original EU ETS

The primary goal of ETS2 is to drive significant emissions reductions in these sectors, which have not seen the same progress as heavy industry. The EU has set a target to cut emissions from these areas by 42% by 2030, compared to 2005 levels. By putting a price on carbon, ETS2 creates a powerful financial incentive for individuals and businesses to invest in energy-efficient building renovations and low-emission mobility. This is a key component of the European Green Deal, designed to help the EU achieve its long-term goal of climate neutrality by 2050.

How Does It Work? The 'Upstream' Approach

A common misconception is that ETS2 will directly regulate homeowners or individual drivers. This is not the case. The system is designed as an ‘upstream’ mechanism, which means it targets the companies that supply the fuel, not the end consumers.

ETS2 upstream mechanism

Here’s a simple breakdown of the process:

  1. Regulated Entities: Fuel suppliers—the companies that sell natural gas, heating oil, petrol, and diesel—are the ones required to participate in the system.
  2. Purchase of Allowances: These suppliers will have to monitor the emissions generated by the fuel they sell and then purchase an equivalent number of 'allowances' through an auction system. One allowance covers one tonne of CO2.
  3. The Carbon Price: The interaction of supply and demand for these allowances creates a market-based carbon price.

The Bottom Line: What This Means for Your Building

While fuel suppliers are the regulated entities, the costs they incur from purchasing carbon allowances are widely expected to be passed on to consumers in the form of higher fuel prices. This means you can anticipate an increase in the cost of heating your building with natural gas or oil, as well as higher prices at the petrol pump.

Ultimately, ETS2 is a clear signal from policymakers. It is designed to make carbon-intensive energy sources more expensive, thereby encouraging a shift towards cleaner alternatives and greater energy efficiency. For anyone with a stake in property, this legislation turns energy performance from a ‘nice-to-have’ into a critical financial consideration. Understanding your building's current energy consumption and exploring retrofitting options is no longer just about sustainability—it's about preparing for a new economic reality.

In our next article, we will examine the official timeline for the ETS2 rollout, detailing the key dates every property owner needs to have on their calendar. Stay informed with FeliCity to navigate the changes ahead.

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