From 2028, a new carbon quota market will come into force in the European Union which will directly concern buildings and road transport: it is called Ets2 (Emissions Trading System 2). The new system, which runs alongside that of corporate emissions quotas, has raised fears of direct consequences for Europeans, some of whom fear that citizens will also have to buy permits to heat their homes and use their cars.
This is not exactly the case, as the system will not force families to purchase emission quotas, but the obligation will fall on fuel suppliers, i.e. the companies that put petrol, diesel, heating oil and natural gas on the market.
They will be the ones who will have to buy the permits corresponding to the emissions produced by the use of their products at auction, even if this could lead to increases which could then, indirectly, impact citizens at the distributor, in their bills, in their district heating installments.
And it is precisely to contain that impact that the European Parliament approved this week in Plenary a series of changes to the market stabilization mechanism, voting with 433 votes in favor and 120 against its negotiating position which will now be at the center of negotiations with governments in the EU Council. The new rules aim to avoid sudden spikes in the price of carbon, which could translate into price increases for families and motorists.
Why Ets2 was born
Since the 2000s, the European Union has been managing a carbon market for large industries, power plants and the aviation sector: companies that emit carbon dioxide must hold quotas (or “emission permits”) equal to each tonne produced. A part of those allowances is assigned free of charge, especially to the sectors most exposed to international competition, but those who emit more than they have received are obliged to purchase the difference on the market.
Those who pollute less can sell the unused quotas, transforming the reduction of emissions into a concrete economic advantage. The price of those allowances thus creates an incentive to pollute less: the less you emit, the less you spend, and you can even earn from it. But buildings and road transport, which account for a large share of total emissions, were left out of that system.
With the revision of the carbon market directive approved in 2023, as part of the European climate package known as “Fit for 55”, the EU has decided to extend the logic of emission permits to these sectors too, creating a separate system called Ets2. The stated goal is to reduce emissions from buildings and transportation by 42 percent by 2030 compared to 2005 levels.
Unlike the old system, however, in Ets2 it will not be families or motorists who directly purchase emission quotas: the obligation will fall on fuel suppliers, i.e. companies that put petrol, diesel, heating oil and natural gas on the market.
Originally scheduled for 2027, the system was postponed by a year to 2028 following pressure from many governments and the European Parliament. The postponement gave more time to prepare the social accompanying measures, but did not resolve the uncertainties about the price of allowances.
Unpredictable prices
The central issue of the ongoing reform does not concern the structure of the ETS2 as such, but a technical tool that governs its functioning: the market stability reserve (in English Market Stability Reserveabbreviated to Msr).
This is an automatic mechanism that regulates the supply of shares on the market. When there are too many allowances in circulation (and therefore the price of carbon risks falling too much, weakening the incentive to reduce emissions), the reserve withdraws part of them. However, when quotas are scarce (and the price risks rising too much, penalizing businesses and families), the reserve introduces new quotas.
The problem is that the original parameters of the reserve, established in 2023 at the same time as the creation of Ets2, proved insufficient to support subsequent analyses. Nineteen EU governments, including France, Germany, Italy, Spain, Poland and others, put it in black and white in a joint document presented in July 2025, flagging three main risks: strong uncertainty about the initial price of allowances in 2028, the risk of volatility caused by too abrupt a release mechanism, and the inadequacy of protections already in place against excessively high prices. It is in response to that document that the European Commission presented the proposal under consideration last November.
The reform
The Commission’s original proposal contains three technical but concrete measures. The first concerns the so-called “invalidation” of allowances not released by 31 December 2030: under the current law, the 600 million allowances initially placed in reserve lose their validity on that date if they have not been placed on the market. The Commission proposes to eliminate this deadline, leaving those quotas in the reserve indefinitely. The effect is to make the system more predictable in the long run, because market participants know that quotas will not suddenly disappear.
The second measure concerns the automatic release mechanism. Today, when the total number of allowances in circulation falls below a certain threshold, the reserve releases a fixed volume of new allowances. The problem is that this “spurt” can be triggered by a single more or less permit, creating volatility. The Commission proposes a gradual and more flexible formula
The third measure concerns the emergency intervention already foreseen by the existing directive: when the price of quotas exceeds 45 euros per ton, the reserve releases 20 million additional quotas, increasing supply and therefore tending to bring down the price. It is protection against the most violent shocks, designed especially for the very first years of the system. The Commission proposes to raise that volume to 40 million (i.e. adding another 20 million), making the intervention more effective in controlling the market.
The European Parliament, in the position adopted this week, approved the overall structure but asked for changes on several points. The most relevant on an operational level concerns the speed of response: MEPs want that, in the event of a sudden spike in prices, allowances be released within a month, rather than the two months proposed by the Commission. “Speedy makes the reserve credible”, we read in the analyzes accompanying the parliamentary dossier: quicker intervention can curb expectations of scarcity before volatility is transferred to consumer prices.
On the “life” front of the quotas in reserve, Parliament partially departs from the Commission: instead of leaving them valid indefinitely, it proposes a gradual cancellation, with 50 percent of the unused quotas canceled from 1 January 2034 and the remaining 50 percent two years later. A compromise between the certainty of the long term and the need not to inflate the reserve indefinitely.
The price ceiling
The 45 euro per tonne mechanism is based on a threshold set in 2020 euros, which is already worth less in real terms due to the inflation of recent years and which expires at the end of 2029, just two years after the start of the system. Parliament calls for extending the mechanism beyond 2029 and updating the reference value to 2026 prices instead of 2020.
The rapporteur of the text, the Czech MEP Danuše Nerudová of the European People’s Party group, summarized the parliamentary position as follows: “Europe must do more to protect families from the potential negative social impacts of Ets2. We have proposed concrete measures to extend the 45 euro ceiling beyond 2029 and lower it through indexation to 2026 prices”.
The exemption for residential buildings
The most politically delicate point concerns residential buildings. Parliament asks the Commission to evaluate whether it is appropriate to allow Member States to temporarily exempt homes from the Ets2 system, provided that they have already put in place other measures to achieve their national emission reduction targets.
However, there could be an impact of ETS2 on families and for low-income families, already exposed to the risk of energy poverty, that impact could be significant. For this reason the system provides for a Social Fund for the climate, a European financial instrument dedicated to supporting the most vulnerable categories in the transition, which will have to be fueled in part by the proceeds from the auctions of Ets2 quotas.
Parliament underlines that the reform of the stability reserve is not sufficient in itself to protect families: complementary policies are needed, investments in the energy efficiency of buildings, support for low-emission mobility, and a strengthened Social Fund.
