The EU Emissions Trading System (EU ETS) has long been considered one of the most important tools of the European Union’s climate policy. The following article clearly summarizes the basic information regarding EU ETS and the related calculation of carbon footprint for everyone for whom the rules represent an applied standard. You will learn how the system works, what steps to follow for proper carbon footprint monitoring, and there is also a comparison with the GHG Protocol standard.
It is probably no surprise that through ambitious climate policy, the EU is aiming to achieve “carbon neutrality” by 2050. One of the key tools of this plan is the Emissions Trading System, known as the EU Emissions Trading System (EU ETS). This system, which includes not only EU countries but also Iceland, Liechtenstein, and Norway, was launched in 2005 with the aim of reducing greenhouse gas emissions in a cost-effective way. By setting emission caps and trading allowances, the EU ETS is designed to encourage the adoption of energy-efficient solutions and technological innovation. At the same time, its goal is to steer the European economy toward a lower carbon footprint model.
Within the EU ETS system, companies monitor direct emissions from their operations (according to the GHG Protocol, these are so-called Scope 1). In doing so, they not only fulfill their legislative obligations but also gain insight into opportunities for process optimization. Calculating and reporting the carbon footprint allows for a better understanding of the impact of company activities on climate change and helps identify opportunities for mitigation. The EU ETS currently covers the most emission-intensive industrial sectors, including energy, steel, cement, chemicals, paper, and also aviation within the European Economic Area. These sectors together account for approximately 36% of greenhouse gas emissions in the EU.
Whether a company falls under the EU ETS can be determined on the basis of Annex I of the EU ETS Directive, which lists the regulated sectors and activities. Detailed information and support are also provided by the Ministry of the Environment or the Czech Environmental Inspectorate.
In the coming years, the EU ETS 2 system will be introduced, which will expand the current system to other sectors. Newly included will be activities associated with fuel combustion in the building sector, road transport, and related industries. This change is intended to ensure that emissions from heating households, commercial buildings, and road transport will also be subject to carbon pricing. Fuel suppliers will start monitoring emissions in 2025, and from 2027, emissions from the EU ETS 2 sectors will be priced via entry into the emissions trading market.
“Cap-and-trade” as the principle behind the EU ETS
The EU ETS operates on the “cap-and-trade” principle. Under this system, the EU sets an annual emissions cap that limits the total amount of greenhouse gases emitted by the sectors covered. Entities included in the EU ETS must prove that they possess emission allowances in the required quantity, and if not, a fine is imposed and the necessary allowances must be purchased. The emissions cap is reduced each year with the aim of steadily reducing the volume of emissions in the EU. Companies either receive or purchase emission allowances (trade), each of which allows for the emission of one ton of CO₂ equivalent (CO₂e).
If a company emits less, it can sell its unused allowances. Companies that exceed their limits must purchase additional allowances. Companies that can reduce their emissions at a cost lower than the price of an allowance must decide whether it is more advantageous to reduce emissions through innovation or by purchasing additional allowances. This market mechanism supports investment in low-emission technologies, ensures achievement of emission targets, and thanks to the declining cap, increasingly motivates companies to reduce emissions.
How to calculate carbon footprint in the EU ETS
The basic steps in the process of measuring carbon footprint according to EU ETS are as follows:
- Preparation of a monitoring plan
First, it is necessary to prepare a Monitoring Plan (MP), which each facility must submit for approval to the competent authority (in the Czech Republic, the Ministry of the Environment). The plan identifies all emission sources, defines the methods used (calculation or measurement), and determines the level of accuracy according to the so-called tier system. After registration in the Union Registry and, if applicable, a voluntary application for free allowances, monitoring of direct emissions of carbon dioxide (CO₂), nitrous oxide (N₂O), and perfluorocarbons (PFCs) for the calendar year begins using the chosen methods. - Data collection, calculations, and obtaining allowances
Data on fuel consumption, emission factors, and oxidation factors are used to calculate emissions based on harmonized rules. The next step is to obtain emission allowances in one of three ways: through auctions, buying on the market from other EU ETS participants, or free allocation. Free allowances are allocated each year on February 28, while auctioned and market-purchased allowances are available continuously according to supply and demand. - Reporting and verification
Companies submit annual emission reports, which are verified by independent accredited verifiers. After verification, the report together with the verification statement is sent to the competent authority no later than March 31 of the following year. By April 30, operators must submit the corresponding number of allowances to cover the verified emissions from the previous calendar (monitoring) year.
The tier system in EU ETS
The calculation method uses data on fuel consumption, calorific value, emission factors, and oxidation factors to calculate total emissions. The measurement method, on the other hand, relies on direct measurement of emissions using certified equipment that provides accurate real-time data. The tier system in EU ETS determines the required level of accuracy and data quality for emission monitoring: a higher tier means higher accuracy and more demanding measurement methods. This system ensures that larger facilities with higher emissions use advanced methods, while smaller facilities can apply simpler procedures.
According to the GHG Protocol, the carbon footprint always comes out higher than under EU ETS
The concept of the GHG Protocol has already appeared on the CSRD website before. The EU ETS approach to carbon footprint monitoring can be compared with this widely used standard.
EU ETS focuses only on direct emissions from processes controlled by a given facility, such as fossil fuel combustion or chemical reactions, which more or less corresponds to Scope 1 under the GHG Protocol. However, the GHG Protocol covers a broader spectrum of emissions. It includes the aforementioned Scope 1, as well as Scope 2 (indirect emissions from purchased electricity, heat, and steam) and Scope 3 (other indirect emissions in the supply chain). “In practice, companies purchasing emission allowances within the EU ETS fear carbon footprint reporting, because under the GHG Protocol it always comes out higher, so there is a real risk of being accused of greenwashing. Therefore, these companies need to pay greater attention to communicating the results of the carbon footprint calculation,” warns Lukáš Ferkl, CTO of EnviTrail.
So what are the main differences between the EU ETS and the GHG Protocol standards?
- Methodology: EU ETS requires the use of strictly defined formulas and emission factors determined by regulation, ensuring consistency and comparability of data from participating facilities. In contrast, the GHG Protocol allows greater flexibility in methodology, including the use of primary or secondary data and various emission factors depending on the region or data availability. The comparability of results from different companies under the GHG Protocol is therefore very problematic.
- Scope: EU ETS imposes a reporting obligation only for regulated emissions within defined sectors (e.g. energy, industry, aviation), whereas the GHG Protocol supports a comprehensive approach to emission measurement. These differences reflect the different objectives of both systems – the EU ETS focuses on regulating emissions in the EU’s most emission-intensive sectors, while the GHG Protocol is a tool for comprehensive carbon footprint management for virtually all types of companies.
Connection with CBAM is to help decarbonize beyond the EU
The functionality of EU ETS will in the future be complemented by the Carbon Border Adjustment Mechanism (CBAM), which is currently in its first transitional phase. CBAM is designed to ensure that products imported into the EU face similar carbon pricing to that faced by European companies subject to EU ETS. Importers of products from third countries will be required to submit certificates corresponding to the carbon emissions associated with the production of imported products. This mechanism aims to level the playing field between countries with strict climate policies and those lacking such regulations, thereby protecting the competitiveness of European manufacturers and supporting global decarbonization efforts.
Summary: EU ETS and GHG Protocol as reference points for European companies on the path to sustainability
EU ETS focuses on direct emissions of companies (which under the GHG Protocol is essentially Scope 1) and regulates specific sectors. In contrast, assessing greenhouse gas emissions in the full scope according to the GHG Protocol (i.e., Scopes 1–3) provides a more comprehensive overview of the reporting company’s impact on climate change. The obligation to report under CSRD legislation, which allows annual emission results to be reported according to the GHG Protocol, applies to a broader range of companies than the EU ETS. However, both systems share the ambition to help the EU achieve carbon neutrality by 2050 while motivating companies to innovate and increase efficiency. The introduction of the CBAM mechanism (carbon border adjustment) also extends the impact of this regulation beyond the EU, strengthening global responsibility for decarbonization. The combination of EU ETS and the GHG Protocol not only strengthens corporate transparency and accountability but also guides European businesses and the economy towards a more sustainable future.
Authors
Petr Tomáš and Anna Zora Kloužková
EnviTrail