What does the new ETS 2 involve?

From 2027, the EU’s new Emissions Trading Scheme will introduce new reporting, verification and cost liability requirements for carbon dioxide emissions. Unlike previous schemes, ETS 2 will focus on upstream activities rather than end users directly.

To understand how the system might affect your business, we need to go back to 2005, when emissions trading was first introduced. This was when the EU ETS (Emissions Trading Scheme) came into force. Initially, it only covered industries and energy companies. Christer Nilsson, an audit manager at RISE, explains how it worked: 

– Put simply, an emissions allowance entitles you to emit one tonne of carbon dioxide. Under the previous system, companies were allocated free emissions allowances based on their historical emissions. If they did not need to use all their allowances, they could sell the surplus. In the years before the scheme was amended, a great deal of money was circulating within the system.

Lower emissions = lower costs

EU ETS 2 represents a significant expansion of the directive. ETS 2 covers carbon dioxide emissions from road transport, commercial and public buildings, agriculture, forestry, and shipping. Together, these sectors account for 60 per cent of the EU’s total emissions. Under ETS 2, companies that supply these sectors with fuel, such as importers, suppliers and distributors, will be responsible for compliance.

ETS 2 does not offer any free allowances. When an operator sells more biofuels, blends more renewable fuel into fossil fuels or switches to electricity or hydrogen, emissions are reduced. Consequently, they need to purchase fewer emission allowances and their costs fall. This creates a reverse economic incentive, whereby companies with a cleaner product mix enjoy better profit margins than those which continue to emit carbon dioxide and must therefore purchase allowances, which will also become more expensive.

– Producers and suppliers of fuels will be required to keep track of their volumes and flows. Most of them probably already do this, but now the results must be reported in annual emissions reports and reviewed by an independent, accredited party, says Christer Nilsson.

How should emissions be reported correctly?

Anyone covered by EU ETS 2 must set up a monitoring plan. This plan acts as a guide for those carrying out checks. Before it can be used, the monitoring plan must be approved by the Swedish Environmental Protection Agency. The plan describes the fuels that the company will sell, how volumes will be measured and documented, and the amount of carbon dioxide that will be emitted per unit of fuel.

Every year, companies must enter their data into the Reporting Tool, an EU system. The figures in the Reporting Tool then form the basis of the report that we review. 'For many companies, getting to grips with this will be quite a journey,' says Christer Nilsson.

Put simply: Emission allowances must be purchased, and a monitoring plan must be drawn up and approved by the Swedish Environmental Protection Agency. Figures must also be entered into a digital system. Finally, an independent, accredited party must review the emissions report generated by the system.

RISE is a Swedish-accredited verifier that reviews and verifies emission reports for both ETS 1 and ETS 2. Once a report has been approved by RISE, the approval is entered into the Union Registry, which is a database for emission allowances.

What are the consequences of not meeting the requirements?

Anyone covered by ETS 2 who does not comply with the rules will face sanctions and will be banned from purchasing new emission allowances. In practice, this will result in the shutdown of operations. Christer Nilsson therefore recommends that affected companies make use of the information and training materials provided by the relevant Swedish authorities, such as the Swedish Environmental Protection Agency and the Swedish Energy Agency.

I think we can expect to continue learning how to understand and handle the rules over the next one, two or three years.