Emissions trading systems in Germany and Europe - an overview

The European emissions trading system, which has been in place for around 20 years, makes an important contribution to achieving climate neutrality. Nevertheless, it was highly controversial for a long time.  Since its introduction, it has been continuously modified, expanded and supplemented by additional national emissions trading systems in line with political requirements. The basic system is simple: CO2 emissions are given a price, politicians determine the reduction target to be achieved and the market regulates who carries out the CO2 reduction where and how in the most cost-effective way. However, the political will to shape the market does not always make it easy for affected and interested companies to keep an eye on the relevant legal bases and use them to their advantage. The various trading systems add to the uncertainty. In this article, we provide you with an overview of the emissions trading system at European and German level as well as the relevant legal bases in each case.

The European emissions trading system

With the Emissions Trading Directive (2003/87/EC), the EU introduced the European Emissions Trading Scheme (EU ETS 1) in 2005 and sets out the main framework conditions and requirements for European trading in emissions certificates. The system is a key instrument for the cost-effective reduction of greenhouse gas emissions and is intended to help achieve greenhouse gas neutrality. The EU ETS 1 covers around 9,000 stationary energy and industrial plants from around 30 sectors across the EU. These emit just under 40 % of European greenhouse gas emissions. Since 2012, intra-European air transport and, since 2024, maritime transport have also been included in ETS 1. Participation in emissions trading is mandatory for the companies concerned.

With the so-called "Fit for 55" package from 2021, the EU is aiming to reduce its greenhouse gas emissions by at least 55% by 2030 compared to 1990. To this end, and among other things, the emissions trading system is to be expanded and tightened. European emissions trading for fuels is to be introduced in 2027 with a focus on the emissions-intensive transport and building sectors (EU ETS 2). There are already corresponding provisions in Art. 30a ff. of the Emissions Trading Directive. Although the two emissions trading systems (EU ETS 1 and EU ETS 2) run in parallel, they remain separate so that separate certificates are allocated and traded in EU ETS 2. 

The cap-and-trade system

The emissions trading system is based on the so-called cap-and-trade system. In the first two trading periods since the introduction of EU ETS 1 (2005-2007 / 2008-2012), each member state set its own upper limit (cap) for emitted greenhouse gases for its territory. This cap specified how many greenhouse gases could be emitted by all installations subject to emissions trading in the member state for the period of the respective trading period. Since the third trading period (2013-2020), the European Commission has determined how many greenhouse gases may be emitted across the EU. Each member state is then allocated a cap. The total quantity of available emission allowances has been continuously reduced from year to year. As part of the "Fit for 55" package in particular, the EU lowered the annual emissions limit, as emissions are to be reduced by 62% by 2030 compared to 2005, instead of the previous 43%.

Companies that operate plants subject to emissions trading must purchase emission allowances (certificates). These certificates authorise companies to emit a certain amount of CO2. The certificates are allocated in the member states - in Germany initially mostly free of charge (in accordance with the 2007 and 2012 Allocation Acts (Zuteilungsgesetz)). In the meantime, the certificates are increasingly allocated via auctions; the detailed procedure is governed by Delegated Regulation (EU) 2023/2830. 

If a company emits less CO2 than the number of certificates allocated, it can sell the surplus certificates to other companies that exceed their emission limit (trade). The price of the certificates is determined by the market. In this way, the cap-and-trade system provides an incentive to reduce greenhouse gas emissions in the long term. 

The German emissions trading system

In Germany, the Greenhouse Gas Emissions Trading Act (Treibhausgas-Emissionshandelsgesetz, TEHG) implements the Emissions Trading Directive and thus creates the legal requirements for greenhouse gas trading at national level. In addition, the Ordinance on the Implementation of the Greenhouse Gas Emissions Trading Act specifies the provisions of the TEHG in the current 4th trading period (2021-2030).

In addition to the EU ETS 1, an additional national system for trading emission allowances for fuels has been in place in Germany since 2021. The law on national certificate trading for fuel emissions (Brennstoffemissionshandelsgesetz, BEHG) applies to fossil fuels such as petrol, diesel, heating oil and natural gas.

The national system works in a similar way to the European emissions trading system and is also designed as a cap-and-trade system. Trading in certificates and the national emissions trading register are regulated by the Fuel Emissions Trading Ordinance (Brennstoffemissionshandelsverordnung, BEHV). 

In contrast to the European system (EU ETS 1), the companies that place the fuels on the market must purchase certificates for the emissions that customers cause when consuming the fuels. The resulting costs can be passed on to fuel prices, which should motivate customers to reduce their emissions. This is therefore not a so-called downstream system, in which the direct emissions from plants are priced, but an upstream system, which places the emissions trading obligations at the supplier level. 

For companies that fall under both the European and the German system, there are equalisation mechanisms to avoid a double burden (see Section 7 (5) BEHG and the BEHG Double Balancing Ordinance - BEDV). With the introduction of the EU ETS 2, the German system will be integrated into the European certificate trading system in the fuel sector.

Voluntary emissions trading

In addition to these mandatory emissions trading systems, there is also voluntary certificate trading. Member states can introduce their own emissions trading systems in which participation is not legally required. 

Instead of issuing certificates for emissions in advance, voluntary certificates are linked to the offsetting or avoidance of emissions elsewhere, meaning that the offsetting of greenhouse gas emissions can only ever be a downstream step. Certificates are issued for projects that reduce CO2. Companies can then buy these in order to offset their own CO2 emissions - at least on paper (for developments in voluntary emissions trading after COP29, see also here).

To date, trading in these certificates has generally not taken place directly between companies and project operators, but via intermediaries. These buy the certificate from the project developer and sell it on with commission. There are also exchanges (e.g. Aircarbon Exchange (ACX)) on which the carbon credits are traded as standardised financial products. 

With Regulation (EU) 2024/3012, the European Union agreed on an EU-wide voluntary legal framework for the certification of CO2 removals for the first time in November 2024. Numerous provisions of the regulation still need to be concretised through delegated acts. A European register is intended to ensure transparency and guarantee the quality of the certificates. It is also intended to incentivise new projects in the EU. Integration into the existing (mandatory) European emissions trading system is not planned.

Plans of the new German federal government

Emissions trading is a central component of climate protection for the new German government and is to be further promoted. As emissions trading, especially EU-ETS 2, which will soon begin in the fuel sector, leads to noticeable burdens for consumers, particularly burdened households are to be relieved. According to the coalition agreement, Germany will not include the agricultural sector in ETS 2. Voluntary emissions trading via CO2-reducing projects will continue to be supported, with the German government emphasising that this must be a "credible CO2 reduction through highly qualified, certified and permanent projects".

Conclusion

The European Emissions Trading System (EU ETS 1 and, in future, EU ETS 2) is proving to be a key building block for climate protection by creating a direct incentive for plant operators to reduce greenhouse gases. It now covers around 9,000 stationary energy and industrial plants as well as parts of the aviation and shipping sectors and aims to gradually reduce emission caps. With increasing auctions and fewer and fewer allowances being allocated free of charge, the price pressure on emitters is increasing, thus supporting climate-friendly investments in the long term. This is flanked by more recent legislative packages from the "Fit for 55" package. At the same time, Germany is building on national regulations such as the BEHG, which covers fossil fuels. Voluntary markets are also becoming increasingly important, for example through new EU regulations that are intended to certify voluntary emission credits and ensure their quality.

Emissions trading is a key component in the fight against climate change. However, the legal structure and the interplay between European and national regulations as well as participation in voluntary emissions trading often pose challenges for affected and interested companies. We are happy to support you in mastering these challenges.