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Fit for ETS II: New CO₂ Costs for Heat from 2028

UPDATE: The new EU ETS II with it a binding CO₂ price for buildings and transport will NOW start in 2028 – one year later then originally planned.   
Although trading will not begin earlier, the reporting phase is already underway: those affected should start recording emissions data, setting up internal processes and reviewing CO₂ cost scenarios now. We explain how ETS II works and what steps companies should take today to avoid high certificate costs.

Graphic showing houses and trees with green energy in bright colours versus CO2-emitting fossil fuels in dark colours...chimney stacks
Those who use climate-damaging energy sources should pay for it Image: AI-generated by Canva

What is ETS II?

EU ETS II is the European Union's second emissions trading system (ETS). It is being introduced to reduce CO₂ emissions in the building and road transport sectors – for example, from heating with gas or oil and driving cars with petrol or diesel. Until now, this has largely been regulated in Germany by the national emissions trading system (BEHG) – through the CO₂ price (currently €55/tonne). The BEHG will then be replaced by the European system in 2027.
The goal: 
Those who use climate-damaging energy sources should pay for them – and thus be motivated to switch to climate-friendly alternatives. Those affected are therefore well advised to familiarise themselves with ETS II at an early stage.

Who is affected – with regard to buildings?

The new system does not focus directly on homeowners, but rather on those who distribute fuels. These include, in particular:

  • Energy suppliers and municipal utilities that supply heating oil, natural gas or liquefied petroleum gas
  • Operators of local or district heating networks, provided they use fossil fuels
  • Housing associations or contractors that provide central heating in larger properties
  • Commercial and industrial companies that procure their own fuel

End customers are also affected: not by the purchase of emission certificates, but by the associated high prices that are passed on.

One tonne of CO2 = € - symbolic picture showing that emitting CO2 will become very expensive in the future, das zeigen soll, dass CO2 Ausstoß künftig kostet
Picture made with AI by Canva

How does the system work?

Simply explained, as financial trading is not our core area of expertise, ETS II is a cap-and-trade system – i.e. a trading system with an upper limit:

1. The EU sets a total amount of CO₂ certificates.

  • One certificate = one tonne of CO₂.
  • The upper limit on how much CO₂ can be emitted in total is referred to as the ‘cap’.
  • Those who emit CO₂ need the appropriate certificates – at the same time, only as many certificates are available for trading as the cap allows.
  • This amount of permitted certificates decreases every year so that emissions fall.

2. Certificates must be purchased at auction.

  • Companies that sell heating fuels or motor fuels (e.g. oil companies or energy suppliers) must purchase a certificate for every tonne of CO₂ generated by the use of their products.

3. Costs are passed on

  • This makes fossil fuels more expensive – and climate-friendly behaviour cheaper
  • Companies usually pass on the costs of CO₂ certificates via the price – e.g. to motorists or tenants, depending on the heating system

Shortage guaranteed: How ETS II leads to high CO₂ prices

In the past, CO₂ emissions in the relevant sectors were significantly higher than what will be permitted in future by emission allowances. This means that the cap is already lower than previous emissions at the outset and will fall year on year – much faster than emissions have actually fallen in the past. As a result, the new ETS II is likely to see a noticeable shortage of allowances right from the start – and thus comparatively high CO₂ prices for fossil fuels such as gas, heating oil and diesel.

When does ETS II start?

  • From 2024 to 2026: Reporting phase
    Affected companies must record and report their fuel quantities and resulting emissions without purchasing certificates. This phase serves the purposes of preparation and transparency.
  • From 2027: Implementation phase
    Certified emission allowances must be purchased and surrendered for every tonne of CO₂ emitted when burning fossil fuels.
  • These allowances are auctioned, with the price determined by trading. The EU can cushion excessive price fluctuations via a market stability reserve (in the form of a limited amount of additional allowances when prices are too high).
  • If energy prices rise extremely high beforehand, the start can be postponed to 2028.

What happens, if a company has purchased too few certificates?

Companies that emit more CO₂ than is covered by their certificates must pay a penalty for each tonne missing – expected to be €100 per tonne. In addition, they must purchase the missing certificates in the following year. There is no threat of a production or sales stoppage – but the financial consequences are noticeable. This is intended to increase pressure on companies to reduce their emissions at an early stage or to secure certificates in good time.

Yellow tram in Berlin with the radio tower in the background
The money from the climate fund could for example be used to expand public transport.
Image: Julia Joppien on Unsplash

And what will be done with the money?

The revenue from ETS II goes into the EU's ‘Climate Social Fund’. Germany will receive €5.3 billion in subsidies from this fund over the coming years. The money is intended to cushion the impact on consumers when companies ‘pass on’ the prices for the certificates.
Member states can use the money, for example, to:

  • pay out climate money
  • finance energy consulting
  • promote thermal insulation or the switch to heat pumps
  • expand public transport

However, Germany (like all EU states) should have submitted its national climate social plans to the EU Commission by 30 June 2025. However, the federal government allowed the deadline to pass without submitting its plans to the EU Commission. According to the Ministry of the Environment, more time is needed ‘to coordinate with environmental, social and consumer protection associations.’ The goal is ‘to submit the plan before the end of this year.’ One thing is clear: there will be no flat-rate climate money, as planned by the previous government.

What´s next?

Affected energy suppliers and large property owners should already be recording their emissions data and planning their reporting obligations. In addition, they should definitely

  • calculate the cost implications for a realistic scenario:
    How do different CO₂ price scenarios affect operating costs and end customer prices? Which investments in efficiency or renewable energies are economically viable?
  • develop a decarbonisation strategy: 
    Now is the time to systematically question fossil fuel dependencies – and switch to renewable energies wherever possible.

Measures that you can entrust us with include:

  • Switching to heat pumps or solar thermal energy
  • Using renewable sources such as waste heat or biogas
  • Creating renovation roadmaps for inefficient buildings
  • Transforming district heating networks with renewable sources

Conclusion

ETS II is not a distant future issue – it is a concrete call to action for companies in the building sector. goodmen energy supports companies and municipalities in converting their heat supply to climate-friendly solutions at an early stage – technically sound, strategically well thought-out and economically viable.
Through individual transformation paths, renovation measures and renewable heating solutions, we help to avoid future CO₂ costs and secure investments in the long term.

Sources:

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