Navigating EU ETS 2 Reform Proposals

The European Union’s (EU) Emissions Trading System 2 (ETS 2) will extend carbon pricing to buildings and road transport from 2027 (or 2028) by requiring fuel suppliers and distributors to purchase and surrender emission allowances. The ETS 2 is designed to transmit a clear carbon price signal along the supply chain, encouraging households and businesses to improve energy efficiency and shift to low-carbon alternatives. 

Adopted in 2023, the ETS 2 is expected to play a crucial role in meeting the EU’s legally binding targets of reducing greenhouse gas (GHG) emissions by at least 55% by 2030 and 90% by 2040 compared to 1990 levels as well as achieving climate neutrality by 2050. 

The ETS 2 was planned to commence in January 2027, but EU environment ministers agreed on 5 November 2025 to postpone its start by one year. The European Parliament voted in favor of this postponement on 13 November 2025. Yet, this decision was part of the Regulation to change the European Climate Law and did not change the ETS Directive, which only allows for a 2028 start in the event of exceptionally high energy prices (Article 30k, ETS Directive). This raised questions regarding the legal character of the postponement. 

Over the course of 2025, some Member States and stakeholders expressed concerns about high and volatile allowance prices as well as societal impacts of 
the ETS 2. They proposed several changes to the ETS 2 design and implementation. On 27 November 2025, the European Commission proposed targeted 
amendments to the Market Stability Reserve (MSR) Decision and the Auctioning Regulation in line with some of the proposed changes. 

While legitimate concerns exist regarding certain aspects of the ETS 2 design and selective reform may have merit, full abolition but also postponement would be counterproductive and likely exacerbate the very challenges it seeks to address. Delaying the ETS 2 would undermine the necessary investment certainty for effective policy.

This report provides an overview of the main proposals for change published by September 2025 and discusses their potential impacts and procedural feasibility. The main reform proposals identified are: 

• Reforming the Market Stability Reserve 
  (MSR)
• Frontloading revenues
• Strengthening the Social Climate Fund (SCF)
• Early auctions
• Improving information provision 

Our analysis focuses on the EU level and excludes proposals targeted at Member State policies. Nonetheless, national-level actions remain central to the success of the ETS 2. 

We find that the proposals would require diverse procedures, ranging from amendments to the ETS Directive to statements issued by the European Commission, implying very different timelines and levels of complexity. Overall, several changes could be implemented by amending laws related to ETS 2 such as the MSR Decision and the Auctioning Regulation. This appears more feasible, faster and likelier to provide certainty of outcomes than reopening the ETS Directive. The report includes a detailed mapping of which proposed changes would require which legislative or administrative action. 

The environmental, economic and societal impacts of the proposals are assessed. While some measures could shift incentives for abatement investments into the future, others could have the opposite effect by accelerating investment earlier than in a no-change scenario. This shows that a careful balancing of 
environmental, economic and societal impacts is important when considering the proposals for 
change. 

It is therefore critical to recognize that the proposals are complementary rather than mutually exclusive. They address different concerns and ETS 2 provisions. For this reason, ideally, they should be considered together so that interactions are properly accounted for.