From 2027 on, the European Union will extend the EU Emissions Trading System (ETS). The new rules identified as ETS2 will focus on further areas not covered by the system yet, including mainly the heating of buildings and road transport. Who will be affected by this new system and what obligations should the affected entities prepare for? Key information on ETS2 is provided in the article below.
The European Union Emissions Trading System introduced by Directive 2003/87/EC of the European Parliament and of the Council underwent a significant revision in 2023. The original ETS system (“ETS1”) covers merely huge stationary installations in the field of energy production and industries, emissions from air transport and newly also maritime transport. However, based on the aforementioned revision, a new emissions trading system named ETS2 is being introduced, which also covers further areas of the fossil fuel combustion sectors such as heating of buildings, road transport and other industrial activities. ETS2 represents a step of the European Union towards achieving the objectives set by the Paris Agreement on climate and its commitment to become carbon neutral by 2050.
From 2027 on, fuel consumption in the heating of buildings and in road transport will be charged through the purchase of emission allowances, which is likely to affect the price of these fuels. This should be a motivation for switching to cleaner fuels and technologies, thus reducing greenhouse gas emissions in these sectors. The military, agriculture, forestry and railway and inland water transport sectors are exempted. The ETS2 system will be independent of the existing ETS1 system. Emission allowances issued in line with the ETS1 and ETS2 systems will not be interchangeable, and their price will not be unified. Both systems will operate in parallel.
ETS2 will make fuel suppliers, rather than end consumers, the obliged parties. This means that companies and households using fossil fuels will not have to purchase emission allowances directly. Instead, this obligation will lie on fuel suppliers; for each tonne of CO2, which their fuels produce, the suppliers will have to purchase and retire one allowance.
For participation in the ETS2 system, the activities of the respective entity are decisive: these include either putting liquid fuels into free tax circulation or delivering gas or solid fuels to final customers.
ETS2 will affect the following entities:
– Holders of an authorisation for the operation of a tax warehouse or authorisation of a recipient regarding duty on mineral oils who put liquid fuels into free tax circulation or use such fuels themselves;
– Holders of an authorisation for the purchase of gas net of tax who supply gaseous fuels to final consumers or use such fuels themselves; and
– Holders of an authorisation for the purchase of solid fuels net of tax who supply solid fuels to final consumers or use such fuels themselves.
As regards the specific fuels, the ETS2 relates to liquid fuels subject to excise tax (mainly petrol and diesel oil), solid fuels subject to solid fuel carbon tax (mainly hard coal, lignite and fuels made from them) and gaseous fuels subject to tax on natural gas and some other gases (mainly natural gas).
Conversely, ETS2 does not cover waste used as fuel, fuel consumed in installations under the ETS1 system, biofuels that meet sustainability criteria in line with Directive (EU) 2018/2001 of the European Parliament and of the Council on the promotion of the use of energy from renewable sources, and fuels that are not burned but used as input for industrial processes.
The obligation to surrender an emission allowance will arise to the obliged entity upon delivering fuel to the final consumer or releasing fuel into free tax circulation. For ETS2, the moment of burning the respective fuel is not decisive.
From 2025 on, all fuel suppliers under the ETS2 will be required to have a fuel supply permit issued by the Ministry of the Environment (similar to the permit for the operators of installations under ETS1). Part of the application for the permit issuance will be a monitoring plan in which fuel suppliers indicate how they will evidence emissions from fuels they deliver or use.
According to this plan, they will then have to monitor emissions, i. e. determine the amount of fuel delivered and the sectors in which this fuel will be consumed.
Every year, fuel suppliers under ETS2 will be obliged to file a report on emissions from the fuel delivered in the previous year to the Ministry of the Environment (MoE); the first report is to be filed by 30 April 2025 for 2024. From 2026 on, the report (for fuels put into circulation in 2025) will have to be certified by an auditor.
From 2027 on, a charge will be imposed on emissions from fuels and emission allowance trading will commence. The suppliers will be obliged to surrender the respective number of allowances in 2028 for the first time regarding allowances for 2027. Subsequently, this obligation will have to be met each year by 31 May of the year following the year in which fuel was put into circulation.
The Czech Republic, as well as other EU member states, was obliged to implement ETS2 into Czech law by 30 June 2024. However, this deadline was not met.
ETS1 has been implemented into the Czech legal system by Act No. 383/2012 Coll., on the Conditions for Greenhouse Gas Emission trading, as amended (“Act on ETS1”).
The ETS2 is to be introduced into the Czech legal system by an amendment to the Act on ETS1. However, as of the day of the preparation of this article, it was still unclear how this will be done. It is assumed that an amending parliamentary motion to the proposed amendment to the Act on ETS1 regarding maritime transport will be filed. As of the day of the preparation of this article, the amendment was being discussed in the Chamber of Deputies.
Originally, the Ministry of the Environment considered dividing the implementation ETS2 into two steps: In the first step, obligations regarding monitoring and reporting of fuels put on the market would be implemented and subsequently, the rules for the purchase and surrender of emission allowances itself would follow.
Thus, a very chaotic situation for entities impacted by ETS2 occurred – even though some of the suppliers’ obligations are to come into force on 1 January 2025, there is currently no Czech legislation on these obligations. In particular, the Ministry of the Environment cannot issue the permit necessary for delivering fuels to the respective suppliers at the moment, as the Ministry does not have the statutory authorisation to do so. Simultaneously, it is assumed that until 30 April 2025, the suppliers will file reports on emissions from delivered fuel to the MoE made according to the monitoring plans prepared by the end of 2024. It is expected that the MoE will set detailed rules on monitoring and reporting by means of a regulation; however, the Ministry is not authorised to issue such regulation at the moment.
Further doubts may arise with holders of an authorisation for excise and energy tax purposes, as the list of authorisation holders may not be complete; for example, it is not clear yet whether ETS2 emission monitoring will also apply for holders of permits to acquire electricity tax-free. If there are entities holding this permit for other reasons than a regular purchase and sale of fuels, it might be favourable for them to ask for the cancellation of such permit. ETS2 system would then not apply to them, and the price of emission allowances would enter into the price of fuels charged by the supplier.
Additional tax implications may also arise if permits or licences to buy and sell fuels are revoked (e.g. regarding the VAT regime application).
There is a possibility that by the end of 2024, ETS2 will not be implemented into Czech legislation, and the legislator will be forced to handle the situation by establishing an interim period with special rules.
Given the pending transposition of the ETS2 system into Czech legislation, it is important for entities affected by ETS2 to familiarise directly with the primary European legislation and with guidance issued by the MoE in this regard to be able to respond fast to legal requirements arising from the implementation. We strongly recommend consulting an expert advisor on the subject on an ongoing basis.
For other entities not subject directly to ETS2, this new regulation mainly represents another incentive to thoroughly think about the extent to which they will use fossil fuels in the future.
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