Stepping into the ETS2 era
Overview and immediate impact details
Something big is coming. You might not know the details, you might be oblivious to the impact, but you know something will change. The European Union's Emissions Trading System 2 (ETS2) is the most significant regulatory and market-affecting transformation for the European road transportation sector since the introduction of Mobility Package. It is set to become fully operational in 2027. A delay in implementation of ETS2 for road transport until 2028 is possible, but highly unlikely, due to very high energy prices in 2026 needed to trigger this delay. Below we will share our strategic analysis of ETS2 and real-life impact important for every decision maker from a shipper, a carrier or from an LSP.
From a first glance ETS2 for road transport seems to be a simple environmental tax; akin to fuel excise duty levied on every liter of diesel fuel in many countries. But in its core, it is designed differently – to be a market-restructuring lever, pricing carbon dioxide (CO2) emissions from road fuel into the logistics value chain and forcing supply chains to adopt less-emitting solutions. Operating as an "upstream" cap-and-trade system, it places the compliance burden on fuel suppliers, who will be required to purchase and surrender emission allowances for all the fuel they sell on the open market. While stability mechanisms exist, there will be no hard price ceiling. These costs are expected to be passed through the value chain, creating a direct, significant, and, importantly, volatile increase in the price of diesel fuel.
The system's design, featuring an annually declining total cap on issued allowances, almost surely guarantees a mid-term price appreciation trajectory for carbon emissions, making a "wait and see" approach a financially risky strategy. ETS2 does not operate in isolation. It is the central pillar of a coordinated, three-pronged EU strategy to decarbonize heavy-duty transport. It is complemented by stringent new (CO2) standards for heavy-duty vehicles, which force manufacturers to supply zero-emission trucks, and the Alternative Fuels Infrastructure Regulation (AFIR), which mandates the build-out of a pan-European charging and refueling network to ensure their operational viability.
Expert reports project that the cost of ETS2 allowances will rise from an initial inflation-adjusted level of ~€55 per tonne in early 2027 to over €100-€150 per tonne by 2030-2031. Depending on the country, this will translate into a substantial increase in fuel prices - carriers' key operating expense and, consequently, to shippers' freight budgets. After 2031 long term forecasts expect that fuel efficiency and alternative propulsion adoption improvements will decrease consumption to a level which would allow CO2 costs to decrease.
For carriers, ETS2 necessitates a shift in asset strategy in the mid- to long-term view, moving from simple aging fleet replacement with incremental efficiency improvements to the complex portfolio balancing between diesel, biofuel, LNG and zero-emission vehicles, all guided by a dynamic Total Cost of Ownership (TCO) model that incorporate a volatile carbon price. For freight forwarders and LSPs, ETS2 is a catalyst for transformation, creating an urgent need to move beyond commoditized transport brokerage and develop value-added services in carbon accounting and sustainable procurement.
For shippers, the era of procuring transport based solely on price and service level is over; carbon emissions must become a third, critical criterion in all tender processes and network design considerations. The direct financial pressures from ETS2 or emission level-differentiated road toll costs make using fossil fuels for transport an unavoidable cost, while legal obligations under the Corporate Sustainability Reporting Directive (CSRD) force emissions accounting and reporting to be a non-negotiable compliance issue.
Key Details and Milestones
The central objective of ETS2 is to deliver a legally binding emissions reduction of 42% in the covered sectors by 2030, relative to 2005 levels. This target is enforced through the system's cap - the total number of emission allowances made available to the market each year.
This cap is not static; it is designed to shrink over time, forcing a corresponding reduction in emissions. The Commission has set the cap for the inaugural year, 2027, at ca. 1 bn allowances. The cap's trajectory is determined by a Linear Reduction Factor (LRF), which dictates the annual rate of decrease from base level of 2016-2018. The LRF is set at 5,1% for the current period leading up to 2027 and will increase to a more aggressive 5,38% annually from 2028 onwards, switching the base to 2024-2026 emissions.
This mechanism of a guaranteed, annually declining supply of allowances is the primary engine of the ETS2 system. It creates a predictable scarcity that, when coupled with ongoing demand for fossil fuels, ensures a long-term appreciation trajectory for the price of carbon. Recognizing the potential for extreme price volatility and the associated social and economic risks, policymakers have embedded several stability mechanisms into the ETS2 framework.
The most prominent of these is a “soft” price cap. For the first three years of operation (2027-2029), if the average price of an ETS2 allowance exceeds €45 (in 2020 prices, which will be adjusted for inflation to around €55 by 2027), a predefined number of additional allowances will be released from a dedicated Market Stability Reserve (MSR). This injection of supply is designed to dampen the price increase. It is important to note that this is a “soft” cap, not a hard ceiling; prices can, and likely will, temporarily trade above this level before the mechanism is triggered. Furthermore, to ensure a smooth start and provide initial market liquidity, the volume of allowances auctioned in 2027 will be front-loaded by 30%, drawing from 2029-2031 caps.