Bridging the Gap How to Finance the Net Zero Transition 2025

The EU-ETS was established as the primary policy tool to fulfil the EU’s commitments under the Kyoto Protocol. Launched in 2005, it has expanded to become the largest carbon market globally based on the volume of emission allowances traded. By 2009, the system represented 96.46% of all global allowance transactions. While the scheme is no longer as dominant as it was with the coming onstream of other cap-and- trade schemes, such as China’s ETS (now the world’s largest in terms of emissions covered), it remains the dominant driver of global carbon pricing. In 2022, 12.5 billion tonnes of emission allowances with a value of $958 billion were traded on EU-ETS platforms. In its first two years, between 2021 and 2023, China’s ETS recorded a cumulative trading value of 239.9 million tonnes of emission allowances valued at $1.5 billion. The EU-ETS covers around 40% of the EU’s GHG emissions.144 The scheme sets a cap on the total amount of emissions that can be emitted by power plants, industrial facilities and aircraft operators covered by the system. The cap is reduced annually in line with the EU’s climate targets, using the so-called linear reduction factor. This is currently 4.3% and will increase to 4.4% from 2028 to 2030. Regulated entities can trade emission allowances within this cap, providing a financial incentive to reduce emissions. The EU-ETS significantly contributes to reducing emissions in the EU: from 2005 to 2023 it helped reduce emissions from European power and industry plants by approximately 47%.145 Recent developments have expanded its scope and ambition. The cap on emissions has been tightened to achieve a 62% reduction in covered emissions by 2030 compared to 2005 levels.146 The scheme now includes maritime transport emissions starting in 2024 and will cover road transport and buildings under a new separate system, the ETS2, which will become operational in 2027.147 ETS2 aims to further reduce emissions by 42% by 2030 compared to 2005 levels, focusing on emissions from fuel combustion in buildings, road transport and small industrial sectors.148 These expansions reflect the EU’s ambition to achieve climate neutrality by 2050 and the comprehensive nature of the bloc’s carbon pricing mechanisms.3.2 European Union Emissions Trading System (EU-ETS) From 2005 to 2023, the EU’s Emissions Trading System helped reduce emissions from European power and industry plants by approximately 47% Deploying EU-ETS revenues BOX 2 The EU has set up three funding programmes to deploy the revenue generated through the auctioning of allowances in the EU-ETS: Innovation Fund: one of the world’s largest financing programmes dedicated to deploying innovative, net-zero technologies, particularly in the energy and industrial sectors. It is funded with the auctioning of around 530 million EU allowances (estimated at €40 billion).149 One EU allowance (EUA) gives the holder the right to emit one tonne of CO2e. Modernization Fund: more targeted, focusing on modernizing energy systems in lower-income EU member states. With a projected total budget of €57 billion from 2021 to 2030,150 it is financed through the auctioning of 2% of the total EUAs issued from 2021 to 2030, with an additional 2.5% from 2024 to 2030.151 Social Climate Fund: established to ensure that addressing climate change is inclusive by mitigating the social impact of the EU-ETS’s expansion, particularly on vulnerable households, micro-enterprises and transport users.152 Bridging the Gap: How to Finance the Net-Zero Transition 23