ETS and ETS2 in Italy: The New European Emission Market in Light of EU Directives 958/2023 and 959/2023

published on 16 February 2025 | reading time approx. 6 minutes

Legislative Decree 147/2024, published in the Official Gazette on October 14, 2024, transposes two European Directives, specifically No. 958/2023 and No. 959/2023, concerning aviation’s contribution to emission reduction target and a system for trading greenhouse gas emission allowances within the Union, as well as a stability reserve for this market (through amendments to Directive 2003/87/EC and Decision (EU) 2015/1814).

Legislative Decree 147/2024 modifies the so-called ETS (Emissions Trading Scheme), the European system for trading greenhouse gas emission allowances (specifically carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride). This system was originally established by Directive 2003/87/EC, transposed and implemented in Italy through Legislative Decree 216/2006, later amended by Directive (EU) 2018/410 and implemented through Legislative Decree 47/2020.

Legislative Decree 147/2024 further modifies its configuration and expands its scope of application, implementing not only the 2018 Directive but also the aforementioned European regulations from 2023.

The ETS System

The ETS operates at a European level by creating a maximum volume (differing by sector) of emission rights, translated into allowances, which can be freely traded on specific markets. These allowances can be allocated through three different methods: for a fee, via auction, or free of charge (the latter being available only to entities that meet the applicable regulatory requirements). Free allowances are allocated by June 30 of the reference year.

Revenues from auctioning emission allowances that are not allocated to the European Union budget are used for climate-related purposes, such as improving energy efficiency, addressing carbon leakage, and promoting and enhancing renewable energy sources.

This emissions regulation system, whose scope of application has been expanded following the 2021 "Fit for 55" package, aims to achieve a minimum net greenhouse gas emissions reduction of 55 per cent by 2030, ultimately reaching climate neutrality by 2050 (as provided for in Regulation (EU) 2021/1119).

In line with European legislation, this will be achieved by progressively reducing the number of greenhouse gas emission allowances available to polluters, who will consequently have to find solutions to reduce harmful emissions. The goal of this gradual reduction in available allowances is to increase the cost of CO2 production for industries.

New Developments Introduced by EU Directives 2023/958 and 2023/959, Transposed by Legislative Decree 147/2024

The main change introduced by Directive EU 2023/958, which specifically addresses greenhouse gas emissions in the aviation sector, is the gradual elimination of free emission allowances allocated to this sector for flights within the European Economic Area (EEA) and to Switzerland and the United Kingdom. Starting from January 1, 2026, 100 per cent of these allowances will be subject to auctions.

Furthermore, based on the European Commission’s assessment of the implementation and effectiveness of CORSIA (Carbon Offsetting and Reduction Scheme for International Aviation), Article 28 ter, paragraphs 2 and 3 of Directive EU 2023/958 provides that if CORSIA fails to sufficiently curb aviation-related emissions, the Commission may propose extending the ETS system to outbound flights from the EEA.

Directive EU 2023/959, on the other hand, has raised the emission reduction target by 2030 from 43 per cent to 62 per cent compared to 2005 levels (Recital No. 39) and expanded ETS application to the maritime transport sector for commercial passenger and freight shipping (for vessels with a gross tonnage of 5,000 tons or more). Additionally, this Directive has introduced mechanisms to manage price fluctuations and adjust the market stability reserve established by Decision EU 2015/1814, reducing the allocation of allowances to this reserve and introducing a release mechanism in case of excessive price increases.

For stationary installations subject to the Carbon Border Adjustment Mechanism (CBAM), which prevents carbon leakage by applying ETS-related costs to imports of specific products (e.g., iron, steel, hydrogen, and fertilizers), free allowance allocation will be phased out by 2034. For other stationary installations, stricter rules have been introduced for the free allocation of allowances, linked to conducting energy audits or implementing measures to enhance climate neutrality.

The New ETS 2 Market

With the addition of Chapter Iva (Articles 30 bis et seq.) to Directive 2003/87/EC, Legislative Decree 147/2024 introduces a new market, known as ETS 2, which will apply from January 1, 2025, to fossil fuels used in sectors not originally covered by the 2003 Directive, such as road transport, buildings, and energy-intensive industries. The activities subject to ETS 2 are listed in Annex III of the Directive, as last amended.

The emission allowance market under ETS 2 is separate and independent from the ETS market, with distinct maximum allowance volumes. Unlike the ETS, there will be no free allocation of emission allowances in the ETS 2 sectors or the maritime sector.

By April 30, 2025, regulated entities must report their 2024 emissions for simplified monitoring. From 2028, each year until 2030, they will be required to report the average allowance restitution costs transferred in the previous year by April 30. Starting in 2025, they must monitor emissions from fuels placed on the market and report them annually to the National Competent Authority (the newly established ETS 2 Committee).

Legislative Decree 147/2024 has established a new oversight body within the Ministry of the Environment and Energy Security (MASE): the ETS 2 Committee. This collegial body consists of eleven members, serving five-year terms renewable once. Three members are appointed by the Minister of the Environment and Energy Security, two by the Minister of Economy and Finance (one from the Customs and Monopolies Agency), two by the Minister of Infrastructure and Transport, one by the Minister of Justice (with voting rights limited to sanction-related matters), two by the GSE (Gestore dei Servizi Energetici), and one by ISPRA (the Institute for Environmental Protection and Research). Each year, the ETS 2 Committee will report to Parliament on its activities and verify emissions data submitted by operators.

Unless otherwise communicated by the European Commission, the first auctions for emission allowances in ETS 2 sectors will commence in 2027, with allowance restitution required by May 31, 2028.

The tightening of emission thresholds through these new regulatory provisions undoubtedly presents an additional challenge for affected entities. However, this also represents an opportunity for efficiency and development, enabling companies to enhance sustainability, reduce negative externalities, cut costs, and improve market reputation.