On 8 December, the European Commission proposed starting ETS2 allowance auctions in January 2027, a year before the system’s operational launch. Both 450 Mt Social Climate Fund (SCF) volumes and member state volumes can begin auctioning from January 2027, subject to national implementation of key provisions. Crucially, early auctions represent the functional start of the ETS2 because they enable the futures market to operate under viable conditions, which will allow a clear price signal to emerge ahead of full compliance in 2028.
On 8 December, the European Commission presented a draft delegated regulation to start early auctioning of the emission allowances that will be used in the new ETS2 for road transport and buildings. The following summarises the key changes of the proposal to the ETS2 auctioning rules.
Early ETS2 auctioning starting in January 2027 and two‑year distribution window: The draft formalises starting auctions for ETS2 allowances from 2027, to ensure early liquidity and a clear price signal and allows the first ETS2 auction year’s volumes to be distributed between January 2027 and December 2028.
Gating of member State ETS2 volumes on national transposition: Member state ETS2 volumes are only auctioned once the member state has implemented Article 30e(2) (surrender obligation) and Article 16(1)–(4) (penalties) for ETS2. Withheld volumes are later added back and smoothed over an equivalent period.
Early Social Climate Fund (SCF) auctions: The draft sets an initial SCF auction volume of 450 Mt allowances between January 2027 and December 2028, with calendars adjustable to meet revenue objectives.
Scheduling rule to avoid same‑day auctions between platforms: When the common auction platform (CAP) runs auctions on one or two days per week, no opt‑out auctions may be held on those days. If CAP auctions occur on more than two days per week, CAP designates two “no opt‑out” days. ETS1 and ETS2 auctions may occur on the same day.
Relaxed cancellation safeguards for initial ETS2 auctions: To avoid cancellations in the absence of a liquid secondary market, the draft regulation introduces measures to ensure auctions proceed under low-demand conditions, effectively relaxing the usual cancellation safeguards during the initial period.
Operational tweaks: Member states may appoint more than one auctioneer.
The draft regulation stipulates that 450 million allowances will be auctioned for the SCF between January 2027 and December 2028. This represents a significant change compared to the previous regulation, which did not specify any fixed volume or time period for these auctions.
The proceeds will be used by member states to finance programmes that promote electric cars and heat pumps and/or support households suffering from energy poverty.
The 450 Mt will be sequenced via the annual auction calendars, not fixed ex‑ante in an equal split. In practice, the Commission will distribute SCF auctions within each year to meet revenue and operational objectives (and may adjust calendars during the year). An even split is possible but not required.
The key objective of early ETS2 auctions is to ensure early liquidity and establish a clear price signal for market participants ahead of the formal start of the system in 2028.
Additionally, by generating revenues early auctions could incentivise complementary policies such as EV uptake and heat‑pump deployment. These policies affect the ETS2 price: If low‑carbon technology adoption accelerates faster than the market assumes, emissions fall more quickly and demand for ETS2 allowances is lower than expected, placing downward pressure on the ETS2 price. Conversely, if adoption lags what is priced in, the ETS2 price could rise.
By putting downward pressure on the ETS2 price, and hence the price passed-through to the end-consumer, early implementation of complementary policies makes the ETS2 system more politically acceptable.
From both an early liquidity and policy perspective, it may therefore make sense to move significant volumes forward for early auctioning to support market functioning and encourage policy implementation ahead of the system’s operational start.
However, liquidity in the launch year represents the counterweight: shifting auctions from 2028 to 2027 reduces the available auction volume during 2028, which could undermine liquidity and increase volatility in the first compliance year. This is particular relevant because ETS2’s regulated entities include many smaller firms with less forward-hedging capability.
Auctions for member states volumes could also start as early as January 2027. But they may only be auctioned once that country has implemented into national law the ETS2 surrender obligation (Article 30e(2)) and the penalties regime (Article 16(1)–(4)). Any volumes withheld on that account must later be added back and smoothed over a period equal to the withholding.
Technically, the draft regulation allows first‑year member state volumes to be distributed anywhere between January 2027 and December 2028. But it seems likely that SCF allowances and member states volumes are auctioned in parallel.
According to IETA, currently the following member states are lagging in implementing the required ETS2 policies into national law: Czech, Estonia, France, Hungary, Poland, Romania and Slovakia.
According to our analysis, the total 2028 volume will be 1212 Mt (consisting of 977 Mt from the assigned cap for that year, plus 235 Mt frontloaded 2030-32 volumes). 450 Mt of the total supply volume will represent SCF auctions, while the remainder will represent member state volumes. The individual member state shares are determined in the ETS Directive as a distribution key tied to emissions in the ETS2 sectors. The Auctioning Regulation then uses those shares to set each country’s annual auction volume, which are then scheduled in the auction calendars.
The draft regulation is currently in the consultation phase for four weeks. Following this, the European Commission will finalise the text and formally adopt the regulation. Once adopted, the European Council and Parliament may raise objections within the standard two-month period. If no objections are raised, the regulation will enter into force and the rules become binding and directly applicable across all member states, paving the way for auction calendar preparation. We do not expect significant changes to the proposed draft regulation.
Based on practice for the ETS1, the auction calendar is typically released several months prior to the first auction. It is therefore likely that the ETS2 auction calendar will be finalised and published during the second half of 2026, following the adoption and entry into force of the draft regulation and the appointment of auctioneers.
The start of auctioning in January 2027 effectively marks the functional launch of the ETS2, as it enables the futures market to operate under viable conditions. While ETS2 futures already exist, current liquidity is extremely low because sellers face significant risk in the absence of primary supply as they cannot hedge positions effectively. Early auctions change this dynamic by providing the underlying allowances needed for hedging, which reduces risk and encourages participation. This creates the foundation for a liquid futures market, allowing a clear price signal to emerge well before full compliance begins in 2028.
In the meantime, early low-carbon technology adoption trends will shape expectations and influence forward pricing well before the system starts.
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