MONETARY POLICY REPORT | SUMMER 2025 (box 1)
(authors: Jan Hošek, Pavla Netušilová, Radek Šnobl)
The EU Emissions Trading System 2 (ETS 2) is scheduled to be launched at the start of 2027. Its aim is to impose a charge on greenhouse gas emissions at the EU level from road transport, building heating and small-scale energy and industrial production through emission allowances. It builds on the EU ETS 1[1] introduced in 2005, which applies to large emitters, particularly in the energy sector and heavy industry. From 2027, the combined system is expected to cover up to 85% of greenhouse gas emissions in Europe, with only agriculture and waste management remaining outside its scope. The aim of this box is to estimate the potential impacts of the ETS 2, although any quantification is currently subject to considerable uncertainty.
The ETS 2 – including the setting of the allowance price – will operate independently of the ETS 1. Under current EU legislation, if the average price of an emission allowance exceeds EUR 45 per tonne of CO2 (in constant 2020 prices), additional allowances will be released into circulation with a time lag to prevent excessive price growth. Allowances will not be bought directly by households or firms, but by major fuel suppliers, who will then pass the costs on to consumers and end users through higher prices. Similar to the ETS 1, the volume of allowances in circulation is expected to decline each year. If energy prices in the market are exceptionally high in the first half of 2026, the launch of the ETS 2 will be postponed until 2028.[2]
To estimate the impacts of the ETS 2 on domestic inflation, we assume a maximum allowance price of EUR 45 in 2020 prices. However, it is gradually increased by the average HICP inflation rate in the EU27, which was 22.6% in 2024 compared to 2020. Assuming 2% inflation in the coming years, the resulting limit for emission allowances at the start of 2027 would be roughly 28% higher than in 2020, i.e. around EUR 57.
If the allowance price were to reach the limit of EUR 57 per tonne of CO2 in 2027, domestic consumer prices could increase by 0.9 pp due to higher prices of natural gas, fuel and coal. However, there is considerable uncertainty associated with this estimate. EU Member States are currently calling on the European Commission to introduce fundamental changes to emission allowance trading rules under the ETS 2. Further uncertainty surrounds potential compensation measures by the Czech government and the extent to which these would be reflected in consumer prices. The forecast therefore assumes a primary impact of half the size (0.4 pp) and a secondary impact of 0.2 pp. In the baseline scenario, monetary policy reacts to the secondary impact only. Alternative scenarios involve monetary policy responding to the overall impact of the introduction of emission allowances and a potential larger impact corresponding to an allowance price of EUR 57 per tonne of CO2 with no additional compensation, with the central bank reacting to the secondary impacts only.
Additional uncertainty relates to the commercial and pricing strategies of fuel suppliers. In the Czech Republic, there is currently no legal framework governing how fuel suppliers will trade emission allowances and incorporate them into their end-user prices. As a result, gas suppliers have recently been limiting the conclusion of fixed-price contracts for periods longer than two years, or have introduced contractual clauses that take into account future allowance prices.
The Czech Republic will receive additional funds from the auctioning of emission allowances, which will be used for as-yet unspecified compensation measures for the economic agents affected. In addition, one year before the launch of the ETS 2, a Social Climate Fund will be established at the EU level, to which a portion of emission allowances will be allocated. The funds earned from their sales will be used to offset the adverse effects of rising fuel prices. To access this EU financial resource, Member States will be required to prepare a Social Climate Plan. They must contribute at least 25% of the fund’s expenditures from their own resources. A plan is currently being prepared in the Czech Republic. However, it will only be approved by the European Commission once the ETS 2 Directive is fully transposed into national legislation, which has not yet happened.
The configuration and timing of compensation mechanisms, along with the price of emission allowances, will play a key role in determining how the introduction of the ETS 2 will affect the financial situation of Czech households. The impact on households will be uneven, depending on their use of energy-efficient housing and reliance on public or private transport.
[1] In the ETS 1, one emission allowance (European Emission Allowance, EUA) entitles the holder to emit one tonne of carbon dioxide, or an equivalent amount of nitrous oxide or perfluorocarbons. Each year, the EU issues a set quantity of allowances, with the emissions cap steadily decreasing over time. Firms participating in the system acquire allowances either through auctions (and may subsequently trade them on the exchange) or bilaterally, or receive a certain amount free of charge.
[2] However, a postponement of the ETS 2 would require the TTF (Title Transfer Facility, a virtual trading point in the Netherlands) gas price to exceed roughly EUR 107/MWh or the Brent crude oil price to rise above around USD 160 per barrel, which currently seems unlikely. The ETS 2 allows for exemptions for firms and households if they are subject to a national carbon tax that exceeds the price of the emission allowance. No such carbon tax is currently in place in the Czech Republic.