ETS2 Explained: What It Means for Heat, Costs, and Decarbonisation in Europe
A New Phase of Carbon Pricing
Europe is entering a new phase of decarbonisation policy. Carbon pricing is no longer limited to heavy industry and power generation, it is expanding into everyday energy use, including how buildings and businesses generate heat.
For organisations across Europe, this represents a fundamental shift. For years heating costs have been unstable due to fossil fuel crisis, the pricing pressure on end consumers is now ramped up by being directly linked to carbon pricing mechanisms.
This is not just policy; it is a structural shift in how heat is priced.
As a result, businesses must rethink how they decarbonise heat, reduce fossil fuel exposure, and transition toward renewable heat technology such as solar thermal collectors and solar thermal systems.
Setting the Scene:
What Is the EU ETS?
The EU Emissions Trading System (ETS), often referred to as ETS1, is Europe’s flagship carbon pricing mechanism.
It operates as a cap-and-trade system covering:
• Power generation
• Heavy industry
• Aviation
Under this system:
• A cap is set on total emissions
• Companies must hold allowances for every tonne of CO₂ emitted
• Allowances are limited and reduce over time
• This drives carbon prices upward
Since its introduction in 2005, the ETS scheme has helped reduce emissions in covered sectors by approximately 50% and addresses approximately 40% of total emissions. (https://www.rabobank.com/knowledge/d011467712-ets2-what-is-it-and-what-impact-will-it-have-on-households-and-businesses).
What Is ETS2 and
Why It Matters
ETS2 is the next phase of Europe’s carbon pricing strategy. It expands the scope of emissions trading into sectors that have been slower to decarbonise.
ETS2 will apply to:
• Buildings(heating fuels such as gas and oil)
• Road transport
• Smaller industrial users
The objective is clear: accelerate emissions reduction in sectors where progress has been limited.
With ETS2, around 75% of EU emissions will fall under carbon pricing mechanisms.
The implication is significant for the first time, fossil fuel-based heating in commercial and industrial buildings will be directly impacted by carbon costs.
How ETS2 Works (and How It Differs from ETS)
Like the original ETS, ETS2 operates as a cap-and-trade system. However, it introduces a key structural difference.
Instead of applying directly to large emitters, ETS2 is applied upstream, to fuel suppliers.
Key Differences Between ETS1 and ETS2
ETS (Today)
• Applies to large emitters
• Covers heavy industry and power
• Includes some free allowances
• Direct compliance required
ETS2 (New)
• Applies to fuel suppliers
• Covers buildings, transport, and SMEs
• Fully auctioned allowances
• Costs passed to end users
Fuel suppliers will incorporate carbon costs into the price of:
• Natural gas
• Heating oil
• Diesel and petrol
Businesses do not participate directly in ETS2, but they feel the impact through rising energy costs.
Key Takeaway
Carbon pricing moves from a compliance issue to an operational cost.
What Will Change for Businesses
Rising Cost of Heat
As ETS2 comes into effect, fossil fuel-based heating costs will increase.
Key impacts include:
• Higher natural gas and oil prices
• Embedded carbon costs in energy bills
• Increased price volatility over time
Carbon pricing is expected to materially increase fuel costs across commercial and industrial sectors.
Who Is Most Affected?
ETS2 will have the greatest impact on sectors with high heat demand:
• Commercial buildings such as hotels, hospitals, and leisure centres
• Industrial facilities requiring process heat
• District heating networks
• Large real estate portfolios
Any organisation relying on fossil fuels for heating becomes exposed to carbon pricing. For information on the industries and sectors we serve, visit our Industries page.
Key Takeaway
Doing nothing is no longer a neutral position, it increases cost exposure over time.
Regional Impacts:
Spain, Germany, BENELUX
Spain 🇪🇸
Spain presents a unique opportunity within the ETS2 landscape.
• High solar resource availability
• Large hospitality sector with significant hot water demand
• Continued reliance on gas for commercial heating
Heat-related emissions are relatively lower than northern Europe, at approximately 1.26tonnes CO₂ per capita. Source: https://www.scribd.com/document/555105920/criteria-for-an-effective-and-socially-just-eu-ets-2
However, natural gas remains widely used in commercial buildings, and certain regions are expected to be highly exposed to ETS2 cost increases.
Germany 🇩🇪
Germany faces a more complex challenge.
• Existing national carbon pricing is already in place
• Contains large industrial industry with high heat demand
• Grid constraints limiting full electrification
Heat-related emissions are among the highest in Europe at approximately 2.23 tonnes CO₂ per capita, with over 50% of heating still reliant on fossil fuels, according to https://www.elgas.sk/wp-content/uploads/2026/03/EZ_NW_ETS2_Study_2026_ENG.pdf.
BENELUX(Belgium, Netherlands, Luxembourg) 🇧🇪 🇳🇱 🇱🇺
The BENELUX region is highly exposed to ETS2 due to:
• Dense urban environments
• High reliance on gas heating
• Concentrated heat demand
Heating emissions are among the highest in Europe:
• Belgium:~2.17 tonnes CO₂ per capita
• Netherlands: ~1.87 tonnes CO₂ per capita
Data sourced: (https://www.scribd.com/document/555105920/criteria-for-an-effective-and-socially-just-eu-ets-2)
Key Takeaway
ETS2 compounds existing cost pressures, making industrial heat decarbonisation more urgent. Hybrid solutions that combine renewable heat technology with existing systems will be critical and impact varies across regions, but the direction is consistent: fossil fuel-based heat becomes more expensive.
Spain, combines strong solar potential with increasing carbon cost exposure, making renewable heat solutions, particularly solar thermal collectors such as Virtu are highly attractive for businesses looking to reduce gas use in commercial buildings. While the BENELUX markets require scalable, space-efficient solutions such as solar thermal systems (Virtu) that can integrate into district heating networks and commercial infrastructure.
The Strategic Response: From Cost Exposure to System Design
ETS2 does not just increase energy costs, it fundamentally changes how heating systems should be designed.
The focus shifts from:
• Minimising upfront cost
to
• Optimising long-term system performance, carbon exposure, and resilience
For businesses, the question is no longer how to comply, but how to redesign energy systems to reduce exposure to carbon pricing.
How Naked Energy Helps Address ETS2
Virtu: Same space, more energy
Naked Energy’s VirtuPVT hybrid solar collectors deliver both heat and electricity from the same surface area.
• High energy density solar collectors maximise output from limited roof space
• Directly reduce fossil fuel consumption
• Deliver immediate carbon and cost savings
Lower fuel use means lower exposure to ETS2-driven carbon costs.
Heat-as-a-Service: Removing the Cost Barrier
Heat as a service models, such as Heat Purchase Agreements (HPA), allow organisations to deploy solar thermal for businesses without upfront capital investment.
• No CAPEX required
• Immediate operational savings
• Predictable long-term pricing
This replaces volatile, carbon-linked fuel costs with stable energy pricing. Visit our Heat-As-A-Service page for more details.
Why Solar Thermal Is Critical in an ETS2 World
Solar thermal systems offer a unique advantage in a carbon-priced energy system.
• Reduces reliance on fossil fuels
• Lowers electricity demand compared to full electrification approaches
• Integrates with existing infrastructure
• Scales across commercial and industrial applications
For organisations asking how to decarbonise industrial heat or how to reduce gas use in commercial buildings, solar thermal collectors provide a proven immediately reducing costs and carbon emissions solution.
Solar thermal is not just a renewable heat technology; it provides an technology, enabling an infrastructure to reduce and avoid carbon costs.
Conclusion: ETS2 Is a Turning Point for Heat in Europe
ETS2 marks a turning point in Europe’s energy transition.
Heat will be fully integrated into the carbon economy. The cost of fossil fuel-based heating will continue to rise, driven by tightening emissions caps and increasing carbon prices.
For businesses, the implications are clear:
• Delaying action increases financial and operational risk
• Early adoption of renewable heat technology creates competitive advantage
Solar thermal systems, particularly when integrated into wider energy strategies, provide a practical and scalable pathway to commercial heat decarbonisation.
In an ETS2 world, decarbonising heat is no longer optional, it is a strategic necessity.
FAQ's
What is ETS2?
ETS2 is the EU’s new emissions trading system that expands carbon pricing to buildings, road transport, and smaller industries, putting a price on fossilfuel-based heating.
How does ETS2 affect businesses?
ETS2 increases the cost of fossil fuels such as gas and oil by embedding carbon pricing into energy costs, raising operational expenses for businesses.
Who will be most impacted by ETS2?
Commercial buildings, industrial facilities, district heating networks, and real estate portfolios with high heat demand will be most affected.
How can businesses reduce ETS2 cost exposure?
Businesses can reduce exposure by switching to renewable heat technologies such as solar thermal systems and reducing reliance on fossil fuels.
What is the role of solar thermal in ETS2?
Solar thermal collectors provide renewable heat, reducing fossil fuel consumption and helping businesses avoid rising carbon costs.
What is a Heat Purchase Agreement (HPA)?
A Heat Purchase Agreement allows businesses to access renewable heat without upfront investment, paying for heat as a service instead.
Is ETS2 relevant for industrial heat decarbonisation?
Yes, ETS2 directly impacts industrial heat users by increasing fuel costs, making decarbonisation strategies more financially urgent.
