Covered sectors

Covered Sectors are the cornerstone of the European Union's "cap-and-trade" climate policy. They represent the specific industrial and energy sectors that are mandated to participate in the EU Emissions Trading System (EU ETS). These industries were selected because they are collectively responsible for a significant portion—around 40%—of the EU's total greenhouse gas emissions. By placing a "cap" on the total emissions allowed from these sectors and forcing companies to hold allowances (like EUAs) for every tonne of CO they emit, the policy directly targets the largest sources of pollution to drive Europe's climate transition.

The mechanism is designed to make polluting more expensive and clean operations more profitable. Each year, over 10,000 installations within these sectors must accurately report their emissions and surrender an equivalent number of carbon allowances. If a company reduces its emissions, it can sell its surplus allowances on the market. If it pollutes more than its allocated or purchased allowances, it faces steep fines and must still buy the missing permits. This creates a liquid market for allowances, where supply and demand determine the carbon price.

The main sectors covered by the EU ETS include:

• Power and Heat Generation: Fossil fuel-fired power stations and other combustion installations with a thermal input exceeding 20 MW.
• Energy-Intensive Industries:
  • Oil refineries
  • Steel and iron production
  • Cement, lime, and glass manufacturing
  • Pulp, paper, and board production
  • Aluminium production
  • Chemicals (e.g., nitric, adipic, and glyoxylic acids)
• Aviation: Commercial flights operating within the European Economic Area (EEA).
• Maritime Transport: This sector is being phased into the EU ETS between 2024 and 2026.

Furthermore, a new, separate system (ETS 2) is being launched in 2027 to cover fuel suppliers for buildings and road transport, extending the carbon pricing principle to new areas of the economy.

Concrete Examples

• Case 1: A German Cement Plant: A cement factory in Germany is a stationary installation falling under the covered sectors. To produce cement, it emits a large amount of CO. The plant's operator must purchase European Union Allowances (EUAs) on the market to cover every tonne of CO emitted. This cost directly impacts their operational expenses, pushing them to invest in carbon capture technology or more efficient production methods to remain competitive.
• Case 2: An Airline in Spain: An airline operating flights between Madrid and Rome falls under the EU ETS for aviation. The company must monitor the fuel consumption for this route and surrender a corresponding number of EUAs. This incentivizes the airline to use more fuel-efficient aircraft or explore Sustainable Aviation Fuels (SAFs) to lower its carbon liability.

This regulatory framework is what gives carbon allowances their value, making them a unique asset class for investors seeking both financial returns and environmental impact. For more details on the system, see our detailed guide on how the EU ETS works. The full, official list of activities is maintained by the European Union (see the directive on the European Commission's website).