EU ETS: What It Means for SME Suppliers and Non-Covered Businesses

EU ETS for SME Suppliers: What It Means for Your Business in 2026

The EU Emissions Trading System (EU ETS) is often dismissed by SMEs as something that only applies to large industrial operators. That is partly true — the EU ETS directly regulates only large industrial installations emitting 25,000+ tCO2e/year. But EU ETS SME suppliers are indirectly affected in ways that are becoming increasingly significant: energy cost pass-through, CBAM requirements, ETS2 expansion, and Scope 3 supply chain data requests from ETS-covered customers.

If you supply large industrial, energy, or manufacturing companies in the EU, understanding the EU ETS is essential for navigating the supply chain sustainability requests you will receive over the next three years.

What Is the EU ETS?

The EU Emissions Trading System is the world's largest carbon market, covering approximately 40% of EU greenhouse gas emissions. It operates on a "cap and trade" basis:

• Cap: A total limit on GHG emissions from covered installations is set and reduced annually
• Allowances: Each allowance permits emission of 1 tonne of CO2 equivalent
• Trade: Companies can buy and sell allowances — if they emit less than their allocation, they can sell surplus; if they emit more, they must buy additional allowances
• Price: EU ETS carbon price in 2024 averaged €55–70/tonne CO2; expected to reach €100–150 by 2030

Who is currently covered (EU ETS Phase 4, 2021–2030): - Power generation and heat production (>20 MW thermal) - Energy-intensive industries: steel, cement, glass, lime, ceramics, paper, aluminium - Commercial aviation (intra-EU/EEA flights) - Shipping (from 2024) - Total: approximately 10,000 installations across 31 countries

How the EU ETS Affects SME Suppliers

1. Energy Cost Pass-Through

You are already paying EU ETS costs through your electricity bill. EU electricity generators pass their carbon allowance costs into electricity prices:

Approximate EU ETS impact on business electricity prices: - At €70/tonne CO2 carbon price, a gas-fired power plant emitting 0.35 kgCO2/kWh passes through: 0.35 × €0.070 = €0.0245/kWh carbon cost - For a German SME using 500,000 kWh/year: €12,250/year in embedded EU ETS costs

This means the EU ETS is already a material cost factor for energy-intensive SMEs — even if they are not covered by the scheme directly.

2. CBAM (Carbon Border Adjustment Mechanism)

CBAM — in force since January 2024 (transition phase) — requires EU importers of specific products to report and eventually pay for the embedded carbon in: - Iron and steel - Cement - Aluminium - Fertilisers - Electricity - Hydrogen (from 2026)

If you manufacture these products outside the EU and export to EU customers: You or your EU importer must provide certified embedded carbon data for each shipment. From 2026, CBAM certificates must be purchased at EU ETS-equivalent prices.

If you are an EU SME supplying CBAM-covered products: Your EU customers will ask for your production emission data to comply with their CBAM reporting obligations.

3. ETS2 — Buildings and Road Transport (from 2027)

The EU has created ETS2 — a new, separate ETS covering: - Fuel suppliers for buildings (heating fuel distributors) - Fuel suppliers for road transport (petrol and diesel distributors)

This comes into force in 2027 (potentially 2028 if energy prices spike). ETS2 will effectively carbon-price: - Natural gas used for business heating (via your gas supplier) - Petrol and diesel for business vehicles (via your fuel supplier)

Impact on SMEs: ETS2 will embed a carbon cost of approximately €45–75/tonne into your heating fuel and vehicle fuel costs from 2027. This will make gas boiler operation and diesel vehicles significantly more expensive.

4. Scope 3 Data Requests from ETS-Covered Customers

Large ETS-covered companies (steelmakers, cement producers, chemical manufacturers) face CSRD reporting obligations that require them to collect Scope 3 Category 1 data from their suppliers — including from your SME.

If you supply: raw materials, components, packaging, logistics services, or business services to ETS-covered companies, expect a supplier carbon questionnaire asking for your Scope 1, 2, and 3 GHG emissions under GHG Protocol.

What SME Suppliers Need to Prepare

By 2026: - Measure your Scope 1 and 2 emissions using GHG Protocol methodology - Respond to supplier questionnaires from ETS-covered customers with verified emissions data - If you manufacture CBAM-covered products: calculate embedded carbon per tonne of production

By 2027: - Plan for ETS2 energy cost increases (budget for higher gas and fuel costs) - Consider switching to renewable electricity (eliminates market-based Scope 2 costs) - Evaluate heat pump installations before ETS2 makes gas significantly more expensive

Longer term: - Prepare for potential EU SME ETS inclusion discussions post-2030 - Monitor CBAM product category expansion (currently under review to include polymers, chemicals)

UK SMEs and the UK ETS

Post-Brexit, the UK operates its own UK Emissions Trading Scheme (UK ETS), which launched in January 2021: - Covers the same industrial sectors as EU ETS (power, industry, aviation) - UK ETS carbon price: approximately £35–55/tonne in 2024 - UK ETS and EU ETS are not currently linked (UK government has indicated desire to link but no agreement exists) - UK SMEs supplying EU customers still need to provide EU-standard carbon data

DeCarbonOPS produces a GHG Protocol-compliant Carbon Passport that satisfies Scope 3 supplier data requests from ETS-covered customers across the EU and UK. Complete your Scope 1, 2, and 3 calculation in under 20 minutes — free for your first annual report. Get ready before your largest customer sends the questionnaire.