EU ETS reform: New rules for CO₂ and portfolio strategies

Whilst the existing European Emissions Trading Scheme 1 (EU ETS 1) for emission allowances primarily covers energy generation, energy-intensive industry, aviation and, increasingly, the maritime sector, the EU ETS 2 extends CO₂ pricing to fuels used in buildings, road transport and other sectors. Consequently, the focus is no longer solely on the direct emitter, but increasingly on the placing of fuels on the market. For companies that place oil, gas or other energy products on the market, CO₂ thus becomes a key control factor in their portfolio.

The EU ETS 2 is designed as a separate emissions trading scheme and is applied upstream. This means that it is not private end-users who are subject to the obligations, but companies that place fuels on the market. They must monitor and report emissions and, in future, surrender allowances for the emissions recorded. In Germany, this approach is already familiar through the national emissions trading scheme under the Fuel Emissions Trading Act (BEHG). According to current plans, the regulatory phase of the EU ETS 2 is set to begin on 1^st January 2028. The reporting phase will continue until the end of 2027, whilst obligations under the national emissions trading scheme will remain in place in Germany in parallel.

CO₂ score as a new performance indicator in the portfolio

For market participants, this means more than just a regulatory adjustment: CO₂ costs are becoming an integral part of procurement, sales, product design and risk management. In future, those structuring energy portfolios will need to consider not only volumes, prices and supply periods, but also the emissions levels of the products being marketed. The key question is therefore no longer simply: at what price can energy be procured or supplied? But also: what is the portfolio’s CO₂ intensity – and what costs will this entail under national or European CO₂ pricing schemes?

This perspective is particularly relevant for suppliers of oil and gas: those bringing fossil fuels to market must, in future, be more prepared for CO₂ costs to be reflected throughout the value chain. In an upstream system, the direct obligations initially fall on the regulated company; economically, however, these costs can be factored into product prices, supply models and customer offers. This creates a strategic lever: if the fossil fuel share of a portfolio falls, so too does the CO₂ exposure. This is precisely where renewable gases such as biomethane come into play.

Biomethane as a strategic component in reducing CO₂ emissions

Biomethane is a renewable energy source produced through the processing of biogas. Once processed, biomethane can be used in a similar way to natural gas, but with a significantly lower environmental impact. It can be used, amongst other things, in industry, the commercial sector, the heating market, electricity generation in combined heat and power plants, and as a fuel in the transport sector.

The key advantage of biomethane lies in its compatibility with existing systems. It can replace fossil natural gas in many applications without necessarily requiring a complete technological overhaul. For companies with existing gas-based processes or customer products, biomethane can therefore be a pragmatic building block for decarbonisation.

However, for portfolios relevant to the ETS and ETS-2, it is not only the physical energy that counts, but also the verification process. Biomethane must be produced sustainably and documented in accordance with regulatory requirements. Verification can be carried out via established registers such as the dena Biomethane Register or Nabisy. This means that biomethane is not only an energy carrier, but also a decarbonisation tool subject to documentation requirements.

From CO₂ cost logic to portfolio optimisation

Under the emissions trading scheme, the price is not determined by a fixed tax rate, but by limited quantities of allowances, auctions, market mechanisms and demand for emission allowances.

For businesses, ETS 2 effectively acts as an additional CO₂ cost component on fossil fuels. As soon as fossil fuels fall within the scope of the scheme, a cost item arises that must be factored into costing, sales and customer contracts. If sustainable biomethane is used and correctly documented in accordance with regulatory requirements, the fossil emissions share of a portfolio can be reduced. This can also reduce the CO₂ costs associated with fossil emissions.

It is important to draw a clear distinction here: biomethane does not automatically replace every CO₂ cost obligation. The decisive factors are the specific regulatory framework, the verification rules, the accounting logic and compliance with criteria for sustainability and greenhouse gas reduction. In relation to fuels eligible for zero-rating, the European Commission states that, under certain conditions, an emission factor of zero may be applied – with particular emphasis on sustainability, greenhouse gas savings, verification and the avoidance of double counting.

Cost-effectiveness: biomethane price, CO₂ costs and energy duty

At present, the market price of biomethane is in many cases still higher than that of fossil alternatives or higher than the expected CO₂ costs under EU ETS 2. At first glance, biomethane may therefore appear less economically attractive than fossil natural gas. However, a simple comparison of commodity prices is not sufficient for a robust assessment. The key factor is the total cost analysis: if certified biomethane is used to replace fossil gas, CO₂ exposure can be reduced – and with it the need to factor in or hedge against CO₂ costs from the national emissions trading scheme or, in future, from the EU ETS 2.

The relevant comparison is therefore not simply the price of biomethane versus the price of natural gas, but the price of biomethane versus the price of natural gas plus the CO₂ cost risk. The greater the significance of CO₂ prices becomes, the more important this integrated approach becomes.

In addition, energy duty must be taken into account. This is not a CO₂ tax, but an excise duty on energy products and is based on the type, quantity, nature and use of the fuel. Biomethane may also be subject to energy duty, as it is treated as an energy product. The economic advantage of biomethane therefore does not automatically lie in an exemption from all taxes and levies, but primarily in the potential reduction in fossil CO₂ exposure. For a robust economic analysis, the price of natural gas, the price of biomethane, energy duty, other levies, and BEHG or EU ETS 2 costs must therefore be considered together.

Conclusion: CO₂ is becoming a key portfolio consideration

The reform of emissions trading and the introduction of the EU ETS 2 are changing the rules of the game in the energy market. CO₂ is no longer visible only at the end of the value chain, but right from the moment fuels are placed on the market. For oil and gas portfolios, this means that the emissions profile of products is becoming a commercial, regulatory and strategic factor.

In this context, biomethane offers a concrete opportunity to replace fossil gas components, improve a portfolio’s CO₂ score and actively manage CO₂ cost risks. It is crucial, however, not to view biomethane merely as a ‘green molecule’, but as an integrated component comprising energy, verification, certification and CO₂ impact.

The new logic is clear: those who treat CO₂ merely as a cost item are merely reacting to regulation. Those who actively integrate CO₂ into procurement, product development and portfolio management create strategic room for manoeuvre. Biomethane can be a key component in this – particularly for companies that wish to utilise existing gas infrastructure, reduce their CO₂ exposure and prepare for the new European market logic.

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