Introduction

International emissions trading systems are entering a new phase of expansion and policy adjustment. In early 2026, EU carbon allowance prices declined sharply following debate over the future trajectory of the EU ETS and concerns about industrial competitiveness. The episode underscored how carbon markets respond to economic and political signals.

At the same time, major jurisdictions are tightening caps toward 2030 targets, expanding sectoral coverage, and integrating carbon pricing with trade measures. This article compares major international emissions trading systems in 2026, including the EU ETS, UK ETS, California Cap-and-Trade, Canada’s Large-Emitter Trading Systems, China’s national ETS, Germany’s national system, and Japan’s GX-ETS.

Key Takeaways

• EU carbon prices have demonstrated sensitivity to policy debate, reinforcing the need for companies to monitor cap revisions, free allocation changes, and CBAM implementation.
• The UK is refining both its ETS and planned carbon border measures, increasing the importance of cross-border carbon reporting readiness.
• Canada’s Large-Emitter Trading Systems are central to national emissions reductions, with modernization efforts focused on maintaining strong credit market incentives.
• China and Japan are increasing carbon cost exposure in Asia through system expansion and transition to mandatory frameworks.
• Across jurisdictions, tightening 2030 targets, sectoral expansion into transport and buildings, and growing links between carbon pricing and trade policy are reshaping compliance risk.

What Is an Emissions Trading System

An emissions trading system (ETS) is a market-based climate policy built on a cap-and-trade structure. Governments set a limit on total greenhouse gas emissions for covered sectors and issue allowances equal to that cap. Each allowance represents the right to emit one metric ton of carbon dioxide equivalent. Regulated entities must surrender allowances matching their verified emissions.

The cap declines over time, reducing total permitted emissions. Because allowances can be traded, emissions reductions occur where they are most cost-effective while the overall cap ensures environmental integrity. ETS frameworks now regulate power generation, heavy industry, aviation, transport fuels, and in some jurisdictions maritime and buildings sectors.

Carbon Markets in 2026: Expansion and Political Sensitivity

Recent developments in Europe demonstrate how closely carbon markets respond to policy signals. EU carbon allowance prices declined following debate over potential adjustments to the EU ETS and competitiveness concerns. In the United Kingdom, industry groups have raised concerns about the timing of testing for the country’s planned carbon border tax, highlighting operational and compliance challenges.

As emissions trading systems expand into new sectors and become more closely connected to trade measures, regulatory complexity is increasing. A structured comparison of major systems helps clarify how different jurisdictions are progressing toward 2030 targets.

Major Emissions Trading Systems by Jurisdiction

European Union: EU ETS and EU ETS 2

The EU ETS is the longest-running and most institutionally developed carbon market, covering roughly 40 percent of EU greenhouse gas emissions. It applies to power generation, heavy industry, aviation, and maritime transport across 30 jurisdictions. Auctioning is the primary allocation method and offsets are not permitted. The cap aligns with the EU’s target of at least a 55 percent net emissions reduction by 2030 compared to 1990 levels.

EU ETS 2 will extend carbon pricing to fuels used in buildings and road transport beginning in 2027 or 2028. The Carbon Border Adjustment Mechanism is being introduced to address carbon leakage as free allocation is gradually reduced.

United Kingdom: UK ETS

The UK ETS began operating in 2021 and covers power, industry, and domestic aviation. It combines auctioning with free allocation and includes mechanisms such as a cost containment mechanism and an auction reserve price. The UK government has outlined a long-term pathway through 2050 and is consulting on expanding coverage to additional sectors.

California, US: California Cap-and-Trade Program

California’s Cap-and-Trade Program, administered by the California Air Resources Board (CARB), covers approximately 76 percent of state emissions. It includes power, industry, transport fuels, and buildings, with upstream compliance for fuel suppliers. Allowances are distributed through auctions and free allocation using output-based benchmarking. Limited domestic offsets are permitted, and auction revenues are reinvested in emissions reduction and community programs. The system is linked with Québec under the Western Climate Initiative.

Canada: Large-Emitter Trading Systems

Canada’s Large-Emitter Trading Systems are identified by the Canadian Climate Institute as the country’s most important climate policy for reducing emissions, protecting industry competitiveness, and supporting low-carbon investment. The Institute’s assessment finds that these systems could contribute up to half of national carbon cuts by 2030 while keeping costs low for businesses.

Federal minimum national standards have helped bring provincial systems into closer alignment. Under LETS, large emitters pay only a small fraction of the carbon price on their total emissions, limiting competitiveness impacts while maintaining an incentive to reduce emissions. The systems establish markets for trading emissions credits, and policy discussions focus on modernization to strengthen incentives and address risks such as credit oversupply.

China: National ETS

China’s national ETS is the largest in the world in terms of covered emissions, regulating an estimated 8 billion tons of CO2. It currently focuses on power generation and selected heavy industries including steel, cement, and aluminum. Allowances are allocated using output-based benchmarking. The system continues to expand gradually while building administrative capacity, supported by the relaunch of the Chinese Certified Emissions Reduction scheme.

Germany: National ETS

Germany’s national ETS covers transport and heating fuels not included in the EU ETS. It began with a fixed carbon price and is transitioning toward auction-based pricing with a price corridor. This phased approach provides price predictability while preparing for full market operation.

Japan: GX-ETS

Japan’s Green Transformation framework includes a voluntary emissions trading system that will transition to a mandatory ETS starting in fiscal year 2026. A carbon levy on fossil fuel importers will follow in fiscal year 2028. The framework is designed to support long-term decarbonization while integrating domestic and international credit mechanisms.

How Do Major ETS Systems Compare at a Glance?

Conclusion

Emissions trading systems are becoming central components of national climate and industrial strategies. Recent movements in the EU carbon market and ongoing adjustments in the UK illustrate how sensitive these systems are to economic and political developments.

Although allocation methods, credit rules, and sectoral coverage differ across jurisdictions, major systems are refining design features while moving toward 2030 targets. For companies operating internationally, understanding these structural differences is essential for managing compliance exposure and guiding long-term investment decisions.

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