EU ETS, ETS2 and CBAM: Legal and cost impacts for businesses

21.5.2026 | ARROWS law firm

European regulation of emissions allowances fundamentally affects energy and input costs. With the expansion of the EU ETS and ETS2 systems and the launch of the CBAM carbon border adjustment mechanism, the impact on business will deepen significantly. This article explains how these changes work from a legal and economic perspective, what obligations and costs may arise, and how, with the support of attorneys from ARROWS, a Prague-based law firm, to set a strategy so that your company avoids sudden price spikes and uses the regulation to its advantage.

In the image, we see an expert addressing the issue of the impacts of emissions allowances.

Context of European climate policy and emission allowances
From climate targets to allowances: why the regulation will affect every company
Why the legal and financial impacts of ETS2 will be felt even before 2028
How EU ETS and ETS2 work from a legal and practical perspective
Direct and indirect impacts on Czech companies
Impacts on construction and development projects
How to avoid a sudden increase in the cost of energy and inputs
Energy and fuel supply contracts: how to pass through emission costs fairly
Specific obligations and risks for selected entities

Key takeaways

European regulation of emission allowances is currently based on the EU ETS system, which since 2005 has put a price on emissions primarily in the energy sector and heavy industry. Thanks to a gradually declining emissions cap and rising allowance prices, it has already led to an approximately 50% reduction in emissions compared to 2005 in the sectors it covers.

In 2023, the EU ETS Directive was substantially amended and a new, separate ETS2 system was created. From 2028, it will fully apply to emissions from fuels used in buildings, road transport, and parts of industry that have so far been unregulated.

The obligated entity will not be the end customer, but the fuel supplier, which will have to monitor emissions and purchase allowances. These costs will be reflected in energy and fuel prices.

At the same time, from 2026 the CBAM carbon border adjustment mechanism will enter full operation. Importers of steel, cement, fertilisers, aluminium or electricity will have to purchase CBAM certificates for the carbon footprint of imported goods, unless the value of the imported consignment does not exceed EUR 150, to which the de minimis exemption applies. Emission costs are thus newly shifting into international supply chains as well.

To avoid a sudden increase in the cost of energy and inputs, companies need to combine technical measures (savings, energy management, technology changes) with legal preparation. Legal preparation typically also includes setting responsibility and cost pass-through in contractual relationships, which the contracts and negotiations team can help with.

This includes reviewing long-term contracts, setting pricing and emissions clauses, preparing for ETS2 and CBAM, and using subsidy and financial instruments such as the Social Climate Fund or the Modernisation Fund.

Context of European climate policy and emission allowances

From climate targets to allowances: why the regulation will affect every company

The European Union has set a legally binding target to achieve climate neutrality by mid-century. At the same time, it is to reduce greenhouse gas emissions by at least 55% compared to levels around 1990 by 2030. The political agreement also adds a medium-term target for 2040, when emissions are to fall by approximately 85% to 90%.

Part of this reduction may, from a certain point, be achieved through international carbon credits from projects outside the EU. These targets are not merely declaratory; they are reflected in detailed legislation and regulation which, through energy, industry, transport, buildings, agriculture and the financial sector, gradually affects virtually all companies operating on the market.

From the perspective of entrepreneurs and managers, it is important that the EU has long preferred market-based instruments over purely administrative bans. That is why it chose the emissions trading system as the main tool for reducing emissions across a large part of the economy.

For companies, however, this does not mean a “voluntary carbon tax”; the allowance price is gradually reflected in all relevant inputs and services. This includes electricity, heat, construction materials, transport, and imports of steel or cement. We also summarise the practical impacts of emission allowances on costs and the options for managing them through lawful ESG reporting in the article Emission allowances and companies: How to reduce energy costs through lawful ESG reporting.

From a business perspective, emissions regulation therefore functions today as a comprehensive system. It affects cost structures, investment decisions, competitiveness and, in the future, also access to financing, because banks and investors increasingly assess climate risks and a project’s carbon footprint.

For Czech companies, it is also specific that the domestic energy mix is still largely based on coal and natural gas. The Czech economy is highly industrial, with a significant share of energy-intensive sectors.

This means that any increase in the price of an emission allowance will relatively quickly be reflected in the prices of electricity, heat or gas, and thus in the costs of most businesses in the Czech Republic. In practice, it is therefore worth addressing the regulatory and contractual set-up of energy supplies as part of energy law.

At the same time, the emissions trading system creates pressure for modernisation, energy savings and a transition to low-emission technologies. This represents not only a cost but also an investment opportunity – those who wait with modernisation may find themselves in a few years in a situation where the combination of high allowance prices, expensive energy and stricter technical standards significantly worsens their competitiveness.

Successes and weaknesses of EU ETS: why ETS2 is coming

The EU Emissions Trading System (EU ETS) was launched in 2005 as the first major international emissions trading system and is now in its fourth phase, which will run until 2030. The principle is relatively simple: the EU sets an overall emissions cap for the sectors to which the system applies.

This cap is reduced each year, and the corresponding number of allowances is allocated to companies or auctioned. One allowance corresponds to the right to emit one tonne of CO₂ or the equivalent of another greenhouse gas.

Companies can trade allowances with each other, and if they manage to reduce emissions more cheaply than the price of an allowance, it pays off for them to invest in savings and sell the surplus allowances. This is also related to the text Which arguments determine the choice of ARROWS for energy projects: Managing complex regulation and ensuring the smooth progress of construction or operation of energy sources, which discusses how companies in energy projects prepare for complex regulation and how to minimise delays in the construction or operation of energy sources.

Practical experience in recent years shows that the EU ETS is an effective tool: in the sectors covered by this system, emission levels were reduced by around half compared to 2005 by the middle of the decade.

Mainly thanks to a combination of technical innovation, the closure of the dirtiest sources, and the rising price of allowances. Historically, the average market price of an allowance in 2024 and 2025 ranged approximately between EUR 60–80 per tonne of CO₂.

However, it is necessary to expect significant fluctuations depending on demand trends, the energy mix, geopolitics, and regulatory interventions. For 2026, continued volatility is expected, with a tendency for prices to hold steady or rise slightly due to more ambitious climate targets and the gradual reduction in the volume of available allowances.

At the same time, it has become clear that emissions in other sectors—especially buildings and road transport—do not fall quickly enough if they are regulated only by national rules and tax policy. These sectors account for roughly 40% of final energy consumption and 36% of energy-related emissions, respectively.

Without bringing them into a carbon price market system, the EU would struggle to meet its medium-term and long-term targets. This is the main reason why, in 2023, a major amendment to the EU ETS Directive was adopted (specifically Directive (EU) 2023/959), which led to the creation of a separate ETS2 system.

It is intended precisely for fuels used in buildings, road transport, and parts of smaller industry.

Why the legal and financial impacts of ETS2 will be felt even before 2028

Formally, the ETS2 system will be fully launched in 2028, although it was originally expected to start in 2027. The postponement was the result of a political compromise intended to give Member States room to set up compensation mechanisms and stabilisation measures and to limit the risk of a sudden price spike.

However, this does not mean that companies can ignore the issue until 2028. In practice, ETS2 starts in two steps: the first phase from 2025 focuses on mandatory monitoring and reporting of fuel emissions. This phase applies to fuels that suppliers release for free circulation or supply to end customers.

The second phase from 2028 focuses on the obligation to purchase and surrender allowances for these emissions. Fuel suppliers therefore already have to apply to the Ministry of the Environment for a permit to supply fuels, submit monitoring plans, and from 2025 keep detailed records of the quantity and purpose of fuel consumption. They will report consumption once a year.

EU ETS2 regulation also introduces a market stability mechanism (specifically in Article 30e of Directive (EU) 2023/959), which is intended to keep the ETS2 allowance price in the first years below EUR 45 (in 2020 prices) by releasing additional allowances from the reserve. This is intended to reduce the risk of a sudden increase in fuel prices for households and businesses. In other words, the legal framework and market expectations are already taking shape.

If a company waits for the “definitive” moment of ETS2 launch in 2028, it risks losing several years—during which it could have adapted contracts, technologies, and investment plans relatively cheaply.

How EU ETS and ETS2 work from a legal and practical perspective

The “cap and trade” principle and the difference between ETS1 and ETS2

Both the existing EU ETS system (often referred to as ETS1) and the new ETS2 are based on the “cap and trade” principle—i.e., “set a cap and trade”. The European Union sets an annual emissions cap for each system, which is gradually reduced using the so-called linear reduction factor.

In the case of the existing ETS1, this factor has been increased to 4.3% in the current phase and will increase further in the next period in order to achieve more ambitious climate targets.

Emission allowances in the ETS1 system are partly allocated free of charge (especially to sectors at risk of carbon leakage, such as steelmaking). They are partly auctioned, with the proceeds going to Member States and required to be used for climate and decarbonisation measures.

In the ETS2 system, the legal set-up will differ in several key respects. First, ETS2 focuses on emissions from fuels used in buildings, road transport, and parts of smaller industry that have not so far been covered by the EU ETS.

Second, it is a so-called upstream system, where the obligated entities are not end consumers (for example, households or companies heating with gas).

The obligated entities are fuel suppliers who release fuels for free circulation or supply them to final customers. From 2028, these suppliers will have to purchase allowances at auction in quantities corresponding to the CO₂ emissions contained in the fuels sold. All allowances in ETS2 will be auctioned, with no free allocation.

Another important difference is that ETS2 is linked to the Social Climate Fund (SCF). It was established so that part of the proceeds from auctions of ETS2 allowances is automatically used to support vulnerable households, micro-enterprises, and transport users, especially in connection with energy and transport poverty.

From the perspective of corporate clients, it is essential to view ETS1 and ETS2 as two separate but interconnected systems. ETS1 continues to significantly influence the prices of electricity, heat, and energy-intensive materials, while ETS2 will add a carbon price to fuels for heating buildings and transport and will substantially expand the number of sectors indirectly burdened by emissions costs.

The mechanics of obligations: permits, monitoring plan, reporting, and sanctions

In both systems, the basic logic of obligations is similar: obligated entities must have a permit for emissions or for supplying fuels, prepare a monitoring plan, monitor and report emissions annually, and surrender a sufficient number of allowances within the prescribed deadline. Otherwise, they face fines and other sanctions.

However, under ETS2 it is necessary to take into account that the administrative focus is not on technical measurement of emissions at chimneys, but on working with tax and customs rules and accounting records. This involves accurate records of the quantity and type of fuels released for free circulation or supplied to the final consumer, and assigning the correct emission factors.

As of 1 January 2025, every regulated entity in ETS2 (typically a fuel supplier) must have a permit to supply fuels and an approved monitoring plan. This forms part of the permit and sets out the methodology for calculating emissions from supplied fuels.

Each year, regulated entities must submit an emissions report for the previous year by 30 April; from 2026, this data must be verified by an accredited verifier. From 2028, an obligation will arise to surrender the corresponding number of allowances by 31 May of the following year. Otherwise, a penalty obligation arises and potentially further measures, including the possibility of a ban on supplying fuels.

In Czech law, this logic is reflected primarily in Act No. 383/2012 Coll., on the conditions for trading in greenhouse gas emission allowances, as amended, and in the newly introduced instruments of fuel supply permits and monitoring plans. Supplying fuels without a fuel supply permit is explicitly classified as an administrative offence.

For this, the Czech Environmental Inspectorate may impose a fine of up to CZK 50 million, which for many companies is an amount with the potential to materially affect both financial performance and reputation.

From a corporate management perspective, it is therefore essential not only to meet the formal obligation to submit an application. It is also necessary to ensure that internal data collection processes, quality control and archiving are set up so that emissions can be reported correctly and the methodology can be defended even during an in-depth inspection or administrative proceedings.

The allowances market, the carbon price and the market stability mechanism

The price of emission allowances is the result of trading on the market, similar to commodity prices. It is influenced by the relationship between supply and demand, expected economic developments, weather, the availability of alternative energy sources, and regulatory interventions.

In the past, it became apparent that when there were too many allowances in circulation, the carbon price was low and the system did not provide sufficient investment signals; conversely, sharp price increases in recent years raised concerns about impacts on households and industry.

In response, the EU introduced the Market Stability Reserve (MSR), which automatically withdraws or, conversely, releases allowances to/from the market when the volume of allowances in circulation reaches certain levels, thereby dampening extreme fluctuations.

In ETS2, the stability mechanism was designed from the outset to prevent extreme price increases in the first two years of operation (2028–2029). Such increases would have an immediate impact on the prices of motor fuels, gas and coal for households and small businesses.

If the ETS2 allowance price in the first two years exceeds the equivalent of EUR 45 in 2020 prices (i.e., a slightly higher value in nominal terms), an additional volume of allowances is to be released from the market reserve to stabilise the price.

A similar mechanism will also apply in the event of excessively rapid price growth. The Czech Republic, together with seventeen other Member States, actively advocated strengthening this mechanism and improving the predictability of the ETS2 allowance price. This included a requirement for regular publication of information on the pace of deployment of zero-emission technologies and the option to release additional allowances to the market on an extraordinary basis in the event of tight conditions.

For corporate strategy, it is important that price regulation in ETS2 does not mean a price cap in the sense of a fixed maximum carbon price. Rather, it is a tool to limit extremes in the first years of operation and buy time for the adaptation of buildings and transport.

The long-term trend may—and, in view of climate targets, likely will—move towards a higher carbon price once stable market conditions are in place and investments in low-emission mobility and building renovations begin to materialise.

This leads to a simple conclusion: those who prepare in time can use a period of relatively lower prices to finance savings and changes. Those who wait may, in a few years, be confronted with a combination of higher allowance prices and stricter technical standards without sufficient time to respond.

Direct and indirect impacts on Czech companies

Energy-intensive industry and major emitters

Companies in the energy sector, district heating, and the chemical, metallurgical, cement or glass industries have already long been part of the EU ETS system. For them, the price of an emission allowance is one of the key variables when planning costs and investments.

These businesses must report their emissions every year, purchase a sufficient number of allowances, and increasingly face pressure from owners, banks and customers to reduce the carbon footprint of their products. A high allowance price is reflected in the price of electricity, heat and materials, which subsequently affects the rest of the economy, including small and medium-sized enterprises.

For large emitters, the extension of regulation through ETS2 is more an increase in existing pressure than a qualitatively new issue. They will face higher costs for transporting inputs and products, for heating or cooling buildings, and for operating vehicle fleets that are not directly covered by ETS1.

At the same time, they may also be affected by the CBAM carbon border adjustment mechanism if they import emission-intensive raw materials or semi-finished products from countries outside the EU. From 2026, their importers will have to purchase CBAM certificates in an amount corresponding to the emissions embedded in the product, unless the value of the imported consignment does not exceed EUR 150, which is covered by the de minimis exemption.

From a legal and contractual perspective, it will therefore be crucial how costs associated with ETS1, ETS2 and CBAM are allocated among the individual links in the supply chain in supply agreements.

For many industrial companies, the ability to align climate requirements with financing and permitting processes will also be decisive. When preparing larger investment projects subject to environmental impact assessment (EIA), authorities now routinely require not only quantification of the project’s CO₂eq emissions.

They also require an assessment of its climate resilience and compliance with national and European climate targets. Projects that are too emission-intensive and not adapted may encounter a negative EIA opinion or difficulties in securing financing, in particular in view of the European taxonomy for sustainable investments and the obligations of large companies to report climate risks under the CSRD Directive.

For large emitters, emissions regulation is therefore not merely a cost item, but a complex legal and financial issue that affects the entire investment portfolio.

Small and medium-sized enterprises, building operators and service providers

For small and medium-sized enterprises, the impact of emissions regulation will be felt primarily indirectly through energy and heat prices, fuel prices, and the costs of operating buildings. Impact analyses of ETS2 for the Czech Republic suggest that, taking into account an ETS2 allowance price at a level corresponding to the market stability mechanism.

The introduction of the system could affect consumer prices through increases in the price of gas, fuels and coal by several tenths of a percentage point; the real impact depends on market dynamics and the implementation of compensatory measures.

Other estimates speak of an increase in the monthly costs of an average household in the order of hundreds of Czech crowns. For companies, the impact depends on specific energy consumption and the ability to pass increased costs on into prices.

For businesses in the services sector, retail, logistics or light industry, it will therefore be key how they have addressed long-term contracts for energy and fuel supplies, lease agreements and service contracts in which both ETS1 and ETS2 will be reflected.

If contracts do not contain any mechanisms for a fair pass-through of changes in regulation and allowance prices, one party may be forced to bear a disproportionate share of the increased costs. This will lead either to losses or to contentious negotiations on contract amendments. Underestimating this contractual layer is among the most common mistakes—especially among smaller companies that adopt template contracts from energy suppliers or landlords and do not review them in detail.

A specific group are operators of larger buildings, such as office complexes, shopping centres, logistics parks or production halls. For them, ETS2 will be an important impetus to address energy intensity and heat sources.

Emissions regulation does not concern only the fuel costs themselves, but also related European standards for the energy performance of buildings. These are moving towards a zero-emission standard for new buildings within the next few years and towards a gradual tightening of requirements for the existing building stock (currently Directive (EU) 2024/1063 on the energy performance of buildings). For developers and building owners, it will therefore be decisive not only how ETS2 is reflected in operating costs, but also how new and refurbished buildings are classified in terms of energy certificates and whether they will be attractive to tenants and investors.

Importers of goods and CBAM: a carbon price at the EU’s borders

Alongside the ETS1 and ETS2 systems, the EU is also gradually introducing the Carbon Border Adjustment Mechanism (CBAM), i.e., a carbon border levy on selected emission-intensive products imported from countries outside the EU (Regulation (EU) 2023/956). A transitional period has been in place since 2023.

During this period, importers had to report the emissions embedded in imported goods, but did not yet pay for them; from January 2026, CBAM enters full operation and importers will have to purchase CBAM certificates for these emissions.

The first purchase of CBAM certificates will take place in February 2027, with the annual declaration for imports in 2026 having to be filed and settled no later than 30 September 2027.

Initially, the CBAM system applies to selected commodities such as iron, steel, cement, aluminium, fertilisers and electricity, with an expansion to additional downstream products with a high share of steel and aluminium planned from 2028.

For smaller importers, there is a de minimis exemption for consignments with an intrinsic value not exceeding EUR 150, to which CBAM obligations do not apply. In other cases, if the importer does not have the status of an authorised CBAM declarant and does not secure emissions data, this may lead to suspension of imports and to sanctions.

From a business perspective, CBAM complements the EU ETS to prevent carbon leakage. If European companies pay for emissions through allowances, imports of competing goods from jurisdictions without a comparable carbon price should not be advantaged.

For Czech companies operating in supply chains, this means they will need to gain a better overview of the emissions intensity of their foreign partners. They must also contractually set who will bear the costs associated with CBAM and how emissions data will be obtained and verified.

Lawyers from ARROWS, a Prague-based law firm, can assist not only with registration, setting up internal data collection processes and preparing declarations. They can also help with reviewing international sales contracts and framework agreements to prevent disputes and supply blockages due to non-compliance with CBAM obligations.

Impacts on construction and development projects

Construction is a typical example of a sector where emissions regulation affects both the production phase and the operation of buildings. Manufacturers of construction materials such as cement, steel or glass already fall under ETS1 and include the cost of allowances in the prices of their products.

ETS2 will therefore not fundamentally change the price of the materials themselves. However, the extension of ETS2 will be reflected mainly in higher prices of fuels and other energy sources, which will increase the costs of transporting construction materials and operating construction machinery. And thus also the price of construction works, although expert estimates speak of an increase in construction costs in the low single-digit percentages.

Even more significant, however, is the impact on the operating costs of buildings. ETS2 focuses on fossil fuels used for heating buildings, which means that the costs of heating with gas or coal will gradually be more burdened by the carbon price.

The importance of the energy efficiency of the building envelope and the choice of heat source will also increase. For owners and developers, this means in practice that the value of real estate will increasingly depend on its energy class, its ability to meet future minimum energy performance standards, and its attractiveness to tenants who themselves face climate and ESG requirements.

The new European Directive on the energy performance of buildings (Directive (EU) 2024/1063 on the energy performance of buildings) aims to ensure that all new buildings in the EU will, in the near future, be zero-emission or have nearly zero energy consumption. For public buildings, the deadline is even stricter.

The Directive sets minimum energy performance standards for the existing building stock. Combined with ETS2 and other instruments, this creates pressure for systematic renovation, insulation, replacement of heat sources and the installation of renewable sources.

For example, solar panels where this is technically and economically appropriate. If a developer or owner ignores these trends, they risk not only higher operating costs for the building. They also face poorer project bankability, lower market value, and potential issues in permitting procedures—especially within EIA (Environmental Impact Assessment), where the climate impacts of projects are being assessed increasingly strictly.

Impacts on companies’ cost structure

When planning for the impacts of emissions regulation, entrepreneurs and managers often ask how large a price increase they can expect and whether it is possible to “survive” ETS2 without fundamental changes to operations. Estimates by the central bank, consulting firms and environmental authorities differ.

However, they mostly agree that in the medium term ETS2 may cause energy and fuel prices to rise by single digits to the low tens of percent. This depends on the allowance price, the speed of the transition to zero-emission technologies, and the market’s ability to adapt.

The difference in real costs between a company that prepares for ETS2 and invests in savings and a company that leaves everything to chance can, however, amount to tens of percent.

Another important question is whether ETS2 is more of a risk or an opportunity for companies. In the short term, it is undoubtedly a regulatory risk that increases the complexity of the business environment and requires investment in compliance as well as technical adjustments.

In the longer term, however, ETS2 favours companies that can quickly reduce energy intensity, switch to renewable sources or low-emission technologies, and offer customers products and services with a lower carbon footprint. These companies may then gain better access to financing, public-sector contracts and cooperation with large corporations that are under pressure from ESG standards.

A third common question concerns whether small and medium-sized companies will be compensated directly in any way. The EU Social Climate Fund is primarily intended to protect vulnerable households and micro-enterprises that may face energy and transport poverty when ETS2 is introduced.

In the Czech Republic, it is expected that resources from this fund—estimated at tens of billions of Czech crowns—will be used to support energy-efficient housing, more efficient public transport and advisory services for citizens.

Some programmes may also indirectly help small businesses, for example through investment subsidies for building renovations. For larger companies, it will be key to use other national and European instruments, such as the Modernisation Fund or programmes supporting energy savings and renewable sources.

How to avoid a sudden spike in energy and input costs

Strategic energy management, audits and technical measures

The first pillar of defence against sudden price increases is systematic energy management, combining consumption monitoring, savings planning and investment in technical measures. Many companies today have at least a basic overview of how much electricity, gas or heat they consume.

However, only a smaller portion of them work with data of such quality and frequency that it is possible to effectively model the impacts of rising emissions allowance prices and to plan targeted technical interventions.

Yet high-quality data is the basis both for economic decision-making and for meeting legislative requirements—for example, in mandatory energy audits or when preparing applications for subsidies for energy-saving measures.

In the public sector, from 2026 the rules for energy audits of municipalities and cities are being tightened under Act No. 406/2000 Coll., on energy management, as amended.

New categories are being introduced based on consumption intensity, and the methodology for calculating mandatory consumption is changing, including a shift to an average over the last three years instead of monitoring two consecutive years.

Although this change formally applies to municipalities, it indicates the trend in which regulation of energy management for private entities is likely to develop as well. The emphasis is on a more precise methodology, inclusion of all relevant components of consumption, and regular data updates.

Companies that voluntarily implement comprehensive energy management can gain a head start over any future obligations and, at the same time, better manage their costs in an environment of rising carbon prices.

Technical measures do not concern only major investments such as a complete overhaul of heating systems or installing photovoltaics on a factory roof. It is often possible to reduce consumption quickly and at relatively low cost through optimisation of controls, lighting upgrades, insulation of selected parts of buildings, or changes to operating regimes of technologies.

From the perspective of emissions allowances, it is crucial to focus on those parts of operations where fossil fuels are used for heating, technological processes or transport, because that is where ETS2 will have the greatest impact.

ARROWS advokátní kancelář attorneys in Prague can work here with energy consultants to set up contractual and organisational frameworks for energy projects, including EPC-type contracts, heat supply agreements, the position of operators, and the allocation of risks among the investor, technology suppliers and operators.

Energy and fuel supply contracts: how to pass on emissions costs fairly

The second pillar of preventing sudden price increases is a well-thought-out setup of contracts for the supply of energy, heat and fuels, in which ETS1 and ETS2 are reflected so that there is no one-sided escalation of costs without the possibility to respond. Czech law generally allows energy suppliers to adjust the price unilaterally under certain conditions.

These conditions must be clearly defined in the contract or terms and conditions, and any increase must be notified in due time to the consumer or a self-employed natural person; otherwise, the price change will not produce legal effects.

In addition, for consumers the terms and conditions must clearly specify an objective, serious and specific reason for a unilateral price increase, and the increase must not be contrary to good morals.

In B2B relationships, the arrangement tends to be more flexible, but precisely for that reason it is essential not to underestimate the negotiation and review of contractual provisions on price and its recalculation. If the contract allows a unilateral price change based on vague wording without a clear link to objective parameters.

For example, to regulation or market indices, the customer exposes itself to the risk of an unexpected sudden price increase that may not correspond to the real impact of ETS or other supplier costs.

Conversely, contractual wording that clearly defines how changes in the emissions allowance price, taxes or other regulated components will be reflected in the price creates a predictable environment for both parties and reduces the risk of disputes.

In practice, various pricing clause models can be used—for example, a combination of a fixed margin with a variable component linked to a specific exchange index for the price of electricity, gas, or allowances. Alternatively, a pre-defined band may be set within which the price is indexed automatically, while outside this band it may be opened for negotiation.

Long-term contracts deserve particular attention—for example, for heat supplies or leases of premises—where being locked into an unsuitable pricing mechanism in combination with ETS2 may be economically ruinous for a company.

Lawyers at ARROWS advokátní kancelář routinely help clients design, negotiate, and review these mechanisms so that they comply with the law, are commercially balanced, and are sufficiently flexible in a changing regulatory environment.

Another aspect is the transparency of margins and the price structure, especially in segments such as fuels, where the state has already used monitoring of petrol station margins in the past to verify whether unjustified price increases were occurring during crisis periods.

It is realistic to expect that similar supervisory and communication measures may also appear in connection with ETS2, especially if fuel prices were to rise faster than corresponds to developments in the allowance price and other costs. Companies that have a well-documented price structure, including the impact of emission allowances, will be in a significantly better position in any communication with regulators and customers.

Risk table: contracts, compliance, and investments

For clarity, some of the main practical risks can be summarised in the following table together with examples of how ARROWS advokátní kancelář assists in these situations.

Potential issues	How ARROWS helps (office@arws.cz)
Unbalanced pricing clauses in long-term contracts: unilateral and insufficiently transparent increases in energy and fuel prices without a clear link to ETS	Review and negotiation of contractual arrangements: we set objective pricing formulas linked to regulation and market indices to prevent disproportionate unilateral increases and minimise the risk of disputes.
Failure to comply with obligations under ETS2 or CBAM: fines, suspension of imports, loss of a licence to supply fuels	Compliance and representation before authorities: we assess whether you are an obligated entity, set up internal monitoring and reporting processes, prepare documentation, and represent you in inspections or administrative proceedings.
Stopping or delaying an investment project due to climate requirements in the EIA process: negative opinion, inability to secure financing	Legal support for investments and EIA: we ensure that the EIA documentation includes the required climate analyses, propose mitigation and adaptation measures, and align the project with the EU Taxonomy and banks’ requirements.
Failure to use subsidies and funds financed from emission allowances: loss of the opportunity to draw support for savings and modernisation	Strategic advice on subsidies and financing: in cooperation with advisors, we identify suitable programmes (e.g., the Modernisation Fund, SKF), prepare the legal framework for projects, and the underlying contracts.
Reputational and commercial damage due to unclear communication of emission-related costs to customers and partners	Setting ESG and contractual standards: we help you incorporate emission-related costs into contracts, reporting, and communications in a way that is transparent and supports long-term relationships with partners and investors.

If you recognise yourself in any of the scenarios above, now is a good time to review your key contracts, investment plans, and compliance processes with the lawyers at ARROWS advokátní kancelář and to put in place a safer framework for cooperation in good time. If you are interested, you can consult the situation via office@arws.cz.

CBAM, supply chains, and contractual allocation of emission-related costs

For companies that import or use emission-intensive materials from third countries, it is necessary to pay particular attention to CBAM and related contractual issues. From 2026, CBAM will cease to be merely a reporting tool and will become a fully-fledged financial mechanism.

Under this mechanism, importers will pay for the emissions embedded in imported goods through the purchase of CBAM certificates. This will directly affect the prices of imported goods and the competitiveness of suppliers from different countries, depending on whether comparable carbon regulation exists in their home jurisdictions.

From a practical perspective, it is essential to identify in good time whether CBAM applies to the company and, if so, to what extent. It is necessary to take into account not only the company’s own direct imports of the listed commodities, but also the group structure, outsourcing imports to business partners, or the use of intermediaries.

For smaller importers, there is a de minimis exemption for consignments with an intrinsic value not exceeding EUR 150; in such cases, CBAM obligations do not apply. For other imports, if the company does not have the status of an authorised declarant and does not secure emissions data, this may lead to suspension of imports and sanctions.

From the perspective of contractual relationships, it is crucial that purchase agreements, framework agreements, and logistics contracts clearly specify who is responsible for fulfilling CBAM obligations and who bears the associated costs and risks.

Without such arrangements, there is a risk that the importer will have to bear CBAM costs without being able to realistically pass them on to the foreign manufacturer, or conversely that the parties will end up in a dispute as to whether the agreed price takes CBAM costs into account.

Lawyers at ARROWS advokátní kancelář can assist both with analysing existing contracts from the perspective of CBAM risks and with drafting new clauses that clearly allocate responsibility for emissions data, the purchase of CBAM certificates, and any sanctions if a party fails to meet its obligations.

Use of the Social Climate Fund and other sources of financing

The third pillar of a strategy for addressing emissions regulation is the active use of subsidy and financial instruments funded from revenues from emission allowances, which are intended to help companies and households manage the transition to a low-emission economy. At the European level, the Social Climate Fund (SCF) was established alongside ETS2.

Its aim is to support in particular vulnerable households and small businesses threatened by rising energy and transport costs; it is expected that, with national co-financing, it will mobilise at least EUR 86.7 billion in the period 2026–2032. The Czech Republic may obtain, when converted, up to tens of billions of Czech crowns from this fund, which—according to the plans of the Ministry of the Environment—are to be used to support energy-efficient housing, efficient public transport, and advisory services.

In addition to the SCF, national funds financed from ETS1 revenues also play a key role for companies, in particular the Modernisation Fund and programmes of the State Environmental Fund of the Czech Republic, which support investments in renewable sources, modernisation of district heating, energy savings in industry, and buildings.

An amendment to the Emissions Trading Act also shifts, from 2026, most allowance revenues to the State Environmental Fund of the Czech Republic and provides that these resources must be fully used for climate and decarbonisation measures.

Part of the funds is also to be allocated to the Ministry of Industry and Trade for the development of renewable energy projects and to the Ministry of the Environment for administration and the fulfilment of international commitments. This means that the volume of available resources for climate investments will be substantial in the coming years, but competition among projects will also increase.

For businesses, it is crucial to link technical and legal preparation at the project level – it is not enough to have an energy concept; you also need a well-prepared ownership and contractual framework. This includes resolving rights to land and buildings, setting up relationships with subcontractors and off-takers, and a well-thought-out allocation of risks.

Experience shows that projects with high-quality legal documentation and aligned with European climate targets have a higher chance of success both in subsidy programmes and in negotiations with banks.

That is why the attorneys at ARROWS advokátní kancelář often work with clients already at the feasibility study stage, when it is still possible to adjust the project so that it better meets both technical and regulatory requirements and delivers a better economic return.

Specific obligations and risks for selected entities

Fuel suppliers as regulated entities under ETS2

The greatest number of direct obligations under ETS2 will fall on fuel suppliers, who become regulated entities responsible for monitoring, reporting and verification of emissions associated with fuels placed on the market. From 2025, these suppliers must supply fuels only with a permit from the Ministry of the Environment and must have a monitoring plan in place.

This plan sets out procedures for determining emissions from fuels supplied to customers. A broad range of fuels is monitored – liquid fuels subject to excise duty, solid fuels subject to the solid fuels tax, and gaseous fuels subject to the natural gas tax and certain other gases. This applies where they are used for combustion in the buildings sector, road transport and other activities not previously covered.

The Act also provides for exemptions, for example for fuels consumed by the armed forces, agriculture, forestry, rail and maritime transport, or for biofuels meeting sustainability criteria. At the same time, it clearly states that supplying fuels without a fuel supply permit is an administrative offence punishable by a fine of up to CZK 50 million.

This means that companies that have so far supplied fuels only marginally or as part of another main activity must carefully assess whether the obligation applies to them. This is not only about large refineries and distributors, but also about certain wholesale or logistics entities. The first years of ETS2 operation will be a stress test for the monitoring plans and internal processes put in place; errors in records and reporting may lead to disputes with authorities, the need to make up emissions, and reputational damage.

The attorneys at ARROWS advokátní kancelář can assist fuel suppliers both with the process of obtaining a fuel supply permit and with setting up contractual relationships with customers. This is to ensure it is clear who is responsible for data collection, how emissions are allocated across different segments of fuel use, and how emissions costs will be reflected in the price.

Given that ETS2 is built primarily on working with tax and customs data, coordination with tax advisers is also important, as is setting up internal accounting and IT systems so that emissions data can be obtained efficiently and archived in compliance with legal requirements.

Development projects, the energy performance of buildings and EIA

For developers, property owners and construction companies, emissions regulation has specific impacts that go beyond the price of energy and materials alone. The new Energy Performance of Buildings Directive (Directive (EU) 2024/1063 on the energy performance of buildings) is aimed at decarbonising the building stock.

The Directive provides that all new buildings are to be zero-emission within a certain timeframe, public buildings even earlier, and that minimum energy performance standards will apply to existing buildings.

This means that projects that today barely meet minimum requirements may, within a few years, find themselves on the edge of compliance—especially if the building is used as collateral for loans or forms part of the portfolio of a larger investor under pressure from ESG rules.

In addition, in practice climate assessment within EIA is becoming stricter, where for several years there has been a statutory obligation to assess not only environmental impacts in general, but also the project’s emissions balance and its resilience to climate change.

Where a formal description often used to be sufficient, today authorities—under the influence of case law and the European climate framework—require detailed emissions calculations, future climate scenarios, and specific mitigation and adaptation measures.

If a project shows high emissions without adequate compensatory measures, or if it is not sufficiently resilient to future extreme weather, this may be grounds for a negative EIA opinion or for conditioning approval on extensive changes to the project.

From a legal perspective, EIA documentation for larger construction and energy projects must include a section dedicated to quantifying greenhouse gas emissions during both the construction and operational phases, a comparison with relevant reference values, and a description of measures to reduce energy demand.

At the same time, the project must demonstrate its resilience to future climate risks, such as higher temperatures, changes in precipitation patterns, drought or floods, and propose adequate adaptation measures, including technical and ecosystem-based solutions. This also affects other legal areas, for example contracts with construction suppliers, where the project’s emissions and climate parameters need to be reflected, or financing, where banks assess the project’s alignment with the sustainable investment taxonomy.

The attorneys at ARROWS advokátní kancelář become involved in these cases already at the project preparation and EIA stage, so that an investor does not invest in an unrealistic plan that would later run into regulatory barriers or fail to secure financing. They help set up cooperation between technical experts, energy consultants and designers so that the legal documentation accurately reflects the technical parameters.

So that the project can be defended both before the authorities and before financing institutions. For cross-border projects, they then use the ARROWS International network to align the requirements of different national legal systems and European regulations.

Municipalities, cities and the public sector

The public sector has a dual role in relation to emissions regulation – first, as a regulator and administrator of subsidy programmes, and second, as a major energy consumer itself through buildings, infrastructure and services. From 2026, the rules for mandatory energy audits for municipalities and cities in the Czech Republic will be tightened under Act No. 406/2000 Coll., on Energy Management, as amended.

Three categories are being introduced based on consumption intensity, the methodology for calculating average consumption is changing, and what is included in final energy consumption within energy management is being clarified. At the same time, audit intervals are being shortened for medium-sized and larger cities, and for the largest entities an obligation is being introduced to implement an energy management system under ISO 50001, which until now has been more voluntary.

Municipalities that fail to meet the obligation face fines in the hundreds of thousands of Czech crowns and reputational impacts, especially if audit deficiencies are linked to inefficient energy management.

At the same time, however, audits and the introduction of systematic energy management enable municipalities to better plan the use of subsidy funds, for example from the Modernisation Fund or the Social Climate Fund. And to identify projects with the best return, such as regulation of school boiler rooms, lighting modernisation, or renovation of apartment buildings owned by the municipality.

ARROWS advokátní kancelář can assist municipalities in this context not only with meeting their statutory obligations, but also with the legal structuring of public-private partnership (PPP) projects, public procurement procedures, and concluding contracts with energy service providers.

Politics, uncertainties and scenarios for the development of the price of emission allowances

The EU climate compromise to 2040 and the postponement of ETS2

At EU level, an intense political dispute has been ongoing in recent years over the shape of the climate trajectory after 2030, culminating in a compromise target to reduce emissions by approximately 85 percent by 2040 compared to 1990. This is slightly less than originally proposed by the European Commission.

Part of the compromise is also the option for up to five percentage points of this reduction to be achieved from 2036 through international carbon credits from projects in partner countries whose climate targets are compatible with the Paris Agreement. In exceptional cases, such as natural disasters, additional flexibility is also permitted, which may reduce the effective domestic effort to roughly 80 percent, albeit at the cost of purchasing credits.

As part of the same political agreement, it was decided to postpone the launch of ETS2 by one year, from 2027 to 2028. At the same time, stabilisation mechanisms are to be strengthened to minimise the risk of a sharp increase in the price of allowances in the first years.

The postponement is intended to give governments time to prepare compensation mechanisms—especially the Social Climate Fund—and to set accompanying policies, such as support for building renovations and zero-emission mobility. This is to ensure that ETS2 is not perceived as a purely fiscal instrument, but as part of a broader package of measures. From a business perspective, this means an additional year of preparation, which would be a mistake to waste—especially when it comes to contractual and investment decisions.

Czech political debates and legal reality

In the Czech Republic, ETS2 is a politically very sensitive topic. Part of the political spectrum declares that it will not “allow” the new allowance system for buildings and transport into Czech legislation, even at the risk of infringement proceedings for breach of EU law and potential financial penalties imposed by the Court of Justice of the European Union.

The Czech government, by contrast, together with another seventeen states, is seeking to adjust ETS2 so that it is more predictable and less risky for citizens and businesses. In particular as regards stabilising the allowance price through the MSR mechanism and other control elements. The European Commission has already responded to these requests with a proposal of measures intended to keep the ETS2 allowance price around EUR 45 and prevent extreme fluctuations; these measures are now going through the approval process.

For businesses, it is important to understand that political declarations about “non-implementation” of ETS2 do not replace legal reality. The ETS2 Directive is part of binding EU law and is to be transposed into national legal systems.

If the Czech Republic were to delay or refuse implementation, the European Commission may initiate infringement proceedings, which may result in a judgment of the Court of Justice and financial penalties that would ultimately be paid from the state budget. In such a scenario, the business environment would fall into uncertainty, where certain obligations would arise directly from European law while national regulation would be missing or would conflict with the EU; this is a situation that increases legal risks and worsens the predictability of investments.

Experienced management should therefore plan conservatively, i.e., on the assumption that ETS2 will ultimately be launched, even if there are partial adjustments to parameters or timing. Relying on a political outcome that would lead to a complete blockage of ETS2 in the Czech Republic is risky from both a legal and business perspective.

Our attorneys in Prague at ARROWS advokátní kancelář can help businesses monitor legislative developments, assess their impacts on specific business models, and prepare contractual and corporate documentation so that it remains robust even in the face of changes in the interpretation of regulations.

Scenarios for the development of the price of emission allowances and impacts on planning

The development of the price of emission allowances is a key variable for financial planning. In recent years, the price of an EUA (ETS1) allowance has ranged from tens to low hundreds of euros per tonne, with significant volatility depending on developments in the energy market and geopolitics.

Forecasts for the next few years are subject to considerable uncertainty; however, in connection with stricter climate targets and the gradual reduction of the emissions cap, upward pressure on prices can be expected to increase, albeit with possible corrections.

For ETS2, a stabilisation mechanism will play a role in the first years, intended to keep the price below EUR 45 (in 2020 prices), but in the long term it can be expected that the price will rise as emissions in the buildings and transport sector will have to fall significantly.

Practical analyses recommend that businesses model scenarios of energy and fuel price increases by a certain percentage—for example, 5 to 10 percent for energy and 8 to 12 percent for fuels—and monitor how these scenarios affect annual costs, margins and cash flow.

This makes it possible to identify where business processes are most sensitive to rising emission allowance prices and to prepare targeted countermeasures. For example, efficiency investments, changing suppliers, or revising pricing policy towards customers. In the Czech environment, it is also necessary to take into account that energy prices for households and certain segments are temporarily subsidised or regulated. This may dampen the impacts of ETS in the short term, but increases uncertainty about future developments once these interventions subside.

Our attorneys in Prague at ARROWS advokátní kancelář in practice link economic scenarios with legal tools—for example, they propose how to incorporate energy clauses into commercial contracts.

These will allow the increase in costs associated with emission allowances to be fairly reflected in prices, without breaching statutory rules on unilateral price increases or placing a disproportionate burden on one party.

If needed, they cooperate with economic analysts and tax advisers so that clients have a comprehensive picture of the impacts of ETS1, ETS2 and CBAM on their business and can adopt adequate measures in a timely manner.

The role of legal and strategic advisory

Why legal solutions for emissions regulation are not just a “compliance task”

At first glance, emission allowances may appear to be a topic that primarily falls within the areas of energy, technology and internal management. However, practice in recent years shows that the legal dimension of emissions regulation is just as essential for businesses as the technical dimension, for several reasons.

First, the relevant directives, regulations and national laws are complex, change frequently, and contain a number of exceptions and cross-references to other regulations, including tax and customs rules, so their interpretation is not straightforward.

Second, failure to comply with obligations under ETS2 or CBAM may lead to high fines, suspension of supplies or blocking of imports, and potentially also to litigation with authorities or business partners.

Third, a number of key decisions are implemented through contracts and transactions. For example, when passing through emissions costs in the supply chain, when structuring relationships within joint ventures focused on energy projects, when acquiring companies with a significant carbon footprint, or in financial transactions where the taxonomy of sustainable investments is taken into account.

A poorly structured contract may mean that the company will bear a larger share of emissions costs than corresponds to its position in the chain, or that it will be unable to pass emissions risks on to subsequent links, which will reduce its margins and competitiveness. In extreme cases, insufficient treatment of the climate aspects of a transaction may lead to the value of the target company or project being called into question.

ARROWS advokátní kancelář focuses in this area not only on “classic” legal services such as drafting and reviewing contracts, representation in proceedings, or preparing legal opinions, but also on strategic advisory services that connect the legal, tax, and commercial aspects of emissions regulation.

Thanks to professional liability insurance with a limit of up to CZK 400,000,000 and involvement in the ARROWS International network, the Prague-based law firm can safely cover even complex projects with an international dimension. For example, structuring supply chains from a CBAM perspective, coordinating compliance in several countries, or financing cross-border energy projects.

Risk table: disputes, investments, and the international element

The second layer of risks in the area of emissions regulation can be described by the following overview, which focuses on disputes, transactions, and cross-border situations.

Possible issues	How ARROWS helps (office@arws.cz)
Court dispute or administrative proceedings due to penalties for ETS2/CBAM : risk of a high fine, suspension of operations, reputational damage	Defence against penalties and representation : we will analyse the contested decision, prepare an appeal or action, represent you before administrative authorities and courts, and negotiate a possible amicable settlement.
Acquisition of a company with a high carbon footprint : risk of underestimating emissions liabilities, hidden ETS/CBAM costs	Legal and environmental due diligence : we will review the target company’s emissions profile, the status of its compliance, the contractual allocation of emissions costs, and the risk of penalties; based on the results, we will adjust the share purchase agreement and warranties.
Cross-border supply chain affected by CBAM : unclear cost allocation, risk of breaching regulation in several countries	International coordination and contractual set-up : we will use the ARROWS International network to harmonise contracts and compliance across different jurisdictions, and set clear allocation of CBAM obligations and emissions data.
Investment project facing taxonomy and banks’ ESG requirements : risk of being unfinanceable or subject to strict terms	Project structuring and ESG documentation : we will align the project’s legal structure with taxonomy requirements, prepare ESG clauses and communications with banks and investors so that the project meets their assessment criteria.
Long-term contracts without emissions clauses : risk of future disputes and uncompensated costs	Preventive contract review : we will identify critical provisions, propose adding emissions and energy clauses, and help negotiate them with counterparties to prevent disputes.

If you have transactions, projects, or disputes in your portfolio where emissions regulation plays a role, it makes sense to discuss them with our attorneys in Prague at ARROWS advokátní kancelář and set a joint strategy for the next steps. To arrange specific support, please use office@arws.cz.

Final summary

European regulation of emissions allowances will, in the coming years, transform from a tool that “mainly concerns power plants and heavy industry” into a comprehensive framework affecting the operations of almost every company. The expansion of the EU ETS to include the ETS2 system for buildings, road transport, and other sectors, and the launch of CBAM in full operation from 2026.

Further tightening of standards for the energy performance of buildings and climate assessment of projects means that the carbon price will increasingly be reflected in the prices of electricity, heat, fuels, construction materials, and imported goods.

At the same time, within the EU, climate targets for 2040 and 2050 are being advanced, which increases pressure to reduce emissions, but also creates room for financing modernisation projects from funds that are financed precisely from the proceeds of emissions allowances.

For entrepreneurs, management, and investors, this primarily means the need for an active approach. Relying on political promises that “ETS2 will not apply in the Czech Republic” is risky from both a legal and economic perspective.

The reality is that the ETS2 Directive is valid EU law, that fuel suppliers are already subject to monitoring obligations, and that European and Czech authorities are preparing compensation and stabilisation mechanisms—not the abolition of the system. Real protection against a sudden price increase is not denying regulation, but a combination of technical measures (energy management, savings, technology changes), well-thought-out contractual arrangements (price and emissions clauses, allocation of CBAM costs), and the use of available subsidy and financial instruments.

Our attorneys in Prague at ARROWS advokátní kancelář have long specialised in this area and assist clients not only with ETS2 and CBAM compliance, but also with setting up commercial relationships, preparing investments, defending against penalties, and resolving disputes. Thanks to professional liability insurance up to CZK 400,000,000 and international support within ARROWS International, they are able to safely lead even complex cross-border projects and transactions where emissions regulation plays a key role.

If you do not want to risk mistakes, damages, delays, or fines associated with emissions regulation, it is sensible to entrust the preparation and implementation of your steps to experts and to consult your specific situations, contracts, and projects with them in good time. For a non-binding initial consultation, you can contact office@arws.cz.