Published:
Last updated:
May 24, 2024

European Emissions Trading System (EU ETS)

What is the EU ETS?

The EU ETS, or European Emissions Trading System is designed to reduce emissions in an economically efficient manner. The system operates on a "cap and trade" principle, where a cap, or limit, is set on the total amount of emissions that can be emitted by the covered sectors, and any emission allowances not used can be sold and/or traded.

How an emission trading system works
In the context of the compliance carbon market, carbon credits represent emission allowances.

Sectors Included:

The EU ETS covers a range of sectors, including but not limited to:

  • Energy and heat generation
  • Energy-intensive industries like steel, cement, and chemicals
  • Aviation within the European Economic Area (EEA) and departing flights to specific destinations
  • Maritime transport, with different rules for emissions based on voyage origins and destinations
  • Production of specific gases like nitrous oxide and fluorocarbons

How It Works:

Here's a simplified explanation of how the ETS operates:

A more detailed overview can by found in the ETS Directive documentation.

  1. Emission Allowances: The EU sets an overall limit on greenhouse gas emissions for the covered sectors. This limit is divided into individual allowances, each allowing the holder to emit a specific amount of greenhouse gases.
  2. Allocation: Initially, these allowances are allocated to companies based on various factors, including historical emissions and sector-specific benchmarks. Companies can buy or sell these allowances as needed.
  3. Compliance: At the end of each compliance period (usually a year), companies must surrender enough allowances to cover their actual emissions. If they emit more than their allocated allowances, they need to buy additional allowances. If they emit less, they can sell their surplus allowances.

EU ETS Regulations

  • The cap on emissions covered by the EU ETS is set to decrease by 62% by 2030, based on 2005 emission levels.
  • The EU ETS launched in 2005 and operates in different trading phases. The system is currently in its fourth phase, running from 2021-2030. The legislative framework behind this can be found in the ETS Directive.
  • In order to keep the system in-line with the broader EU climate goals, the EU ETS legislation gets revised periodically, with the most recent major revision occurring in 2021 to align with the European Green Deal.
  • In 2021, the European Commission presented the Fit for 55 package, which is designed to reform EU policy surrounding climate and energy, including the EU ETS. The ETS-related proposals are now a part of EU climate regulation after being adopted by the European Parliament and Member States in the Council of the EU in June 2023.

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