EU Emission Trading System

The European Union Emissions Trading System (EU ETS) was introduced to try to combat high GHG emission levels within the EU. Launched in 2005 it is now in its fourth phase, running from 2021 to 2030. A major revision approved in 2009 in order to strengthen the system means the third phase is significantly different from phases one and two and is based on rules which are far more harmonised than before. The main changes are:

  • A single, EU-wide cap on emissions applies in place of the previous system of national caps;
  • Auctioning, (not free allocation) is now the default method for allocating allowances. In 2013 more than 40% of allowances will be auctioned, and this share will rise progressively each year;
  • For those allowances still given away for free, harmonised allocation rules apply which are based on ambitious EU-wide benchmarks of emissions performance;
  • Some more sectors and gases are included.

Phase four from 2021-2030 was published in 2015

The EU ETS covers more than 11,000 power stations and industrial plants in 31 countries, as well as airlines. Under the scheme, carbon dioxide emissions from large industries are capped, but trading of excess carbon dioxide allowances between industries is permitted. Any industry or company that is unable to keep within the tonnage limit of their carbon dioxide allowances has two options available to them:

  1. They can buy the excess allowances of another company to achieve their targets;
  2. They can invest in clean energy technology development in other regions of the world, and retain the GHG reductions achieved towards their own targets. 

Phase 4 was revised in early 2018 to enable it to achieve the EU's 2030 emission reduction targets and as part of the EU's contribution to the Paris Agreement.

The revision focuses on:

  • Strengthening the EU ETS as an investment driver by increasing the pace of annual reductions in allowances to 2.2% as of 2021 and reinforcing the Market Stability Reserve (the mechanism established by the EU in 2015 to reduce the surplus of emission allowances in the carbon market and to improve the EU ETS's resilience to future shocks)
  • Continuing the free allocation of allowances as a safeguard for the international competitiveness of industrial sectors at risk of carbon leakage, while ensuring that the rules for determining free allocation are focused and reflect technological progress
  • Helping industry and the power sector to meet the innovation and investment challenges of the low-carbon transition via several low-carbon funding mechanisms


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