Markets working to support sustainable development

The EU Emissions Trading System (ETS)

The EU Emissions Trading System is an international trading system used as a tool for reducing industrial greenhouse gas emissions, helping  28 of the EU member states (+ Iceland, Liechtenstein and Norway) meet their Kyoto emission reductions commitment.

It works on a 'cap and trade' principle, whereby a limit is set on the amount greenhouse gases that can be emitted by the factories, power plants and other installations in the system. These caps are allocated by each National Action Plan, which are approved at the EU level to ensure that it is in line with the targets set by the Kyoto Protocol. And, over time, the cap is decreased so that overal emmissions falls, for example caps should be 21 per cent lower in 2020 than in 2005.

Companies operating under the system will receive or buy emission allowances which they can trade with one another as needed. They can also buy limited amounts of international credits from emission-saving projects from around the world. After each year a company must surrender enough allowances to cover all its emissions, otherwise they will face fines. If a company reduces its emissions, it can keep the spare allowances to cover its future needs or else sell them to another company that is short of allowances. The flexibility that trading brings ensures that emissions are cut where it costs least to do so. Meanwhile, the limit on the total number of allowances available ensures that they have a value.

By putting a financial value to each tonne of emissions saved, the EU ETS aims to secure climate change on the agenda of company boards and their financial departments across Europe. It also looks to install a high carbon price to promote investment in clean, low-carbon technologies.

Monitoring, reporting and verification

The companies under the EU ETS are required to have an approved monitoring plan, according to which they monitor and report their emissions during the year. In the case of industrial installations, the monitoring plan forms part of the approved permit that is also required.

They must also produce annual emmission reports, which are verified by an accredited auditor, as well as produce the total number of allowances they hold - this year long process is known as the 'compliance cycle.'

There are 3 phases of the EU ETS:

  • Phase 1: 2005 – 2007 (trial phase)
  • Phase 2: 2008 – 2012 (ETS proper)
  • Phase 3: 2013 – 2020

The main changes that will be implemented as part of Phase three are: 

  • A single, EU-wide cap on emissions to replace the previous system of national caps (and NAPs).
  • Auctioning, not free allocation, will increasingly become the process for allocating allowances.
  • 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 will be included.
Market coverage: 

It covers:

  • More than 11,000 power stations and industrial plants in over 31 countries, as well as airlines.
  • 45 per cent of the EU's greenhouse gas emissions. 
Background information: 

It was the first  cap-and-trade system of it's type in the world and remains the largest.  It has also come under intense scrutiny due to the fluctuations in the price of carbon in the last few years. A study (2013) by the carbon-trading thinktank, Sandbag, found that this was due to a huge oversupply of carbon pollution permits. Meanwhile, according to a Ecosytem Marketplace report, compliance has been at a low.  To address the problem, the European Countries have agreed on a 'blackloading' plan whereby the sale of 900 million allowances is postboned - a move that aims to prop up the market until a more permanent solution is reached.

Notable information: 

It is the World’s 1st emissions trading scheme. It has provided a model for other schemes and is seen as the first step towards a global scheme.

The EU states that linking the EU ETS to other regional or national cap-and-trade systems would allow for a larger market and potentially more efficient reductions.