The EU emissions trading system EU ETS is a cornerstone of the EU's policy to combat climate change and its key tool for reducing greenhouse gas emissions cost-effectively.
It is the world's first major carbon market and remains the biggest one. For a detailed overview, see: A cap is set on the total amount of certain greenhouse gases that can be emitted by installations covered by the system. The cap is reduced over time so that total emissions fall. Within the cap, companies 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 around the world. The limit on the total number of allowances available ensures that they have a value. After each year a company must surrender enough allowances to cover all its emissions, otherwise heavy fines are imposed. 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. Trading brings flexibility that ensures emissions are cut where it costs least to do so.
A robust carbon price also promotes investment in clean, low-carbon technologies. The system covers the following sectors and gases with the focus on emissions that can be measured, reported and verified with a high level of accuracy:. Reports on EU's progress in cutting emissions. Set up in , the EU ETS is the world's first and biggest international emissions trading system, accounting for over three-quarters of international carbon trading.
Allowing participating companies to buy or sell emission allowances means that emission cuts can be achieved at least cost. It is the first international trading system for CO 2 emissions in the world and has been in operation since The EU ETS is a 'cap and trade' system, that is to say it caps the overall level of emissions allowed but, within that limit, allows participants in the system to buy and sell allowances as they require.
These allowances are the common trading 'currency' at the heart of the system. One allowance gives the holder the right to emit one tonne of CO 2 or the equivalent amount of another greenhouse gas.
The cap on the total number of allowances creates scarcity in the market. In the first and second trading period under the scheme, Member States had to draw up national allocation plans NAPs which determine their total level of ETS emissions and how many emission allowances each installation in their country receives.
At the end of each year installations must surrender allowances equivalent to their emissions. Companies that keep their emissions below the level of their allowances can sell their excess allowances. Those facing difficulty in keeping their emissions in line with their allowances have a choice between taking measures to reduce their own emissions — such as investing in more efficient technology or using less carbon-intensive energy sources — or buying the extra allowances they need on the market, or a combination of the two.
Such choices are likely to be determined by relative costs. In this way, emissions are reduced wherever it is most cost-effective to do so.
The first trading period ran for three years to the end of and was a 'learning by doing' phase to prepare for the crucial second trading period. The second trading period began on 1 January and runs for five years until the end of The importance of the second trading period stems from the fact that it coincides with the first commitment period of the Kyoto Protocol, during which the EU and other industrialised countries must meet their targets to limit or reduce greenhouse gas emissions.
The first trading period successfully established the free trading of emission allowances across the EU, put in place the necessary infrastructure and developed a dynamic carbon market. The environmental benefit of the first phase may be limited due to excessive allocation of allowances in some Member States and some sectors, due mainly to a reliance on emission projections before verified emissions data became available under the EU ETS.
The availability of verified emissions data has allowed the Commission to ensure that the cap on national allocations under the second phase is set at a level that results in real emission reductions. Besides underlining the need for verified data, experience so far has shown that greater harmonisation within the EU ETS is imperative to ensure that the EU achieves its emissions reductions objectives at least cost and with minimal competitive distortions.
The need for more harmonisation is clearest with respect to how the cap on overall emission allowances is set. The first two trading periods also show that widely differing national methods for allocating allowances to installations threaten fair competition in the internal market. Furthermore, greater harmonisation, clarification and refinement are needed with respect to the scope of the system, the access to credits from emission-reduction projects outside the EU, the conditions for linking the EU ETS to emissions trading systems elsewhere and the monitoring, verification and reporting requirements.
The agreed design changes will apply as of the third trading period, i. While preparatory work will be initiated immediately, the applicable rules will not change until January to ensure that regulatory stability is maintained.
More harmonisation has been agreed in many areas, including with respect to the cap-setting an EU-wide cap instead of the national caps in phases 1 and 2 and the rules for transitional free allocation. The fairness of the system has been substantially increased by the move towards EU-wide free allocation rules for industrial installations and by the introduction of a redistribution mechanism that entitles new Member States to auction more allowances. The climate and energy targets agreed by the Spring European Council have been maintained and the overall architecture of the Commission's proposal on the EU ETS remains intact.
That is to say that there will be one EU-wide cap on the number of emission allowances and this cap will decrease annually along a linear trend line, which will continue beyond the end of the third trading period The main difference as compared to the proposal is that auctioning of allowances will be phased in more slowly.
In their NAPs for the first and the second trading periods, Member States determined the total quantity of allowances to be issued — the cap — and how these would be allocated to the installations concerned. This approach has generated significant differences in allocation rules, creating an incentive for each Member State to favour its own industry, and has led to great complexity. As from the third trading period, there will be a single EU-wide cap and allowances will be allocated on the basis of harmonised rules.
National allocation plans will therefore not be needed any more. From , the total number of allowances will decrease annually in a linear manner. The starting point of this line is the average total quantity of allowances phase 2 cap to be issued by Member States for the period, adjusted to reflect the broadened scope of the system from as well as any small installations that Member States have chosen to exclude.
The linear factor by which the annual amount shall decrease is 1. The starting point for determining the linear factor of 1. The division that minimises overall reduction cost amounts to:. All absolute figures indicated correspond to the coverage at the start of the second trading period and therefore don't take account of aviation, which will be added in , and other sectors that will be added in phase 3.
The final figures for the annual emission caps in phase 3 will be determined and published by the Commission by 30 September The linear factor of 1. It may be revised by at the latest. No, flexibility for installations will not be reduced at all. In any year, the allowances to be auctioned and distributed have to be issued by the competent authorities by 28 February.
The last date for operators to surrender allowances is 30 April of the year following the year in which the emissions took place. So operators receive allowances for the current year before they have to surrender allowances to cover their emissions for the previous year. Allowances remain valid throughout the trading period and any surplus allowances can now be "banked" for use in subsequent trading periods.
In this respect nothing will change. The system will remain based on trading periods, but the third trading period will last eight years, from to , as opposed to five years for the second phase from to For the second trading period Member States generally decided to allocate equal total quantities of allowances for each year.
The linear decrease each year from will correspond better to expected emissions trends over the period. These figures are based on the scope of the ETS as applicable in phase 2 to , and the Commission's decisions on the national allocation plans for phase 2, amounting to million tonnes.
These figures will be adjusted for several reasons. Firstly, adjustment will be made to take into account the extensions of the scope in phase 2, provided that Member States substantiate and verify their emissions accruing from these extensions. Secondly, adjustment will be made with respect to further extensions of the scope of the ETS in the third trading period.
Thirdly, any opt-out of small installations will lead to a corresponding reduction of the cap. Fourthly, the figures do not take account of the inclusion of aviation, nor of emissions from Norway, Iceland and Liechtenstein.
Industrial installations will receive transitional free allocation. And in those Member States that are eligible for the optional derogation, power plants may, if the Member State so decides, also receive free allowances. It is estimated that at least half of the available allowances as of will be auctioned. While the great majority of allowances has been allocated free of charge to installations in the first and second trading periods, the Commission proposed that auctioning of allowances should become the basic principle for allocation.
This is because auctioning best ensures the efficiency, transparency and simplicity of the system and creates the greatest incentive for investments in a low-carbon economy. These rules will fully harmonise allocations and thus all firms across the EU with the same or similar activities will be subject to the same rules. The rules will ensure as far as possible that the allocation promotes carbon-efficient technologies.
The adopted rules provide that to the extent feasible, allocations are to be based on so-called benchmarks, e. Such rules reward operators that have taken early action to reduce greenhouse gases, better reflect the polluter pays principle and give stronger incentives to reduce emissions, as allocations would no longer depend on historical emissions.
All allocations are to be determined before the start of the third trading period and no ex-post adjustments will be allowed. Taking into account their ability to pass on the increased cost of emission allowances, full auctioning is the rule from onwards for electricity generators. However, Member States who fulfil certain conditions relating to their interconnectivity or their share of fossil fuels in electricity production and GDP per capita in relation to the EU average, have the option to temporarily deviate from this rule with respect to existing power plants.
If the option is applied, the Member State has to undertake to invest in improving and upgrading of the infrastructure, in clean technologies and in diversification of their energy mix and sources of supply for an amount to the extent possible equal to the market value of the free allocation. However, an exception will be made for installations in sectors that are found to be exposed to a significant risk of 'carbon leakage'. This risk could occur if the EU ETS increased production costs so much that companies decided to relocate production to areas outside the EU that are not subject to comparable emission constraints.
The Commission will determine the sectors concerned by 31 December The share of these industries' emissions is determined in relation to total ETS emissions in to CO 2 costs passed on in electricity prices could also expose certain installations to the risk of carbon leakage. In order to avoid such risk, Member States may grant a compensation with respect to such costs.
In the absence of an international agreement on climate change, the Commission has undertaken to modify the Community guidelines on state aid for environmental protection in this respect. Under an international agreement which ensures that competitors in other parts of the world bear a comparable cost, the risk of carbon leakage may well be negligible. Therefore, by 30 June , the Commission will carry out an in-depth assessment of the situation of energy-intensive industry and the risk of carbon leakage, in the light of the outcome of the international negotiations and also taking into account any binding sectoral agreements that may have been concluded.
The report will be accompanied by any proposals considered appropriate. These could potentially include maintaining or adjusting the proportion of allowances received free of charge to industrial installations that are particularly exposed to global competition or including importers of the products concerned in the ETS.
Member States will be responsible for ensuring that the allowances given to them are auctioned. Each Member State has to decide whether it wants to develop its own auctioning infrastructure and platform or whether it wants to cooperate with other Member States to develop regional or EU-wide solutions. The distribution of the auctioning rights to Member States is largely based on emissions in phase 1 of the EU ETS, but a part of the rights will be redistributed from richer Member States to poorer ones to take account of the lower GDP per head and higher prospects for growth and emissions among the latter.More...