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More about the EU Emission Trading Scheme

The EU Emission Trading Scheme (EU ETS) is a tool that European countries use to meet their commitments under the Kyoto Protocol.

The scheme limits the emissions of greenhouse gases from heavily polluting industries, including power generation, offshore extraction, cement production, iron and steel, paper and pulp and chemical processing.

The EU ETS is divided into Phases. Phase 1 ran from 2005 to 2007, Phase 2 runs from 2008 to 2012 and Phase 3 will run from 2013 to 2020.

Within the ETS, governments allocate or auction allowances (EU Emission Allowances, or EUAs) to companies in heavily polluting industries. One EUA represents the right to release one tonne of carbon dioxide into the atmosphere. The total number of EUAs allocated corresponds to the overall cap on emissions for the companies covered by the scheme.

The cap is determined by Europe's target for emissions reduction. The scheme will reduce emissions by 21% compared to 2005 by 2020. The cap continues to tighten, reducing by 1.74% each year.

At the end of each year, companies must retire (cancel) the number of EUAs that equals their emissions in tonnes during the year. The measurement of emissions is verified by an independent auditor.

Trading

EUAs can be traded across the whole scheme. A company in one country may buy credits from a company in another country.

Trading means that reductions are made in the most economically efficient place. A company that can reduce emissions for a low cost may do so beyond its obligation and sell surplus credits to a company that would have to spend more on reducing emissions.

For example, a company may decide to reduce its emissions by using a cleaner but more expensive type of fuel. Under the EU ETS this may save them money, as they will now need to buy fewer allowances to cover their emissions. If the fuel is so clean that it reduces the company's emissions below their allocation, they can sell the extra allowances to other companies that haven't been able to reduce their emissions enough.

A market price for EUAs emerges as a result of trading. Carbon Retirement buys and retires EUAs.

Criticisms

The EU ETS has received some criticism, particularly for an overallocation of credits in the first phase (which ran from 2005 to 2007). We have reviewed these criticisms here.

Further information

For more information, visit

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