© iStock • • • • • policy the emissions inthemostcost-effective way. The The The The The quarters 28 by theEUETS. in othercountries. national orregionalsystems.Europeislooking tolinktheEUETSwithcompatibleschemes made needed. is reducedeachyear. Within thislimit,companiescanbuyandsellemissionallowances as in climate change. these The EUEmissionsTrading EU EU EU EU European system EU framework. greenhouse Member ETS ETS ETS ETS This countries. of remains is for international works covers ‘cap-and-trade’ the Commission its States System (EUETS) cornerstone The In next gases by approximately the total, putting proposal plus phase world’s which carbon around presented Iceland, approach a of (2021-2030), aims biggest are limit the trading. 45% 11,000 largely Liechtenstein to European on in Climate Action gives reduce emissions of overall July It total power responsible continues in companies 2015 EU Union’s line EU emissions stations ETS and trading greenhouse a with legislative emissions Norway, drive to for the the market, inspire and from warming to flexibility EU’s reduce as manufacturing gas covered proposal by the accounting 2030 well 43% emissions the development they its as climate planet compared installations emissions on aviation need the for are plants and and to over revision regulated activities to cut of of causing energy three- 2005. in which man- other their the of

© iStockphoto/ FeelPic Emissions trading systems are among the most cost-effective tools for cutting greenhouse gas emissions. In contrast to traditional ‘command and control’ regulation, trading harnesses market forces to find the cheapest ways to reduce emissions. The European Union launched the EU Emissions Trading System (EU ETS) in 2005 as the cornerstone of its strategy for cutting emissions of carbon dioxide (CO2) and other greenhouse gases at least cost. The EU ETS is the world’s first major carbon market and remains by far the biggest today. By putting a price on carbon and thereby giving a financial value to each tonne of emissions saved, the EU ETS has placed climate change on the agenda of company boards across Europe. Pricing carbon also promotes investment in clean, low-carbon technologies. By allowing companies to buy credits from emission-saving projects around the world, in particular in least developed countries, the EU ETS acts as a driver of investment in clean technologies and low-carbon solutions globally. This factsheet explains the EU ETS as it stood in September 2016.

in 2005. A separate cap applies to the aviation sector: for the whole 2013-2020 period, this is 5% below the average EU ETS: Key facts annual level of emissions in the years 2004-2006.

• Operates in the 28 EU countries plus Iceland, Liechtenstein and Emission allowances are the ‘currency’ of the EU ETS, and Norway the limit on the total number available gives them a value. • Limits greenhouse gas emissions from: Each allowance gives the holder the right to emit one tonne of CO , the main greenhouse gas, or the equivalent amount ◦◦ Approximately 11,000 energy intensive installations in 2 power generation and manufacturing industry sectors of two other powerful greenhouse gases, nitrous oxide (N2O) and perfluorocarbons (PFCs). ◦◦ Operators of flights to and from EU Member States, Iceland, Liechtenstein and Norway (for the time being, only Allowances can be used only once. Companies have flights within these countries are covered) to surrender allowances for every tonne of CO2 (or the • Covers around 45% of the EU’s greenhouse gas emissions equivalent amount of N2O or PFCs) covered by the EU ETS that they emitted in the previous year. Heavy fines are imposed if they do not hand in enough allowances to match their emissions. Companies may receive some allowances from governments for free. To cover the rest of their emissions, they need to do Cutting greenhouse gas emissions: EU targets* EU ETS: Development in phases 2020: –20% 2005-2007: 1st trading period constituted a process of ‘learning by doing.’ EU ETS was successfully established as 2030: –40% (at least) the world’s biggest carbon market. However, the number of allowances, based on estimated needs, turned out to be *compared to 1990 levels excessive; consequently the price of first-period allowances fell to zero in 2007.

2008-2012: 2nd trading period. Iceland, Norway and Liechtenstein joined (1.1.2008). The number of allowances was reduced by 6.5% for the period, but the economic downturn depresses emissions, and thus demand, by even How the EU ETS works more. This led to a surplus of unused allowances and credits which continues to weigh on the carbon price. Aviation was The EU ETS works on the ‘cap and trade’ principle. The brought into the system (1.1.2012). overall volume of greenhouse gases that can be emitted for a multi-year phase by the power plants, factories and other 2013-2020: 3rd trading period. Major reform took effect companies covered by the system is subject to a cap set at (1.1.2013). The biggest changes have been the introduction of an EU-wide cap on emissions (reduced by 1.74% EU level. Within this cap, companies receive or buy emission each year) and a progressive shift towards auctioning of allowances which they can trade, if they wish to do so. allowances in place of cost-free allocation. Croatia joined the ETS (1.1.2013). In the period 2013-2020, the cap on emissions from power stations and other fixed installations is reduced by 2021-2030: 4th trading period. Legislative proposal for 1.74% every year. This means that in 2020, greenhouse the revision of the EU ETS was presented by the European gas emissions from these sectors will be 21% lower than Commission in July 2015. economic many cover to potential the has trading emissions While What theEUETScovers • • of, following: the or amixture either, and The world. the around projects emission-saving approved Within Participation of accuracy. degree ahigh to on sources. technology to surrender and outcome its assess will Commission European the Assembly, for instance in applies Organization Aviation Civil International the in agreement international some international to The amount. equivalent byan emissions their cut the Governments options to address their emissions. emissions. their address to options Greenhouse gasesandsectorscovered Nitrous oxide(N Perfluorocarbons (PFCs) fromaluminiumproduction glyoxylic acidsandglyoxal Carbon dioxide(CO • • • the need. emissions system reduce need companies could draw buy additional allowances previous years. previous EU credits Civil aviation and bulkorganicchemicals cement, lime,glass,ceramics,pulp,paper, cardboard,acids steel Energy-intensive Power andheatgeneration sectors European limits, ETS until This Companies if to sectors on propose allowances works if their they purchase also creates or in any 2016 allows fiscal they emissions which only can (ICAO) the shifting operating judge Economic 2 emissions and covers surplus and O) fromproductionofnitric,adipic and can new exclude plants or EU only 2 can can them ) from: a industry or production greenhouse for other to also ETS they legislation permanent draw from be to also emissions to reported allowances above to take – Area in buy flights certain measured, measures have by understood choose less sell on sectors aviation the credits investing their global of (EEA). a allowances more on gases, between carbon-intensive emissions certain sectors incentive small from iron, the the including reserves they are by reported from After than action most aluminium, EU as the aviation. installations 2020, in size in have the covered, airports ETS certain EU the and place they - for more oil cost-effective of is are obligation ETS and for to saved the allowances mandatory 2016 companies credits, refineries, are Following included. that aviation. metals, types efficient address focuses located verified EU energy but going ICAO from from will ETS for of to in

allocated not Allowances progressively. place takes auctioning to atransition generation, power than other sectors In pay. should polluter the that principle the practice into puts and allowances allocated increase Auctioning Since Auctioning How allowances areallocated limited made Estonia, the buy to have businesses that means This allowances. emission world-wide. asset auction the as much as least at invest will they 2019. return In until joined Commission’s allowances basis platforms. buyers to open are but governments bynational appointed since allowances their all buy to had have generators Power 2020. after same the remain foresees remaining Germany, governments Auctions sector. © iStockphoto/ vencavolrab Commission value an 2013. 2013, since use the increasing numbers from mechanism in Hungary, of that are for Poland of EU for allowances EU the is However, will the late auctioning a any held since use free the proposal the ETS free provision following free estimates be of 2012 country a and proportion share most on allowance decreases Lithuania, 2004 auctioned free common ever are allowances eight a are the and for is allowances platform allowing of years, to implemented transparent – participating the that available of UK Bulgaria, revision allowances be represent platform of the auctions Poland faster during default have 57% as their auctioned. in Member them provided the modernising to of opted for Cyprus, of than allowances 2013-2020, method and volume for method existing for the take the the to in to free their States the continue an be the Romania to EU total most by place This Czech allocation. environmental auctioned use of EU ETS cap. of an power auctions, of their amount allowances which at share significant ETS. on allocating allocating their exchange while Republic, Directive granting In auction. – power a plants total, Most have have daily own The will will but the of

to obliged are States Member world. the in or elsewhere Europe in change climate combat to used be should sector, aviation are Free allocation The and Under The action progress reports. progress action • • and a 2015-2019. The emissions. The energy-intensive The emissions. total their in increase an to lead could This emissions. gas greenhouse on constraints laxer have clearly official with businesses if, ‘Carbon Preventing ‘carbonleakage’ inform relevant distributed significant allowances all for 82%. to amounts For aviation sector, aviation the For 2020. allowances subsectors, sectors list risk EU stakeholders. of list. defined reasons legislation, leakage’ the the manufacturing industries, is of information The established transfer

and carbon revenues Commission risk to given criteria current will covering

of companies sub-sectors industries. refers of The at production costs leakage to decrease carbon from least can and current manufacturing list for to a of the related be includes very after five

auctioning the on half how leakage may deemed found annually situation list to the high years, share extensive of they other applies be to around in basis auctioning

share are the higher to the climate of industries use on allowances countries to that be free placed annual for of share the consultation reach of 170 the exposed may in harmonised the industrial allowances basis policies, revenues, revenues. sectors certain on for which Climate of 30% years occur to an free free of to the

in © iStockphoto/ Pedro Castellano received principle in benchmark the meet that installations leakage, In for free. need they allowances all receive principle in benchmark the or beating meeting Installations competitiveness. their support to treatment special rules. The index. price consumer European the with line in annually rises The measures. security strong with registry Union by asingle exposed Installations emissions. their reduce to businesses installations, ambitious are rules these Underpinning EU. the across equally treated This proportionately lower allocation. allocation. lower proportionately checked for emissions ETS EU their report and monitor must Businesses Ensuring compliance of April by30 emissions total their cover to allowances enough in in Installations A again. used be cannot they so allowances. must is CO customers and their money. their and customers emitted. consultation “named business electronic 2 sectors the

each registry (or accurate percentage pay This following the 80% In to by calendar a benchmarks and not equivalent ensures 2013, It keeps is fine a accounts, an accounting that the in has of with significant penalised shamed” deemed is year. sectors accredited the for to benchmarks the track gradually fall industry. year buy that each allowances These fine amount for just short of allowances to by of and installations and if excess risk emissions the amounted be all as having it reduced verifier. By allowances of ownership have allowances at strengthen sub-sectors does a of of rewarding they the bank tonne N significant ‘carbon its 2 to O their not performance to They benchmark need to make or name holds of reach of €100 are of PFCs). surrender a emission the issued the leakage’ for greenhouse must allowances up deemed given then published, a risk 30% most free the incentive per record The is of surrender receive cancelled drawn shortfall, type tonne in in assured efficient penalty enough reports receive carbon to 2020. 2013. of held and gas are for up its be of © iStock/donfiore a How and where trading is done How the EU ETS is established Anyone with an account in the Union registry can buy or sell allowances, whether they are a company covered by the • The directive on emissions trading was adopted by the EU ETS or not. Trading can be done directly between buyers European Parliament and Council (comprising member countries) in 2003, and substantially revised in 2009. and sellers, through several organised exchanges or through intermediaries active in the carbon market. • The legislation needed to implement specific aspects of the directive (e.g. on carbon leakage, auctioning, international The price of allowances is determined by supply and demand. credits) is adopted by the European Commission after In 2015, on average 26 million allowances or their derivatives approval by the EU Climate Change Committee (grouping were traded per trading day. This added up to over 6.6 billion member state experts) and consultation of the European allowances or their derivatives, with a total value of around Parliament. €49 billion. • Each year, Member States report to the Commission on how the EU ETS Directive is being applied. • Additionally, the Commission monitors the carbon market and presents its conclusions in the annual Carbon Market Promoting low-carbon investment in Report. Europe

By capping overall greenhouse gas emissions from major Clean Development Mechanism or Joint Implementation sectors of the economy, the EU ETS creates an incentive mechanism as bringing real and genuinely additional for companies to invest in technologies that cut emissions. emission reductions. Credits from new market mechanisms The market price of allowances – otherwise known as the may also be accepted once they become available. ‘carbon price’ – creates a greater incentive as it increases. By allowing companies to buy international credits, the EU In addition, revenues from the sale of 300 million allowances ETS is channelling substantial amounts of investment to – 5% of the allowances available in the period 2013-2020 – promote clean technologies and low-carbon development in are used to co-finance large-scale demonstration projects in developing countries and economies in transition. two areas of low-carbon technologies: carbon capture and International credits can be used to cover some 1.6 billion storage, and innovative renewable energy technologies. This tonnes of CO emissions (or the equivalent amount of N O funding programme is known as NER300. 2 2 or PFCs) between 2008 and 2020. As of 30 April 2016 the total number of international credits used or exchanged amounts to 1.468 billion, accounting for over 90 % of the Driving clean investment in developing allowed maximum. countries While allowances are the main currency of the EU ETS, Building an international carbon market companies can also use credits generated by certain types of emission-saving projects around the world to cover part The EU ETS is an important building block for developing an of their emissions. international carbon market. National or regional systems are already operating in China, South Korea, Canada, Japan, These projects must be recognised under the Kyoto Protocol’s New Zealand, Switzerland, and the United States.

Trading volumes in EU emission allowances (in millions of tonnes)

10,000 8,715 9,000 7,903 8,330 8,000 6,713 6,677 7,000 5,631 6,000 5,410 Auctions 5,000 Over the counter 4,000 3,000 2,327 Exchange 2,000 998 1,000 94 460 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: Bloomberg LP, ICE, EEX, NYMEX, Bluenext, CCX, Greenmarket, Nordpool, UNFCC. Also using Bloomberg New Energy Finance estimations. of Switzerland. ETS the with ETS EU the link to principle in agreed has EU The change. climate on cooperation global support and field playing international the level price, carbon the stabilise the reduce helps systems robust other with ETS EU the Linking through develop to is expected market carbon international The trading A Structural reform inphase3 of However, rules. harmonised increasingly introduced functioning orderly the undermining risks surplus this term, short the In emissions. depressed substantially has which crisis economic could As cost-effectively. targets reduction emission allowances resilience was 2019-2020. in auctioned of impacts negative the neutralise 2019, to aims January in operating start will which reserve, 2015. This in agreed was A 2019-2020. more major the a a cost significant first postponed affect existing period structural the the revision of to step,

will of the cutting ETS future bottom-up allowance (2013-2020) the be the surplus system’s continues (“back-loaded”) of measure transferred carbon auctioning shocks. emissions, the of surplus linking ability EU allowances, market. to – strengthened The a face ETS media: social and website Action Climate Commission European Useful resources: to of market increase to and 900 of the from 900 a meet ahead In challenge improve compatible reserve million the largely million stability 2013-2015 more market the pinterest.com/EUClimateAction youtube.com/EUClimateAction twitter.com/EUClimateAction facebook.com/EUClimateAction ec.europa.eu/clima of longer the back-loaded system the rather in demanding allowances due reserve the systems. system’s liquidity, term, current to form than until and the it – The key aspects of the proposal: proposal: of the aspects key The 4: for phase ETS EU of the revision the on 2015 of July proposal Commission’s The EU ETSrevisionfor phase4(2021-2030) • • • • • ◦ allowances, including: Better targeted and more dynamic allocation of free (corresponding toimportantemissionsreduction) rate of2.2%from2021onwards,comparedto1.74%currently The overall numberofallowances todecline atanannual to 2005levels aims to achieve a 43 %reduction in EU ETS emissions compared on the2030climateandenergypolicyframework is in line with the European Council conclusions of October 2014 ◦ ◦ transition toalow-carbon economy sectors meettheinnovation andinvestmentchallengesofthe Several ◦ ◦ ◦ ◦ ◦ ◦ ◦ update ofbenchmarkstoreflectthetechnologicalprogress more targetedcarbonleakageclassification • • Two newfunds: free allocationbetteralignedwithproductionlevels power sectorintheselower-income MemberStates Free allowances continuetobeavailablemodernise the support mechanismshelptheindustryandpower

income MemberStates 10 lower- in efficiency energy boosting and systems in modernisingthepower sectorandwiderenergy Modernisation Fund–facilitatinginvestments breakthrough innovation inindustry the demonstrationofinnovative technologiesto Innovation Fund– extending existing support for ISBN 978-92-79-62396-7 © European Union, 2016 ML-06-16-080-EN-N doi:10.2834/6083 Reproduction is authorised provided the source is acknowledged.