Overview of the European Union Emissions Trading Scheme
The Emissions Trading Scheme (ETS) is one of the key policies introduced by the European Union (EU) to reduce emissions of carbon dioxide and other greenhouse gases. The EU ETS commenced operation in January 2005. The scheme is based on Directive 2003/87/EC, which entered into force on 25 October 2003. The EU ETS is being implemented in distinct phases or ‘trading periods.’
- Phase 1, from 1 January 2005 to 31 December 2007, was a three-year pilot phase of ‘learning by doing’ in preparation for phase 2.
- Phase 2, running from 1 January 2008 to 31 December 2012, coincided with the ‘first commitment period’ of the Kyoto Protocol – the five-year period during which the EU and its Member States must comply with their emission targets under the Protocol.
- Phase 3, commenced on 1 January 2013 and will run until to 31 December 2020. This longer trading period will contribute to the greater predictability necessary for encouraging long-term investment in emission reductions. The EU ETS is substantially strengthened and extended from 2013, enabling it to play a central role in the achievement of the EU’s climate and energy targets for 2020.
The scheme works on a “Cap and Trade” basis. In Phase I and II this meant that all 27 EU governments were required to set an emission limit for all installations covered by the scheme. Each installation was allocated emission allowances for the particular commitment period. The number of allowances allocated to each installation for any given period was determined on the basis of the National Allocation Plan.
From 2013 there is a central European wide cap on emissions and no free allocation in respect of electricity generation. Installations receive free allocation based on EU-wide benchmarks determined by the EU Commission and the level of free allocation will decrease over the trading period from 80% to 30% by 2020. Installations in sectors exposed to carbon leakage will however receive 100% free allocation.
How does emission trading work ?
The EU Emissions Trading Scheme (EU ETS) creates a price for carbon and thereby offers the most cost-effective way to achieve the reductions in greenhouse gas emissions. The common trading ‘currency’ of the EU ETS is an emission allowance. One allowance equates to one tonne of CO2. Learn more here about Phase 3.
The limit or ‘cap’ on the total number of allowances creates the scarcity needed for trading. Companies that keep their emissions below the level of their allocated allowances can sell their excess allowances at a price determined by supply and demand at that time. Those facing difficulty in remaining within their allowance limit have a choice between several options:
- They can take measures to reduce their emissions (such as investing in more efficient technology or using a less carbon intensive energy source),
- They can buy extra allowances and/or CDM/JI credits on the market (the EU ETS links to emission reduction opportunities in the rest of the world by accepting credits from emission-saving projects carried out under the Kyoto Protocol’s Clean Development Mechanism (CDM) and Joint Implementation instrument (JI)) OR
- They can use a combination of the two.
This flexibility ensures that emissions are reduced in the most cost-effective way.
You can check out a cartoon video that explains the Emissions Trading Scheme in an easily understandable way.(This video is courtesy of the Climate and Pollution Agency, Norway)
The first six years – how has the EU ETS performed?
Emissions Trading Scheme – Stationary Installations
Currently, the ETS covers stationary installations . Across the EU, some 11,000 heavy energy consuming installations in power generation and manufacturing are covered. In Ireland over 100 installations are covered by the scheme.
Emissions Trading Scheme – Aviation
From 2012 the ETS was expanded to include emissions from air flights to and from European airports.
Emissions Trading Registry
EU-ETS allowances (called EUAs) are not printed but held in accounts in electronic registries set up by Member States. The European Commission has set up a standardised and secured system of registries across Member States based on United Nations data exchange standards to track the issue, holding, transfer and cancellation of allowances. Provisions on the tracking and use of credits from CDM and JI projects in the EU system are also included.
The registries system is similar to a banking system which keeps track of the ownership of money in accounts but does not look into the deals that lead to money changing hands.
The system is overseen by a central administrator at EU level who, through an independent transaction log, checks each transaction for any irregularities. Any irregularities detected prevent a transaction from being completed until they have been remedied. The EU registries system is linked to the international registries system used under the Kyoto Protocol. In 2012, the Commission intends to merge each Member State registry into a consolidated Community Registry to facilitate the holding of all EU allowances in one EU registry system.