Emissions cap and allowances
The overall volume of greenhouse gases that can be emitted by the power plants, factories and other fixed installations covered by the EU emissions trading system (EU ETS) is limited by a 'cap' on the number of emission allowances. A separate cap applies to the aviation sector. Within these Europe-wide caps, companies receive or buy emission allowances which they can trade as needed.
Each allowance gives the holder the right to emit
- one tonne of carbon dioxide (CO2), the main greenhouse gas, or
- the equivalent amount of two more powerful greenhouse gases, nitrous oxide (N2O) and perfluorocarbons (PFCs).
Some allowances are allocated or auctioned specifically to aviation operators. Airlines can use any allowances for compliance purposes, but fixed installations cannot use aviation allowances.
Cap for fixed installations decreases each year
The 2013 cap for emissions from fixed installations was set at 2,084,301,856 allowances. During phase 3 of the EU ETS (2013-2020), this cap decreases each year by a linear reduction factor of 1.74% of the average total quantity of allowances issued annually in 2008-2012. This amounts to a reduction of 38,264,246 allowances each year.
The linear reduction factor determines the pace of emission reductions in the EU ETS. It is a feature without an end date and as such it gives investors certainty about the return on investment in emission reductions.
Thanks to the decreasing cap, the number of allowances that can be used by fixed installations to cover emissions will be 21% lower in 2020 than in 2005.
To achieve the target of cutting EU emissions by 40% by 2030 compared to 1990, agreed by EU leaders as part of the 2030 climate and energy framework, the cap will need to be lowered by 2.2% per year from 2021.
This would reduce emissions from fixed installations to around 43% below 2005 levels by 2030. By 2050, emissions would be reduced by around 90% compared to 2005.
Aviation cap set at 210 million allowances for 2013-2020
The aviation sector cap remains the same in each year of the 2013-2020 trading period.
The cap has been provisionally set at 210,349,264 aviation allowances per year, which is 5% below the average annual level of aviation emissions in the 2004-2006 base period.
The cap will be adjusted to include additional aviation activities arising from Croatia's full integration into the aviation part of the EU ETS on 1 January 2014.