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. Both caps are set at EU level. 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).
Power stations and other fixed installations have a separate emissions cap from aviation because different types of allowances are issued for the two parts of the EU ETS. Allowances issued for fixed installations are general allowances, while the aviation sector has aviation allowances. Airlines can use both types of allowances for compliance purposes, but fixed installations cannot use aviation allowances.
The 2013 cap for emissions from power stations and other fixed installations in the 27 EU Member States has been provisionally set at 2,039,152,882 allowances.
For each year after 2013, this cap will decrease by 1.74% of the average total quantity of allowances issued annually in 2008-2012. In absolute terms this means the number of general allowances will be reduced annually by 37,435,387.
Thanks to the decreasing cap, in 2020 emissions from fixed installations will be 21% lower than in 2005. The annual reduction in the cap will continue beyond 2020, but may be revised no later than 2025.
In 2013 more than 40% of general allowances will be sold through auctioning, and this proportion will rise progressively in the following years.
The remainder are allocated free of charge on the basis of harmonised rules underpinned by benchmarks of emissions performance. Industrial sectors and sub-sectors deemed to be exposed to a significant risk of ‘carbon leakage’ receive a higher share of free allowances than those that are not.
Unlike the cap for fixed installations, 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 when aviation activities concerning Croatia are fully brought into the EU ETS from 1 January 2014.