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Additional tools
The EU Emissions Trading System (EU ETS) is a cornerstone of the European Union's policy to combat climate change and its key tool for reducing industrial greenhouse gas emissions cost-effectively. Being the first and biggest international scheme for the trading of greenhouse gas emission allowances, the EU ETS covers some 11,000 power stations and industrial plants in 30 countries.
The EU ETS, a system based on the "cap and trade" principle
Launched in 2005, the EU ETS works on the "cap and trade" principle. This means there is a "cap", or limit, on the total amount of certain greenhouse gases that can be emitted by the factories, power plants and other installations in the system. Within this cap, companies receive emission allowances which they can sell to or buy from one another as needed. The limit on the total number of allowances available ensures that they have a value.
At the end of each year each company must surrender enough allowances to cover all its emissions, otherwise heavy fines are imposed. If a company reduces its emissions, it can keep the spare allowances to cover its future needs or else sell them to another company that is short of allowances. The flexibility that trading brings ensures that emissions are cut where it costs least to do so.
The number of allowances is reduced over time so that total emissions fall. In 2020 emissions will be 21% lower than in 2005.
Growing bigger and stronger
The ETS now operates in 30 countries (the 27 EU Member States plus Iceland, Liechtenstein and Norway). It covers CO2 emissions from installations such as power stations, combustion plants, oil refineries and iron and steel works, as well as factories making cement, glass, lime, bricks, ceramics, pulp, paper and board.
Nitrous oxide emissions from certain processes are also covered. Between them, the installations currently in the scheme account for almost half of the EU's CO2 emissions and 40% of its total greenhouse gas emissions.
Airlines will join the scheme in 2012. The EU ETS will be further expanded to the petrochemicals, ammonia and aluminium industries and to additional gases in 2013, when the third trading period will start. At the same time a series of important changes to the way the EU ETS works will take effect in order to strengthen the system.
Making a difference
The EU ETS has put a price on carbon emissions and shown that it is possible to trade in greenhouse gas emissions. Emissions from installations in the scheme are falling as intended. The changes to be introduced in 2013, notably a progressive move towards auctioning of allowances, will further enhance its effectiveness.
The success of the EU ETS has inspired other countries and regions to launch cap and trade schemes of their own. The EU hopes to link up the ETS with compatible systems around the world to form the backbone of a global carbon market.
