The EU Emissions Trading System
In its effort to combat climate change by reducing greenhouse gas emissions, the EU has chosen a market-oriented and cost-effective approach. The European Union's Emissions Trading System (EU ETS) has been introduced to cap the region's emissions and create a market for emission certificates that drives technological development and investments in low-carbon technologies.
A system based on the "cap and trade" principle
"Since its launch in 2005, the EU Emissions Trading System has rapidly established itself as the main driver of the emerging international carbon market", says Connie Hedegaard.
"world's largest company based cap-and-trade system" as the Commissioner calls it, entails that energy-intensive industries like power generation or steel and cement have to surrender allowances every year for every tonne of CO2 they emit.
In principle, the industries receive a certain amount of allowances for free, but if they need more, they have a choice between taking measures to reduce their own emissions – such as investing in more efficient technology or using less carbon-intensive energy sources – or buying the extra allowances they need on the carbon market, or a combination of the two. Participants that keep their emissions below the level of their allowances can sell their excess allowances.
An example worth following
Thanks to the EU Emissions Trading System, the number of allowances is reduced over time so that total greenhouse gas emissions fall. In 2020 emissions are expected to be 21% lower than in 2005.
"The example of the EU ETS should be encouraging for those countries that are contemplating setting up domestic cap-and-trade systems, which could then be linked together to create a stronger international carbon market", says Connie Hedegaard.
Growing bigger and stronger
By 2012, the EU ETS will include the aviation sector, which represents some 3% of EU emissions.
The system will be further expanded to the petrochemicals, ammonia and aluminium industries and to additional gases in 2013, when the third trading period will start.
While auctioning of carbon allowances is limited during the first and second trading period, it will be the main allocation method as of 2013.