What is the EU Emissions Trading System (EU ETS) and how does it work?

Ø  requires polluters to pay for their greenhouse gas (GHG) emissions;

Ø  launched in 2005, it is the world’s first carbon market and among the largest ones globally;

Ø  helps bring overall EU emissions down while generating revenues to finance the green transition;

Ø  covers emissions from the electricity and heat generation, industrial manufacturing and aviation sectors - which account for roughly 40% of total GHG emissions in the EU;

Ø  started covering emissions from maritime transport in 2024;

Ø  operates in all EU countries plus Iceland, Liechtenstein and Norway, and is linked to the Swiss ETS (since 2020).

The EU ETS is based on a “cap and trade” principle. The cap refers to the limit set on the total amount of GHG that can be emitted by installations and operators covered under the scope of the system. This cap is reduced annually in line with the EU’s climate target, ensuring that overall EU emissions decrease over time. By 2023, the EU ETS has helped bring down emissions from European power and industry plants by approximately 47%, compared to 2005 levels.

The EU ETS cap is expressed in emission allowances with one allowance giving right to emit one tonne of CO2 eq (i.e., carbon dioxide equivalent). Allowances are sold in auctions and may be traded. As the cap decreases, so does the supply of allowances to the EU carbon market.

Under the system, companies must monitor and report their emissions on a yearly basis and surrender enough allowances to fully account for their annual emissions. If these requirements are not met, heavy fines are imposed.

While allowances are predominantly sold in auctions, companies receive some allowances for free. Companies may also trade allowances among themselves as needed. If an installation or operator reduces emissions, the company can either sell the spare allowances and/or keep them to use in the future. All these operations are recorded in the Union Registry.