European Union Emissions Trading Scheme (EU ETS)

The largest and most important of the emission tradable permits programs has been developed by the European Union to facilitate implementation of the Kyoto Protocol. The EU program applies to 25 countries, including the 10 “accession” countries, most of which are former members of the Soviet bloc. The first phase, a trial phase, runs from 2005 through 2007. The second phase coincides with the first Kyoto commitment period, beginning in 2008 and continuing through 2012. Subsequent negotiations will specify the details of future phases.

The European Union Emissions Trading Scheme (EU ETS) is the first international trading system for carbon dioxide (CO₂) emissions in the world. It covers over 11,500 energy-intensive installations across the EU, which represent close to half of Europe’s emissions of CO₂. These installations include combustion plants, oil refineries, coke ovens, iron and steel plants, and factories making cement, glass, lime, brick, ceramics, pulp and paper. Initially, the program covers only carbon dioxide (CO₂) emissions from four broad sectors: iron and steel, minerals, energy, and pulp and paper. All installations in these sectors larger than established thresholds are included in the program.

The EU ETS uses a market-based mechanism to incentivize the reduction of greenhouse gas emissions in a cost-effective and economically-efficient manner. The scheme operates through the allocation and trade of greenhouse gas emissions allowances throughout the EU – one allowance represents one tonne of carbon dioxide equivalent.

An overall limit, or ‘cap’, is set by each Member State on the total number of allowances to issue to installations in the scheme, based on the Member States emission reduction targets (Kyoto and/or national). The allowances are then distributed by Member States to the installations in the scheme.

At the end of each year, installations are required to ensure they have enough allowances to account for their installation’s actual emissions. They have the flexibility to buy additional allowances (on top of their free allocation), or to sell any surplus allowances generated from reducing their emissions below their allocation. The buying and selling of allowances takes place on an EU-wide market. The scheme provides a flexible compliance regime for operators, whilst ensuring that emissions are reduced in the EU to the level of the EU cap.

Phase I of the scheme runs from 1 January 2005 to 31 December 2007. CO₂ is the only greenhouse gas covered by the EU ETS in Phase I. Other greenhouse gases or activities could be covered in Phase II (2008 to 2012) if Member States chose to opt-in additional gases or activities, or if the EU ETS Directive were to be amended for future phases.

The EU ETS requires all annual emissions reports and monitoring to be verified by an independent accredited verifier. A verifier will check for inconsistencies in monitoring with the approved plan and errors/misstatements in the emissions report. They will produce a verification opinion statement which must then be sent with the now verified annual emissions report to the regulator by 31 March the following year.

Though this allocation scheme provides installations with the permits free-of-charge, in the future, auctions may be held to determine the distribution of permits. Countries will be allowed the option to auction up to 5% of allowances in the first phase of the program and up to 10% in the second phase. Participating countries can use credits acquired from outside the European Union (via Joint Implementation or Clean Development Mechanism) to meet their obligations under the EU ETS.

Further Reading
European Union Emissions Trading Scheme