What is the European Union Emissions Trading Scheme?

The European Union Emissions Trading Scheme (EU ETS)  - puts a cap on the carbon dioxide (CO2) emitted by business and creates a market and price for carbon allowances. It covers 45% of EU emissions, including energy intensive sectors and approximately 12,000 installations.

The EU ETS scheme started in 2005 in order to help the EU meet its targets under the Kyoto Protocol (8% reduction in greenhouse gas emissions from 1990 levels). 

The scheme is the world's largest carbon-trading scheme. It provides an incentive for installations to reduce their carbon emissions, because they can then sell their surplus allowances.

Installations are included in the scheme on the basis of their carbon dioxide (CO2) emitting activities.  Industries that are covered include:

• Electricity generation
• Iron & steel
• Mineral processing (for example: cement manufacture)
• Pulp and paper processing

The EU ETS: Phase II (2008-2012)

Phase II of the EU ETS ran from from 2008-2012 (the commitment period of the Kyoto Protocol). During this phase, every EU member state:

1. Developed a National Allocation Plan (NAP)
   • Member State proposed a limit ('cap') on total emissions from relevant  installations
   • The plans were approved by the European Commission, in many cases after some revision.
2. Distributed Allowances
   • The 'Cap' was converted into allowances, known as EUAs (1 tonne of carbon dioxide = 1 EUA)
   • The Member States distributed these allowances to installations in the scheme in their country according to their approved plan.
   • Up to 10% of the allowances could be auctioned instead of being given for free. These auctions were largest in the UK and in Germany.
3. Operated the Scheme
   • Installations were obliged to monitor and report verified carbon emissions
   • At the end of each year, installations were obliged to surrender sufficient allowances to cover their emissions and could buy additional allowances or sell any surplus
   • Joint Implementation (JI) and Clean Development Mechanism (CDM) credits could be used within the scheme, through the 'Linking Directive', agreed in 2004)

The EU ETS: Phase III (2013-2020)

Phase III started in 2013 and runs until 2020. The biggest changes in Phase III are:

• Design
  A centralised EU-wide cap on emissions is set.
• 'Cap' will reduce over time
  The 'cap' will decline by at least 1.74% a year, so that emissions in 2020 will be at least 21% below their level in 2005
• More will be covered
  The scheme will include the production of all metals (including aluminium). For some sectors, it will include the emission of other greenhouse gases in addition to carbon dioxide.
  The scheme was also meant to be extended to the aviation industry from January 2013, covering all flights taking off and landing in the EU, including those originating from or travelling to non-EU countries. However in November 2012 the European Commission decided to defer the extension of the scheme to extra-EU flights until after the International Civil Aviation Organization (ICAO) General Assembly in Autumn 2013, on the expectation that a global agreement on greenhouse gas mitigation from aviation will be reached. The ETS continues to apply to intra-EU flights from January 2013.  Latest information on the EU ETS and aviation can be found on gov.uk.
• Opt-out
  DECC has introduced an opt-out provision for small emitters and hospitals in the UK, allowing them to move to a more "light-touch" scheme with lower administrative costs (which hit disproportionately smaller companies). The opt-out will deliver an equivalent carbon reduction.
• Allowances
  At least 50% of allowances will be auctioned from 2013 (rather than given to installations). Use of Clean Development Mechanism (CDM) allowances will be more tightly restricted to no more than 50% of the reductions required.

Carbon Trust EU ETS reports

Information in these reports was correct at the time of publication.

Cutting Carbon in Europe: The 2020 plans and the future of the EU ETS (CTC734) 
Publication date: 01/06/2008

This report analyses amendments to the EU emissions trading scheme (EU ETS) proposed by the European Commission on the 23 January 2008 and their implications for business.   It concludes that the proposals are a bold and significant step in the right direction that correct weaknesses in the current scheme and provide the level of certainty that business and investors have been calling for.

EU ETS impacts on profitability and trade (CTC728)
Publication date: 11/01/2008

This report combines data on how business costs would be affected by carbon costs with analysis of the effect on prices and international trade in order to identify the small group of activities for which competitiveness is an issue for the environment, as well as for business, and to identify potential responses.

EU ETS Phase II allocation: implications and lessons (CTC715)
Publication date: 21/05/2007

This report analyses the implications for the Phase II carbon market (and the resulting industrial abatement incentives) and the wider lessons to be learned from the allocation process.

Allocation and competitiveness in the EU Emissions Trading System: Options for Phase II and beyond (CTC609)
Publication date: 01/06/2006

This report, based on collaborative research with Climate Strategies, examines the workings of the EU ETS to date and offers analysis and recommendations on its future development. The study identifies seven key challenges to overcome for the second phase of the EU ETS and sets out the Carbon Trust's own conclusions and recommendations for the future of the EU ETS as an instrument that can both help business deliver emission reductions as efficiently as possible, and also protect and ultimately enhance business competitiveness in a CO2-constrained world.

The European Emissions Trading Scheme: Implications for Industrial Competitiveness (CT-2004-04)
Publication date: 30/06/2004

This report explores in depth the implications of the EU ETS for industrial competitiveness in the UK and the wider EU. It presents our analysis of combined insights from economic modelling and a stakeholder interview programme.