The European Union Emissions Trading System (EU ETS) is a carbon emission trading scheme (or cap and trade scheme) that began in 2005 and is intended to lower greenhouse gas emissions in the EU. Cap and trade schemes limit emissions of specified pollutants over an area and make polluters pay for their pollution, requiring them to buy allowances to emit enough to cover their emissions, from the EU or from other companies. The money is channeled to environmental and social goals. As of 2026 the ETS covers around 40% of the EU's greenhouse gas emissions. The cap decline gradually and should reach zero by 2039. After this year no more allowances will be distributed and when the unused allowances will end, no more emissions will be permitted.
As from 2027 road transport, buildings and industrial installation that fell out of EU ETS will be covered by a new EU ETS2. The "old" ETS and the new EU ETS2 allowances will be traded independently. A major difference to the ETS is that ETS2 will cover the CO2 emissions upstream - fuel suppliers rather than consumers will be obliged to cover emissions with ETS2 emission allowances. The 2 systems will cover 75% of the GHG emissions of the European Union.
Compared to 2005, when the EU ETS was first implemented, the proposed caps for 2020 represent a 21% reduction in greenhouse gases. This target was achieved six years early as emissions in the ETS fell to 1.812 billion (109) tonnes in 2014.
During the years 2005–2025, GHG emissions in the sectors covered by the ETS declined by around 50%, declining only by 20% in the not covered sectors. A 2020 study showed that between 2008 and 2016 the ETS reduced CO2 emissions by 11.5% in covered sectors despite low carbon price. A 2024 study estimate the emission reduction effect at 7%. According to a 2023 study the ETS, reduced emissions by 10% between 2005 and 2012 with no impacts on profits or employment for regulated firms. A 2024 study demonstrated that the ETS has contributed to reduce atmospheric levels of air pollutants in the EU including sulfur dioxide, fine particulate matter, and nitrogen oxide. This reduction has translated in local health co-benefits, alongside the system's primary goal of mitigating climate change. EU countries view the emissions trading scheme as necessary for meeting climate goals. A strong carbon market guides investors and industry in their transition from fossil fuels.
Setup
The EU Emission Trading System follows the cap and trade model where one allowance permits the holder to emit 1 ton of (t). Under this scheme, a maximum (cap) is set on the total amount of greenhouse gases that can be emitted by all participating installations. EU Allowances for emissions are then auctioned off or allocated for free, and can subsequently be traded. Installations must monitor and report their emissions, ensuring they hand in enough allowances to the authorities to cover their emissions. To exceed its emissions allowance, an installation must purchase allowances from others. Conversely, if an installation emits less than its allowance, it can sell its leftover credits. This allows the system to find the most cost-effective ways of reducing emissions without significant government intervention.
The scheme was said to cover energy and heat generation industries and around 11,186 plants participated in the first stage. These plants only accounted for 45% of all European emissions at the time. More than 90% of all these allowances were free of cost in both periods to build a strong base of reductions for the future phases. This free allocation resulted in the volume and value of allowances growing three-fold over 2006 with the price moving from €19/t in 2005 to its peak of €30/t which revealed a new problem. The overallocation of allowances caused the price to drop to €1/t in the first few months of 2007 which created market price instabilities for businesses to reinvest in low carbon-technologies.
The European Union Emission Trading Scheme (or EU-ETS) is the largest multi-national, greenhouse gas emissions trading scheme in the world. After voluntary trials in the UK and Denmark, Phase I began operation in January 2005 with all 15 member states of the European Union participating.Climate Change: The European Union's Emissions Trading System (EU ETS) The program caps the amount of carbon dioxide that can be emitted from large installations with a net heat supply over 20 MW, such as power plants and carbon intensive factories, and covers almost half (46%) of the EU's Carbon Dioxide emissions.Wagner, M. Firms, the Framework Convention on Climate Change & the EU Emissions Trading System . Lüneburg: Centre for Sustainability Management 2004, p. 12. Phase I permits participants to trade among themselves and in validated credits from the developing world through Kyoto's Clean Development Mechanism. Credits are gained by investing in clean technologies and low-carbon solutions, and by certain types of emission-saving projects around the world to cover a proportion of their emissions.
History The EU-ETS was the first large greenhouse gas emissions trading scheme in the world. It was launched in 2005 to fight global warming and is a major pillar of EU energy policy.European Commission Climate Action, Emissions Trading System . As of 2013, the EU ETS covers more than 11,000 factories, power stations, and other installations with a net heat excess of 20 MW in 31 countries—all 27 EU member states plus Iceland, Norway, Liechtenstein and United Kingdom. In 2008, the installations regulated by the EU ETS were collectively responsible for close to half of the EU's anthropogenic emissions of and 40% of its total greenhouse gas emissions.Wagner, M.: Firms, the Framework Convention on Climate Change & the EU Emissions Trading System. Corporate Energy Management Strategies to Address Climate Change and GHG Emissions in the European Union. Lüneburg: Centre for Sustainability Management, 2004, p.12 CSM Lüneburg Questions and Answers on the Commission's proposal to revise the EU Emissions Trading System , MEMO/08/35, Brussels, 23 January 2008 The EU had set a target for 2020 to cut greenhouse gas emissions by 20% compared with 1990, to reduce energy consumption by 20% compared to the 2007 baseline scenario, and to achieve a 20% share of gross final energy consumption from renewable energy sources—all of which was achieved. A 2020 study estimated that the EU ETS had reduced emissions by more than 1 billion tons between 2008 and 2016 or 3.8% of total EU-wide emissions.
The EU ETS has seen a number of significant changes, with the first trading period described as a "learning by doing" phase. Phase III saw a turn to auctioning more permits rather than allocating freely (in 2013, over 40% of the allowances were auctioned); harmonisation of rules for the remaining allocations; and the inclusion of other greenhouse gases, such as nitrous oxide and perfluorocarbons. In 2012, the EU ETS was also extended to the airline industry, though this only applies within the EEA.Limiting global climate change to 2 degrees Celsius – The way ahead for 2020 and beyond , Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions, Brussels, 10 October 2007. The price of EU ETS carbon credits has been lower than intended, with a large surplus of allowances, in part because of the impact of the recent economic crisis on demand. In 2012, the Commission said it would delay the auctioning of some allowances. In 2015, Decision (EU) 2015/1814 was approved to establish a Market Stability Reserve that adjusts the annual supply of permits based on the permits in circulation in the previous year. In 2018, the Market Stability Reserve was amended by Directive (EU) 2018/410 so that a certain amount of permits inside the reserve would be cancelled from 2023 onwards.
In January 2008, Norway, Iceland, and Liechtenstein joined the European Union Emissions Trading System (EU-ETS). The Norwegian Ministry of the Environment has also released its draft National Allocation Plan which provides a carbon cap-and-trade of 15 million tonnes of CO2, 8 million of which are set to be auctioned. According to the OECD Economic Survey of Norway 2010, the nation "has announced a target for 2008–12 10% below its commitment under the Kyoto Protocol and a 30% cut compared with 1990 by 2020." In 2012, EU-15 emissions was 15.1% below their base year level. Based on figures for 2012 by the European Environment Agency, EU-15 emissions averaged 11.8% below base-year levels during the 2008–2012 period. This means the EU-15 over-achieved its first Kyoto target by a wide margin.
Mechanisms The first phase of EU ETS was created to operate apart from international climate change treaties such as the pre-existing United Nations Framework Convention on Climate Change (UNFCCC, 1992) or the Kyoto Protocol that was subsequently (1997) established under it. When the Kyoto Protocol came into force on 16 February 2005, Phase I of the EU ETS had already become operational. The EU later agreed to incorporate Kyoto flexible mechanism certificates as compliance tools within the EU ETS. The "Linking Directive" allows operators to use a certain amount of Kyoto certificates from flexible mechanism projects to cover their emissions.
The Kyoto flexible mechanisms are: Joint Implementation projects (JI) defined by Article 6 of the Kyoto Protocol, which produce Emission Reduction Units (ERUs). One ERU represents the successful emissions reduction equivalent to one tonne of carbon dioxide equivalent (te). The Clean Development Mechanism (CDM) defined by Article 12, which produces Certified Emission Reductions (CERs). One CER represents the successful emissions reduction equivalent to one tonne of carbon dioxide equivalent (te). International Emissions Trading (IET) is defined by Article 17.
IET is relevant as the reductions achieved through CDM projects are a compliance tool for EU ETS operators. These Certified Emission Reductions (CERs) can be obtained by implementing emission reduction projects in developing countries, outside the EU, that have ratified (or acceded to) the Kyoto Protocol. The implementation of Clean Development Projects is largely specified by the Marrakech Accords, a follow-on set of agreements by the Conference of the Parties to the Kyoto Protocol. The legislators of the EU ETS drew up the scheme independently but called on the experiences gained during the running of the voluntary UK Emissions Trading Scheme in the previous years,UK Emissions Trading Scheme DECC and collaborated with other parties to ensure its units and mechanisms were compatible with the design agreed through the UNFCCC.
Under the EU ETS, the governments of the EU Member States agree on national emission caps which have to be approved by the EU Commission. Those countries then allocate allowances to their industrial operators and track and validate the actual emissions per the relevant assigned amount. They require the allowances to be retired after the end of each year.
The operators within the ETS may reassign or trade their allowances by several means: privately, moving allowances between operators within a company and across national borders over the counter, using a broker to privately match buyers and sellers trading on the spot market of one of Europe's climate exchanges
Like any other financial instrument, trading consists of matching buyers and sellers between members of the exchange and then settling by depositing a valid allowance in exchange for the agreed financial consideration. Much like a stock market, companies and private individuals can trade through brokers who are listed on the exchange, and need not be regulated operators.