The European Emissions Trading Scheme

Index

General framework

How EU ETS works

Sectors and gas covered

General framework

The EU Emissions Trading System (EU ETS) is one of the main tools of the climate change policy of European Union, to realize GHG emissions reductions targets in a cost-effective and economically efficient manner.

The EU ETS is the first and largest emissions trading system for reducing GHG emissions, it was introduced in 2005 and it covers 31 countries (28 EU Countries plus Iceland, Liechtenstein and Norway). This system limits the emissions produced by more than 11.000 power stations and industrial plants and by flights between airports of participating Countries, responsible toghether for around 50% of EU GHG emissions.

Since its introduction, the EU ETS has undergone several changes, and has been divided up into distinct trading periods over time, known as “phases”.

The EU ETS is now in its third phase, which started in 2013 and will end in 2020.

The main differences among the different phases of EU ETS are summarized in the following table.

How EU ETS works

The EU ETS operates according to the principle of "Cap and Trade". A limit is set, which establishes the maximum amount of GHGs that can be emitted by the installations that fall within the system. Within this limit, companies can buy or sell allowances based on their needs. The allowances represent the central currency of the system; one allowance gives its owner the right to emit GHG emissions equivalent to the global warming potential of 1 tonne of CO₂ equivalent (tCO2e).

Once a year, all companies participating in the EU ETS must return an emission allowance for every ton of CO2e emitted. A limited number of emission allowances is assigned for free to some companies based on harmonized allocation rules applied throughout Europe. Companies that do not receive emission allowances for free or where the allowances received are not sufficient to cover the emissions produced, they must buy the emission allowances at auction or from other companies. Conversely, those who have emission allowances in excess of the emissions produced can sell them. If a company does not comply with compliance obligations, heavy penalties are applied.

In order to cover the emissions produced companies can choose among several options:

• Take measures to reduce their emissions by investing in more efficient and low-carbon technologies;
• Acquistare le quote necessarie e/o i crediti internazionali derivanti da progetti di Sviluppo Pulito (CDM) o di Applicazione Congiunta (JI) istituiti nell’ambito del Protocollo di Kyoto; Purchase the necessary allowances and/or international credits deriving from Clean Development Mechanism (CDM) or Joint Implementation (JI) projects established under the Kyoto Protocol;
• Use a combination of the two previous options.

This flexibility ensures that emissions are reduced in the most cost-effective way.

Sectors and gas covered

The EU ETS covers the following gases with particular attention to the emissions that can be measured and verified with a high degree of precision:

• Carbon dioxide Anidride carbonica (CO2) deriving from
  • Production of electricity and heat produzione di energia elettrica e di calore;
  • energy-intensive industrial sectors, including oil refineries, steel mills and iron production, metals, aluminum, cement, lime, glass, ceramics, pulp, paper, cardboard, acids and large-scale organic chemicals;
  • civil aviation
  • Nitrogen oxide (N2O) deriving from the production of nitric, adipic, glyoxylic and glyoxal acid;
  • Perfluorocarbons (PFC) deriving from the production of aluminum.

Participation in the EU ETS is mandatory for companies operating in these sectors, but in some sectors only installations above a certain size are included. Furthermore, some small emitters may be excluded if national administrations implement fiscal or other measures that reduce their emissions by an equivalent amount.