The European Union Emissions Trading System (EU ETS) is an instrument of EU climate policy with the aim of reducing greenhouse gas emissions (such as CO2) at the lowest possible economic cost by enforcing the level of emissions reduction, but leaving it up to the market to decide how to achieve this reduction.
It is based on the fact that the companies covered have to buy a certificate for every tonne of CO2 emitted and that there is only a limited number of new certificates available each year. This quantity decreases by 2.2% each year. The system currently covers just under half of the greenhouse gas emissions generated in the EU.
A large proportion of the certificates are auctioned on the European Energy Exchange (EEX Leipzig). This proportion increases linearly in the following years (2020: 80%). The remainder are allocated free of charge and distributed according to certain principles. The certificates are valid indefinitely.
The certificates can be traded on the secondary market on exchanges or bilaterally (OTC).
The EU ETS is the first cross-border emissions trading system and the largest in the world to date. It was adopted by the European Parliament and the Council of the EU in 2003 and came into force on January 1, 2005. The European ETS also acts as a pioneer for a possible global system. The EU ETS currently covers and limits the CO2 emissions of around 13,000 installations in 31 European countries (28 EU member states plus Liechtenstein, Iceland and Norway) in the energy generation and various industrial sectors. Emissions trading takes place in multi-year trading periods in order to compensate for fluctuations caused by extreme weather conditions (mild winters, for example, mean lower emissions) and to create longer-term investment security. Pilot phase I (2005-2007), phase II (2008-2012) and phase III (2013-2020) have been completed to date.
In the first two phases, the EU member states jointly determined the total number of emission allowances (i.e. greenhouse gas emissions) to be made available to companies and the conditions under which this should take place. The distribution of emission allowances to specific installations, on the other hand, was largely left to the discretion of the nation states. This was regulated in so-called national allocation plans (NAPs). Since the start of phase III (2013 – 2020), there are no longer any national allocation plans. Instead, emission allowances are allocated centrally by the European Commission. The Commissioner for Climate Action is responsible for this.