The EU Emissions Trading System (EU ETS) is considered to be a cornerstone of the European Union climate policy. Under the Kyoto Protocol, the EU15 committed to reduce its GHG emissions by 20% below 1990 levels by 2020. The EU ETS was launched in 2005 as a key policy tool to achieve these Kyoto reduction goals. It was the first multinational emissions trading system in the world.
About 50% of the EU’s CO2 emissions and 43% of GHG emissions are covered in the EU ETS. Participating companies are obliged to surrender EU allowances (EUAs) for every ton of carbon dioxide or greenhouse gas they emit. Member countries are obliged to regularly report to the Commission on how they use the revenues from allowance auctioning, as half of the revenues are required to be used to tackle climate change.
Implementation in three Phases
The EU ETS is implemented in three trading periods: Phase I (2005-2007) was designed as a trial period to establish an infrastructure for MRV and was characterized by learning by doing. National allocation plans were set up by participating countries in order to set nationwide caps for emissions. In 2008, the first commitment period of emissions trading including a more ambitious cap began with the start of Phase II (2008-2012). Since 2012, the aviation sector has been included in the EU ETS with a separate cap.
Phase III (2013-2020) replaced the national emission caps with an EU-wide cap that will annually decrease by a linear reduction factor (1.74%). Moreover, auctioning will be used as the principal allocation method. In most states, allowances are already fully auctioned for the power sector. For all other sectors, auctions will gradually replace free allocation until 2027. Additionally, the emissions coverage of the EU ETS was widened to include the greenhouse gases N2O as well as PFCs.
Structural Reform of the EU ETS
Due to the unforeseen depth of the financial and economic crisis from 2008 – 2009 an oversupply of allowances accumulated in the EU ETS. To remedy this structural imbalance, the system has been comprehensively reviewed in extensive stakeholder consultations starting from 2012. As a short-term measure against the surplus of allowances, the ‘back-loading’ of 900 million allowances was approved by the European Parliament and Council in December 2013. As a long-term solution, a legislative proposal for a market stability reserve for the trading period after 2021 was issued by the European Commission in January 2014. Moreover, as part of the European 2030 framework for climate and energy policies, the long-term objective of reducing emissions to 40% below 1990 levels by 2030 requires the annual linear reduction factor of the EU ETS to be increased from 1.74% to 2.2%.
For more information on the Structural Reform of the EU ETS and the possible introduction of a market stability reserve, please refer to the “Information on a Market Stability Reserve for the EU Emissions Trading System”.
More information on the EU ETS: “Emissions Trading – Basic Principles and Experiences in Europe and Germany”