Emissions Trading Overview

The EU emissions trading system (EU ETS) is a cornerstone of the European Union's policy to combat climate change and its key tool for reducing industrial greenhouse gas emissions cost-effectively. The first - and still by far the biggest - international system for trading greenhouse gas emission allowances, the EU ETS covers more than 11,000 power stations and industrial plants in 31 countries, as well as airlines. See also EU Commission website.

 

Installations and aircraft operators covered by the EU ETS are those which carry out activities listed in Annex I of the EU ETS Directive

The EU emissions trading system (EU ETS) was launched in 2005 as the world’s first international company-level ‘cap-and trade’ system for reducing emissions of greenhouse gases cost-effectively. The EU ETS is established under Directive 2003/87/EC and amendments.  This is implemented in Ireland under S.I. 490 of 2012 and amendments and S.I. No.  261 of 2010 and amendments.  The scheme is being implemented in distinct phases or ‘trading periods’.

 

The main differences between the ‘trading periods’ in the EU ETS

Phase I and II (2005 – 2012)

Phase III (2013 – 2020)

National quotas

The limit for the EU

Standing limit

Limit decreased every year

3 and 5 year periods

8 year period

Free allocation based on emissions at installation level

Free allocation based on pre-determined EU-wide benchmarks and historical production

Free allocation of allowances for industries at a constant level

Free allocation for the industry and for the production of heat at a level dependent on the type of product

Free allocation of allowances for electricity production

No free allocation to electricity production (with the exception of the so-called. Derogation)

No free allocation adjustments after the drop in production

Correction of free allowances after falling production by more than 50%

 

How does Emissions Trading work?

Emissions’ trading is a market-based system to reduce the emissions of climate-damaging greenhouse gases. It is based on the principle of a ‘Cap and Trade’ system: The cap makes sure that CO2 becomes a product and, thus, CO2 is valued at a price, which is determined by the supply and demand at the (trading) market.

To the installations, which have to be part of emissions trading scheme according to the legislation, a defined number of emission allowances (from the cap) are allocated. The allocation rules are defined Europe-wide. One emission allowance equals one tonne of CO2.

Once a year, each installation has to surrender enough allowances to cover all its emissions. If a company reduces its emissions so that it has more allowances than it needs, it can sell the remaining (not needed) allowances at the market. Alternatively, it has to purchase additional allowances to comply with its surrender obligation. If a company does not fulfil its obligations to surrender allowances in line with their verified emissions / tonnes of CO2, heavy penalties will apply.

Those facing difficulty in remaining within their allowance limit have a choice between several options:

  • They can take measures to reduce their emissions (such as investing in more efficient technology or using a less carbon intensive energy source),
  • They can buy extra allowances and/or CDM/JI credits on the market (the EU ETS links to emission reduction opportunities in the rest of the world by accepting credits from emission-saving projects carried out under the Kyoto Protocol’s Clean Development Mechanism (CDM) and Joint Implementation instrument (JI)) OR
  • They can use a combination of the two.

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

You can check out a cartoon video that explains the Emissions Trading Scheme in an easily understandable way.(This video is courtesy of the Climate and Pollution Agency, Norway)

 

Emissions Trading Structure

Emissions Trading Scheme - Stationary Installations

Across the EU and three EEA-EFTA states, some 11,000 heavy energy consuming installations in power generation and manufacturing are covered. The system covers emissions of carbon dioxide (CO2) from power and heat generation and a wide range of energy-intensive industry sectors including oil refineries, steel works and production of iron, aluminium, metals, cement, lime, glass, ceramics, pulp, paper, cardboard, acids and bulk organic chemicals.   Nitrous oxide emissions from the production of certain acids and emissions of perfluorocarbons from aluminium production are also included.   In Ireland approximately 100 installations are covered by the scheme.  

Learn more about the Emissions Trading Scheme for Stationary Installations

 

Emissions Trading Scheme - Aviation

Since the start of 2012 emissions from all flights from, to and within the European Economic Area (EEA) are included in the EU Emissions Trading System (EU ETS). The legislation, adopted in 2008, applies to EU and non-EU airlines alike.

Learn more about the Emissions Trading Scheme for Aviation

 

Emissions Trading Scheme - Union Registry

The European Commission has set up a standardised and secured system of registries across Member States based on United Nations data exchange standards to track the issue, holding, transfer and cancellation of allowances. Provisions on the tracking and use of credits from CDM and JI projects in the EU system are also included.

Learn more about Ireland's Emissions Trading Registry