European Union Emissions Trading Scheme (EU ETS)

The European Union Emissions Trading System (EU ETS) is the world's first and largest cap-and-trade program designed to reduce greenhouse gas emissions and combat climate change. Launched in 2005, it is a cornerstone of the EU's climate policy and plays a crucial role in achieving the EU's target of net-zero emissions by 2050. The system covers power and heat generation, energy-intensive industries, and commercial aviation within the European Economic Area (EEA).

Key features of the EU ETS include:

• Cap-and-Trade Mechanism: A cap is set on the total amount of emissions from covered sectors. Companies must hold allowances equivalent to their emissions, creating a financial incentive to reduce emissions or trade allowances.
• Phased Implementation: The EU ETS is implemented in phases, with Phase IV (2021-2030) focusing on tighter caps, the introduction of a Market Stability Reserve (MSR), and addressing carbon leakage risks.
• Carbon Pricing: The price of carbon allowances is determined by the market, encouraging companies to invest in low-carbon technologies to reduce their emissions and operational costs.

The EU ETS has been instrumental in reducing emissions across the EU by providing a cost-effective mechanism to incentivize decarbonization. The system is also evolving to include new sectors and strengthen its impact on achieving climate goals.

Source(s):

• European Commission. (n.d.). What is the EU ETS?
• DNV. (2024). EU Emissions Trading System (EU ETS).

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