EU Emissions Trading System (EU ETS)

The EU ETS is central to the EU’s climate action policy of reducing greenhouse gas (GHG) emissions in a cost-effective way.

The system is based on the ‘ cap and trade ’ principle. This means that a ‘cap’, or limit, is set on the total amount of certain GHGs that can be emitted by the installations covered by the system. The cap is reduced over time so that total emissions fall.

Within the cap, installations buy or receive emission allowances, which they can trade with one another as needed. The limit on the total number of allowances available ensures that they have a value.

At the end of each year, an installation must give up enough allowances to cover all of its emissions. If an installation reduces its emissions, it can keep the allowances it has not used to cover its future needs or sell them on to another installation that is short of allowances.

The ETS:

operates in the EU Member States, plus Iceland, Liechtenstein and Norway. As of 1 January 2020, the EU ETS is also linked to the Swiss GHG emission trading system. From 2021, the EU ETS will cover electricity-generating installations in Northern Ireland;
regulates emissions from nearly 11,000 power plants and manufacturing installations and around 600 aircraft operators flying to and from European Economic Area airports;
covers around 38% of the EU’s GHG emissions.

In September 2020, under the European Green Deal, the European Commission presented a Climate Target Plan, an impact-assessed plan to reduce EU’s net GHG emissions by at least 55% by 2030. In July 2021, the Commission presented legislative proposals to implement the new target, including revising and possibly expanding the scope of the EU ETS.