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Greenhouse gas emission allowance trading system



Directive 2003/87/EC establishing a system for greenhouse gas emission allowance trading within the EU


It establishes the EU emissions trading system (ETS)*. This is the cornerstone of the EU’s policy to tackle climate change by reducing greenhouse gas (GHG) emissions in a cost-effective and economically efficient way. It is based on the ‘cap and trade’ principle*.

EU countries have amended the original legislation several times as the system has evolved. The most recent changes were agreed in March 2018.


The current (third) phase of the EU ETS runs from 2013 to 2020.

The system applies to:

  • power plants;
  • a wide range of energy-intensive industrial sectors;
  • aircraft flying between airports in the EU, Norway and Iceland;
  • emissions of:
    • carbon dioxide (CO2)
    • nitrous oxide
    • perfluorocarbons
    • methane
    • hydrofluorocarbons and
    • sulphur hexafluoride.

Since 1 January 2005, operators of all activities covered by the legislation must surrender an appropriate number of emission allowances to cover their GHG emissions.

The total number of allowances issued in the EU is reduced annually: by 1.74% between 2013-2020 and by 2.2% from 2021.

Aircraft flying to airports in the EU, Iceland or Norway from elsewhere in the world are exempt from the EU ETS until 31 December 2023.


  • may be transferred between installations, airlines and market participants in the EU and to non-EU countries where they are recognised (none so far);
  • are valid indefinitely if issued from 1 January 2013 onwards;
  • issued from 1 January 2021 onwards cannot be used for phase 3 (2013-2020) compliance.

From 2021, 57% of allowances are to be auctioned. At least half of the EU countries’ proceeds must be used for climate-related purposes.

Two new low carbon funding mechanisms will be established:

  • the Modernisation Fund will support modernising investment projects in the power sector and wider energy systems in EU countries whose gross domestic product (GDP) per head at market prices in 2013 was below 60% of the EU average; it will comprise 2% of the total number of allowances in 2021-2030;
  • the Innovation Fund will support the demonstration of innovative technologies and breakthrough innovation in sectors covered by the EU ETS, including innovative renewables, carbon capture and utilisation, and energy storage; the resources available will correspond to the market value of at least 450 million allowances at the time of their auctioning.

EU countries:

  • issue the allowances;
  • ensure recipients of allowances monitor and report their emissions annually;
  • auction, from 2019 onwards, all allowances not allocated free of charge or placed in a market stability reserve;
  • determine how to use income from the auctions. Possibilities include measures to:
    • develop renewable energy and energy efficiency
    • avoid deforestation
    • capture and store CO2 safely
    • promote low emission public transport
    • improve district heating systems
    • finance activities to tackle climate change in developing countries;
  • submit to the Commission by 30 September 2019 a list and details of the installations covered by the legislation for the 5 years beginning 1 January 2021. This must be repeated at 5-yearly intervals;
  • issue annually, by 28 February, the number of allowances to be allocated that year;
  • provide the Commission with an annual report on the application of the legislation;
  • ensure that allowances can be transferred between installations in the EU and to non-EU countries where the allowances are recognised;
  • determine effective penalties for any breaches of the law. Operators without enough allowances to cover their emissions are fined €100 for each tonne of CO2 emitted.

All of these steps are fulfilled on the basis of rules harmonised at EU level.

The European Commission:

  • presents an annual report to the Council and the European Parliament on the implementation of the EU ETS and accompanying climate and energy policies;
  • has the power to define the technical rules necessary to implement basic legislation;
  • maintains an independent registry and a transaction log that record the ownership, issuing, transfer and cancellation of allowances.


It has applied since 25 October 2003 and had to become law in EU countries by 31 December 2003.


Under the Kyoto Protocol on climate change, agreed in December 1997, the EU pledged to reduce GHG emissions between 2008 and 2012 by 8% compared to 1990 levels.

In the second Kyoto period (2013-2020), this commitment was increased to 20% of 1990 levels by 2020.

During the fourth phase of the EU ETS (2021-2030), the EU is aiming to cut its emissions by at least 40% by 2030, in line with the 2015 Paris Agreement on climate change. To meet these targets, the EU established a GHG allowance trading system. Each allowance covers the emission of 1 tonne of CO2 or CO2 equivalent over a specific period.

For more information, see:


EU Emissions Trading System (EU ETS): the first — and still by far the largest — international system for trading GHG emission allowances, it covers nearly 11,000 power stations and manufacturing plants in the 28 EU countries (1), Iceland, Norway and Liechtenstein, as well as aviation activities.
Cap and trade principle: the EU ETS works on the basis of this principle. A ‘cap’, or limit, is set on the total amount of certain GHGs that can be emitted by the factories, power plants and other installations in the system. The cap is reduced over time so that total emissions fall. The system allows trading of emission allowances so that the total emissions of the installations and aircraft operators stays within the cap and the least-cost measures can be taken up to reduce emissions.


Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC (OJ L 275, 25.10.2003, pp. 32-46)

Successive amendments to Directive 2003/87/EC have been incorporated in the original text. This consolidated version is of documentary value only.


Decision (EU) 2018/853 of the European Parliament and of the Council of 30 May 2018 amending Regulation (EU) No 1257/2013 and Directives 94/63/EC and 2009/31/EC of the European Parliament and of the Council and Council Directives 86/278/EEC and 87/217/EEC as regards procedural rules in the field of environmental reporting and repealing Council Directive 91/692/EEC (OJ L 150, 14.6.2018, pp. 155-161)

Decision (EU) 2015/1814 of the European Parliament and of the Council of 6 October 2015 concerning the establishment and operation of a market stability reserve for the Union greenhouse gas emission trading scheme and amending Directive 2003/87/EC (OJ L 264, 9.10.2015, pp. 1-5)

See consolidated version.

last update 03.10.2018

(1) The United Kingdom withdraws from the European Union and becomes a third country (non-EU country) as of 1 February 2020.