eu emissions trading system_2013_en

8/13/2019 EU Emissions Trading System_2013_en

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y The EU ETS is the cornerstone o the European Unions drive to reduce its emissions o man-made greenhouse gaseswhich are largely responsible or warming the planet and causing climate change.

y The system works by putting a limit on overall emissions rom high-emitting industry sectors which is reduced eachyear. Within this limit, companies can buy and sell emission allowances as needed. This cap-and-trade approachgives companies the lexibility they need to cut their emissions in the most cost-e ective way.

y The EU ETS covers more than 11,000 power stations and manu acturing plants in the 27 EU member states as wellas Croatia, Iceland, Liechtenstein and Norway. Flights within and between most o these countries are also covered.In total, around 45% o total EU emissions are limited by the EU ETS.

y As the main market or credits generated by emission-saving projects around the world, the EU ETS is a major sourceo investment in environmentally sustainable development in developing countries. The EU system is the worldsbiggest emissions trading market, accounting or over three-quarters o international carbon trading.

y The EU ETS is inspiring the development o national or regional emissions trading systems in several parts o theworld. Europe is looking to link the EU ETS with compatible schemes in other countries, and a pathway or linkingwith Australias system has been agreed in principle.

The EU Emissions TradingSystem (EU ETS)

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Climate Action


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Greenhouse gases emitted by human activities are warming the Earth and causing changes in the global climate with increasingly severehuman, economic and environmental impacts. Scientic evidence indicates that, to prevent climate change rom reaching the most dangerousproportions, the world needs to stop the growth in emissions o greenhouse gases by 2020 at the latest and then reduce them sharply - by atleast hal o 1990 levels by 2050, and more afer that.

Emissions trading systems are among the most cost-effective tools or cutting greenhouse gas emissions. The European Union launched the EUEmissions Trading System (EU ETS) in 2005 as the cornerstone o its strategy or cutting emissions o carbon dioxide (CO2) and other greenhouse

gases at least cost. In contrast to traditional command and control regulation, emissions trading harnesses market orces to nd the cheapestways o reducing emissions.

The EU ETS is the worlds rst major carbon market and remains by ar the biggest today. The rst international emissions trading systemto address greenhouse gas emissions rom companies, the European system accounts or over three-quarters o the trading volume o theinternational carbon market and unctions as its engine.

By putting a price on carbon and thereby giving a nancial value to each tonne o emissions saved, the EU ETS has placed climate change on theagenda o company boards across Europe. A sufficiently high carbon price also promotes investment in clean, low-carbon technologies.

By allowing companies to buy credits rom emission-saving projects around the world, the EU ETS also acts as a major driver o internantionalinvestment in clean technologies and low-carbon solutions, particularly in developing countries.

While the regulatory ramework o the EU ETS was largely unchanged or the rst two trading periods o its operation, the beginning o the thirdtrading period in 2013 has brought a major re orm based on common rules which will strengthen the system.

This actsheet explains the EU ETS as it stands at the start o the 2013-2020 trading period.

EU ETS: Key facts Operates in the 27 EU countries plus Croatia, Iceland,

Liechtenstein and Norway Limits greenhouse gas emissions rom:

- More than 11,000 heavy energy-using installations inpower generation and manu acturing industry

- Flights to and rom the EU, Iceland,Liechtenstein and Norway

Covers around 45% o the EUs greenhouse gas emissions i S

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How the EU ETS worksThe EU ETS works on the cap and trade principle. The overallvolume o greenhouse gases that can be emitted each year by thepower plants, actories and other companies covered by the systemis subject to a cap set at EU level. Within this Europe-wide cap,companies receive or buy emission allowances which they can tradei they wish.

The cap on emissions rom power stations and other xed installationsis reduced by 1.74% every year. This means that in 2020, greenhousegas emissions rom these sectors will be 21% lower than in 2005.A separate cap applies to the aviation sector: or the whole 2013-2020 trading period, this is 5% below the average annual level oemissions in the years 2004-2006.

Emission allowances are the currency o the EU ETS, and the limit onthe total number available gives them a value. Each allowance givesthe holder the right to emit one tonne o CO2, the main greenhousegas, or the equivalent amount o two more power ul greenhousegases, nitrous oxide (N2O) and peruorocarbons (PFCs).

Allowances can be used only once. Companies have to surrenderallowances or every tonne o CO2 (or the equivalent amount o N2Oor PFCs) covered by the EU ETS that they emitted in the previous year:

heavy nes are imposed i they do not hand in enough allowances tomatch their emissions.

Companies may receive some allowances rom governments orree. To cover the rest o their emissions they need to buy additional

allowances or else draw on any surplus allowances they have savedrom previous years. Within limits, they can also buy credits rom

certain types o approved emission-saving projects around the world.The need to purchase or draw on their reserves o allowances andcredits creates a permanent incentive or companies to reduce theiremissions. But companies can also sell allowances and credits, orinstance i they judge they have more than they are going to need.These exibilities in the system allow companies to choose the mostcost-effective options to address their emissions. The main optionscan be broadly summarised as: Investment in more e cient technology and/or a shi to less

carbon-intensive energy sources in order to reduce emissions; Purchase of extra allowances or credits on the market; A combination of the above.


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Greenhouse gases and sectors coveredCarbon dioxide (CO2) from

- Power and heat generation

- Energy-intensive industry sectors including oil reneries, steelworks and production o iron, aluminium, metals, cement,lime, glass, ceramics, pulp, paper, cardboard, acids and bulkorganic chemicals

- Commercial aviation

Nitrous oxide (N2O) rom production o nitric, adipic, glyoxaland glyoxlic acids

Peruorocarbons (PFCs) rom aluminium production

What the EU ETS coversWhile emissions trading has the potential to cover many economicsectors and greenhouse gases, the EU ETS ocuses on emissionswhich can be measured, reported and veried with a high level oaccuracy.

The system covers emissions o carbon dioxide (CO2) rom power

plants, a wide range o energy-intensive industry sectors and

commercial airlines. Nitrous oxide emissions rom the productiono certain acids and emissions o peruorocarbons rom aluminiumproduction are also included (see boxGreenhouse gases and sectorscovered ).

Participation in the EU ETS is mandatory or companies operating inthese sectors, but in some sectors only plants above a certain sizeare included. Governments can exclude certain small installations

rom the system i scal or other measures are in place that will cuttheir emissions by an equivalent amount.

For commercial airlines, the system covers CO2 emissions romights within and between countries participating in the EU ETS(except Croatia, until 2014). International ights to and rom non-ETScountries are also covered, but as a goodwill gesture the EuropeanCommission has proposed de erring the schemes application tointernational ights in 2012 to allow time or agreement on a global

ramework or tackling aviation emissions to be reached in autumn

2013.Altogether the EU ETS covers around 45% o total greenhouse gasemissions rom the 27 EU countries.

How allowances are allocated Auctioning

Whereas the vast majority o emission allowances was previouslygiven away or ree by governments, rom 2013 auctioning is themain method o allocating allowances. This means that businesseshave to buy an increasing proportion o their allowances at auction.EU legislation sets the goal o phasing out ree allocation completelyby 2027. Auctioning is the most transparent method o allocatingallowances and puts into practice the principle that the pollutershould pay.

From 2013 power generators must buy all their allowances:experience shows that they have been able to pass on the notional cost

o allowances to customers even when they received them or ree.However, eight o the member states which have joined the EU since2004 - Bulgaria, Cyprus, Czech Republic, Estonia, Hungary, Lithuania,Poland and Romania - have made use o a provision allowing themto continue granting limited numbers o ree allowances to existingpower plants until 2019. In return they will invest at least as muchas the value o the ree allowances in modernising their power sector.

Given the signicant weight o power generation in the EU ETS, andeven with partial ree allocation in the eight member states, morethan 40% o allowances in the system will be auctioned in 2013 andthis share will rise progressively in the ollowing years.

Eighty-eight per cent o the allowances to be auctioned are allocatedto states on the basis o their share o veried emissions rom EUETS installations in 2005. Ten per cent are allocated to the leastwealthy EU member states as an additional source o revenue tohelp them invest in reducing the carbon intensity o their economiesand adapting to climate change.

The remaining 2% is given as a Kyoto bonus to nine EU memberstates which by 2005 had reduced their greenhouse gas emissionsby at least 20% o levels in their Kyoto Protocol base year orperiod. These are Bulgaria, Czech Republic, Estonia, Hungary, Latvia,Lithuania, Poland, Romania and Slovakia.

Auctions are held by companies appointed by national governments

but are open to buyers rom any country participating in the EU ETS.Most governments use a common plat orm or their auctions, butGermany, Poland and the UK have opted to use their own plat orms.

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Cutting greenhouse gas emissions:EU targets * and dates

2020: -20% (or -30% i other major economies commit toundertake their air share o a global reduction effort)

2050: -80-95%

*compared to 1990 levels


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Use of auctioning revenues

Under the relevant EU legislation at least hal o auctioning revenues,and all o the revenues rom auctioning allowances to the aviationsector, should be used to combat climate change in Europe or othercountries. Member states are obliged to in orm the Commission ohow they use the revenues. Germany, or instance, is spending alarge part o its auctioning revenues on climate change projects indeveloping countries and emerging economies.

Free allocation

In sectors other than power generation, the transition to auctioningis taking place progressively. Manufacturing industry will receive80% o its allowances ree o charge in 2013 but this will decreaseannually to 30% in 2020. Allowances not allocated or ree will beauctioned. In theaviation sector , however, only 15% o allowanceswill be auctioned over the whole 2013-2020 period.

The allowances given to manu acturing industry or ree aredistributed to companies on the basis o harmonised rules. Thisensures that installations o a given type are treated equally acrossthe EU. Underpinning these rules are ambitious benchmarks oemissions per ormance which have been drawn up in consultationwith industry. By rewarding the most efficient installations, thebenchmarks strengthen the incentive or businesses to reduce theiremissions.

Installations in sectors and sub-sectors which are deemed to beexposed to a signicant risk o carbon leakage receive specialtreatment to support their competitiveness (see boxPreventingcarbon leakage ). Those reaching the benchmark level in principlereceive or ree all o the allowances they need, based on their historicemissions, or the whole 2013-2020 period. Installations allingshort o the benchmark receive a proportionately lower allocation o

ree allowances compared to their emissions, and there ore need toreduce their emissions and/or buy more allowances.

In sectors not deemed to be at signicant risk o carbon leakage,installations which attain the benchmark per ormance level in

principle receive 80% o the allowances they need or ree in2013. This percentage is reduced annually to 30% in 2020. Again,installations alling short o the per ormance benchmark receivea proportionately lower allocation o allowances than those whichreach it.

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Preventing carbon leakageCarbon leakage is the term used to describe the situation thatmay occur i , or reasons o costs related to climate policies,businesses trans erred production to other countries whichhave laxer constraints on greenhouse gas emissions. This couldlead to an increase in their total emissions. The risk o carbonleakage may be higher in certain energy-intensive industries.

The sectors and sub-sectors which are deemed to be exposedto a signicant risk o carbon leakage are those that gure inan official list. This is established or ve years, on the basiso clearly dened criteria and afer extensive consultation withstakeholders. The rst carbon leakage list applies to the reeallocation o allowances in 2013 and 2014. The list is basedon agreed criteria and contains 170 sectors and subsectors,covering a very high share o industrial emissions.

Ensuring complianceBusinesses must monitor and report their EU ETS emissions oreach calendar year and have their emission reports checked byan accredited verier. They must surrender enough allowances tocover their total emissions by 30 April o the ollowing year. Theseallowances are then cancelled so they cannot be used again.

A business is penalised i it does not surrender enough allowances tocover its emissions. It has to buy allowances to make up the short all,

is named and shamed by having its name published, and must pay adissuasive ne or each excess tonne o greenhouse gas emitted. Thene in 2013 is 100 per tonne o CO2 (or the equivalent amount oN2O or PFCs). The penalty rises annually in line with the annual rateo ination in the Eurozone (the group o EU countries using the euroas their currency).

EU ETS: Development in phases2005-2007: 1st trading period used or learning by doing.EU ETS success ully established as the worlds biggest carbon

market. However, the number o allowances, based on estimatedneeds, turns out to be excessive; consequently the price o rst-period allowances alls to zero in 2007.

2008-2012: 2nd trading period. Iceland, Norway andLiechtenstein join (1.1.2008). The number o allowances isreduced by 6.5% or the period, but the economic downturncuts emissions, and thus demand, by even more. This leads to asurplus o unused allowances and credits which weighs on thecarbon price. Aviation brought into the system (1.1.2012).

2013-2020: 3rd trading period. Major re orm takes effect(1.1.2013). Biggest changes are the introduction o an EU-wide cap on emissions (reduced by 1.74% each year) and aprogressive shif towards auctioning o allowances in place ocost- ree allocation. Croatia joins (1.1.2013).

2021-2028: 4 th trading period.


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Building an international carbon marketThe European Commission sees the EU ETS as an important buildingblock or developing an international network o emission tradingsystems. The international carbon market is expected to developthrough the bottom-up linking o compatible domestic cap-and-tradesystems. National or sub-national systems are already operating in

Australia, Japan, New Zealand, Switzerland and the United States,and are planned in Canada, China and South Korea.

Linking the EU ETS with other robust emissions trading systemsprovides several potential benets, including reducing the cost ocutting emissions, increasing market liquidity, stabilising the carbonprice, leveling the international playing eld and supporting globalcooperation on climate change.

In a major step towards the rst ull inter-continental linking oemission trading systems, the European Commission and Australiahave agreed that the EU ETS and the Australian emissions tradingscheme should be ully linked by mid-2018. There will be an interim

link rom 1 July 2015, allowing Australian businesses to use EUallowances to help cover their emissions under the Australian scheme.

Negotiations are also under way with Switzerland on linking the EUETS with the Swiss ETS.

Driving clean investment in developingcountriesWhile allowances are the main currency o the EU ETS, companiescan also use credits generated by certain types o emission-savingprojects around the world to cover a proportion o their emissions.These projects must be recognised under the Kyoto Protocols Clean

Development Mechanism or Joint Implementation mechanism asbringing real and genuinely additional emission reductions. Credits

rom new market mechanisms may also be accepted once theybecome available.

By allowing companies to buy international credits, the EU ETSis channelling substantial amounts o investment and cleantechnologies to promote low-carbon development in developingcountries and economies in transition.

Overall, international credits can be used to cover emissions osome 1.7 billion tonnes o CO2 (or the equivalent amount o N2O orPFCs) between 2008 and 2020. This represents hal the reductionin emissions that will be made under the EU ETS in that period. Justunder one-third o the limit had been used by the end o 2011.Credits are accepted rom all types o projects except nuclear energyprojects, afforestation or re orestation activities, and rom 2013 -projects involving the destruction o industrial gases.

The accurate accounting o all allowances issued is assured by asingle EU registry with strong security measures. The registry keepstrack o the ownership o allowances held in electronic accounts, inthe same way as a bank holds a record o its customers and theirmoney.

Promoting low-carbon investment inEuropeBy capping overall greenhouse gas emissions rom major sectors othe economy, the EU ETS creates an incentive or companies to investin technologies that cut emissions. The market price o allowances -the carbon price creates a greater incentive the higher it is.

In addition, revenues rom the sale o 300 million allowances - 5% othe total allowances available in the 2013-2020 period - are beingused to co-nance the construction and operation o large-scaledemonstration projects in two areas o low-carbon technologies:carbon capture and storage, and innovative renewable energytechnologies. This unding programme is known as NER300.

How the EU ETS is establishedDirective on emissions trading adopted by the EuropeanParliament and Council (comprising member countries) in 2003;substantially revised in 2009 to strengthen the EU ETS rom2013.

Legislation needed to implement specic aspects o the directive(eg on carbon leakage, auctioning, international credits) is

adopted by the European Commission afer approval by the EUClimate Change Committee (grouping member state experts)and consultation o the European Parliament.

Structural reformThe ETS aces a challenge in the orm o a growing surplus oallowances, largely because o a greater than anticipated reductionin emissions since 2008 due to the economic crisis. In the short termthis surplus risks undermining the orderly unctioning o the carbonmarket; in the longer term it could affect the ability o the EU ETS tomeet more demanding emission reduction targets cost-effectively.

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As an immediate measure, the Commission has there ore undertakenan initiative which, i approved, would postpone the auctioning osome allowances until late in the third trading period. The Commissionhas also launched a debate on structural re orm measures whichcould provide a sustainable solution to the surplus in the longer term.

How and where trading is doneAnyone with an account in the EU registry can buy or sell allowances,whether they are a company covered by the EU ETS or not. Tradingcan be done directly between buyers and sellers, through severalorganised exchanges or through the many intermediaries active inthe carbon market.

The price o allowances is determined by supply and demand.Over 70 million allowances have been traded per day. In 2011,some six billion allowances were traded with a total value o77 billion.1

1 Source: Thomson Reuters Point Carbon

Source: Bloomberg New Energy Finance and London Energy Brokers Association. Data from six exchanges are used in this assessment: Bluenext,

Climex, European Energy Exchange, Green Exchange, Intercontinental Exchange and Nord Pool

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Mt Over the counter tradingTotal exchange trading

0 2 J a n u a r y 2 0 0 8

0 2 F e b r u a r y 2 0 0 8

0 2 M a r c h 2 0 0 8

0 2 A p r i l 2 0 0 8

0 2 M a y 2 0 0 8

0 2 J u n e 2 0 0 8

0 2 J u l y 2 0 0 8

0 2 A u g u s t 2 0 0 8

0 2 S e p t e m b e r 2 0 0 8

0 2 O c t o b e r 2 0 0 8

0 2 N o v e m b e r 2 0 0 8

0 2 D e c e m b e r 2 0 0 8

0 2 J a n u a r y 2 0 0 9

0 2 F e b r u a r y 2 0 0 9

0 2 M a r c h 2 0 0 9

0 2 A p r i l 2 0 0 9

0 2 M a y 2 0 0 9

0 2 J u n e 2 0 0 9

0 2 J u l y 2 0 0 9

0 2 A u g u s t 2 0 0 9

0 2 S e p t e m b e r 2 0 0 9

0 2 O c t o b e r 2 0 0 9

0 2 N o v e m b e r 2 0 0 9

0 2 D e c e m b e r 2 0 0 9

0 2 J a n u a r y 2 0 1 0

0 2 F e b r u a r y 2 0 1 0

0 2 M a r c h 2 0 1 0

0 2 A p r i l 2 0 1 0

0 2 M a y 2 0 1 0

0 2 J u n e 2 0 1 0

0 2 J u l y 2 0 1 0

0 2 A u g u s t 2 0 1 0

0 2 S e p t e m b e r 2 0 1 0

0 2 O c t o b e r 2 0 1 0

0 2 N o v e m b e r 2 0 1 0

0 2 D e c e m b e r 2 0 1 0

0 2 J a n u a r y 2 0 1 1

0 2 F e b r u a r y 2 0 1 1

0 2 M a r c h 2 0 1 1

0 2 A p r i l 2 0 1 1

0 2 M a y 2 0 1 1

0 2 J u n e 2 0 1 1

0 2 J u l y 2 0 1 1

0 2 A u g u s t 2 0 1 1

0 2 S e p t e m b e r 2 0 1 1

0 2 O c t o b e r 2 0 1 1

0 2 N o v e m b e r 2 0 1 1

0 2 D e c e m b e r 2 0 1 1

European Union, 2013Reproduction is authorised provided

the source is acknowledged.

Daily trading volumes in EU emission allowances (in millions)

January 2013

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eu emissions trading system_2013_en

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