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EU Emissions Trading System

The European Union Emissions Trading System (EU ETS) is one of the key policies introduced by the EU to combat climate change and to reduce industrial greenhouse gas emissions cost-effectively.  It is the largest multi-national emissions trading scheme in the world and is the first of its kind and covers more than 11,000 power stations and industrial plants in 31 countries, as well as airlines.

Launched in 2005, the EU ETS works on the ‘cap and trade’ principle.  This means there is a ‘cap’, or limit, on the total amount of emissions emitted by installations participating in the scheme.  Within this cap, companies receive emission allowances which they can sell to or buy from one another as needed.  At the end of each year, installations are required to surrender allowances to account for their actual emissions.  If a company reduces its emissions, it can keep the spare allowances to cover its future needs or else sell them to another company that is short of allowances.  The flexibility that trading brings ensures that emissions are cut where it costs least to do so.

The number of allowances is reduced over time so that total emissions fall.  In 2020 emissions will be 21% lower than in 2005.  By 2030, they will be 43% lower, under the agreement reached by the European Council in October 2014.

The scheme is mandatory for large energy-intensive industrial installations.  Over 10,000 installations throughout the EU are covered by the scheme, accounting for nearly 50 per cent of the EU's total CO2 emissions.  Almost 100 installations participate in the scheme in Scotland.

The ETS is now in its third phase, running from 2013 to 2020.  The system has been strengthened for Phase III and the main changes are:

  • A single, EU-wide cap on emissions applies in place of the previous system of national caps;
  • Auctioning, not free allocation, is now the default method for allocating allowances. From 2013, more than 40% of allowances will be auctioned, and this share will rise progressively each year;
  • For those allowances still given away for free, harmonised allocation rules apply which are based on ambitious EU-wide benchmarks of emissions performance;
  • Coverage expands to include all of the following sectors:
    1. Power and heat generation
    2. 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
    3. Commercial aviation.

Proposals for Phase IV of the ETS (post-2020) are expected to be made by the European Commission during 2015, following the political agreement reached by European leaders in the October 2014 European Council, that the ETS should continue beyond 2020, and that it should be reformed and strengthened through an increased linear reduction factor of 2.2% p.a. from 2021.  This means that emissions from sectors covered by the ETS will be 43% lower in 2030 than in 2005.

Ahead of publication of the proposals for Phase IV, EU member states and the European Parliament are also negotiating to address the structural surplus of allowances that have built up within the ETS as a result of the economic crisis since 2008.  The Scottish Government strongly supports the proposal for a Market Stability Reserve, which would create a more dynamic allocation system for allowances that can respond more effectively to real market conditions of supply and demand.  This would see a sustained rise in the carbon price, which would send a stronger signal to industry giving confidence to invest in low carbon technologies to reduce emissions.

The Emissions Trading System in the UK is implemented via the Greenhouse Gas Emissions Trading Scheme Regulations 2012, which were agreed jointly by the UK Government and the devolved administrations.  The Scottish Government has devolved policy responsibility for the ETS in Scotland as part of these arrangements, with regulatory functions in Scotland exercised by SEPA.  Under the agreement for joint implementation of the ETS across the UK, the Scottish Government is regularly involved in discussions on policy development and monitoring of implementation, together with the other devolved administrations and regulators.  Any changes to the operation of the ETS across the UK must be agreed by the Scottish Ministers, and the Scottish Government helps to shape the agreed UK negotiating position ahead of Council discussions in the EU.

Further Information

EU Emissions Trading System – European Commission website

EU Emissions Trading System – UK Government website

EU Emissions Trading System – SEPA website

EU Emissions Trading System Directive 2009

UK Greenhouse Gas Emissions Trading Scheme Regulations 2012

UK position on future of the ETS