Content last updated: December 2012.
The EU ETS puts a cap on the carbon dioxide (CO2) emitted by
business and creates a market and price for carbon allowances.
It covers 45% of EU emissions, including energy intensive sectors
and approximately 12,000 installations.
See further details below on:
How the EU ETS works currently
The scheme is now in Phase II, which runs from 2008-2012 (the
commitment period of the Kyoto Protocol). During this
phase, every EU member state:
- Developed a National Allocation Plan (NAP)
- Member State proposed a limit ('cap') on total emissions from
- The plans were approved by the European Commission, in
many cases after some revision.
- Distributes Allowances
- The 'Cap' is converted into allowances, known as EUAs (1
tonne of Carbon Dioxide = 1 EUA)
- The Member States distribute these allowances to
installations in the scheme in their country according to their
- Up to 10% of the allowances may be auctioned instead of being
given for free. These auctions will be largest in the UK and
- Operates the Scheme
- Installations must monitor and report verified carbon
- At the end of each year, installations must surrender
sufficient allowances to cover their emissions and can buy
additional allowances or sell any surplus
- Joint Implementation (JI) and Clean Development Mechanism (CDM)
credits can be used within the scheme, through the 'Linking
Directive', agreed in 2004)
How the EU ETS will work in the future
Phase III will start in 2013 and run until 2020. The biggest
changes in Phase III will be:
A centralised EU-wide cap on emissions will be set.
- 'Cap' will reduce over time
The 'cap' will decline by at least 1.74% a year, so that
emissions in 2020 will be at least 21% below their level in
- More will be covered
The scheme will include the production of all metals
(including aluminium). For some sectors, it will include the
emission of other greenhouse gases in addition to carbon dioxide.
The scheme was also meant to be extended to the aviation industry
from January 2013, covering all flights taking off and landing in
the EU, including those originating from or travelling to non-EU
countries. However in November 2012 the European Commission decided
to defer the extension of the scheme to extra-EU flights until
after the International Civil Aviation Organization (ICAO) General
Assembly in autumn 2013, on the expectation that a global agreement
on greenhouse gas mitigation from aviation will be reached. The ETS
will continue to apply to intra-EU flights from January 2013.
DECC has introduced an opt-out provision for small emitters and
hospitals in the UK, allowing them to move to a more "light-touch"
scheme with lower administrative costs (which hit
disproportionately smaller companies). The opt-out will deliver an
equivalent carbon reduction.
At least 50% of allowances will be auctioned from 2013 (rather
than given to installations). Use of Clean Development Mechanism
(CDM) allowances will be more tightly restricted to no more than
50% of the reductions required.
Carbon Trust EU ETS reports
Publication date: 01/06/2008
This report analyses amendments to the EU emissions trading
scheme (EU ETS) proposed by the European Commission on the 23
January 2008 and their implications for business.
It concludes that the proposals are a bold and significant step
in the right direction that correct weaknesses in the current
scheme and provide the level of certainty that business and
investors have been calling for.
Publication date: 11/01/2008
This report combines data on how business costs would be
affected by carbon costs with analysis of the effect on prices and
international trade in order to identify the small group of
activities for which competitiveness is an issue for the
environment, as well as for business, and to identify potential
Publication date: 21/05/2007
This report analyses the implications for the Phase II carbon
market (and the resulting industrial abatement incentives) and the
wider lessons to be learned from the allocation process.
Publication date: 01/06/2006
This report, based on collaborative research with Climate
Strategies, examines the workings of the EU ETS to date and offers
analysis and recommendations on its future development.
The study identifies seven key challenges to overcome for the
second phase of the EU ETS and sets out the Carbon Trust's own
conclusions and recommendations for the future of the EU ETS as an
instrument that can both help business deliver emission reductions
as efficiently as possible, and also protect and ultimately enhance
business competitiveness in a CO2-constrained world.
Publication date: 30/06/2004
This report explores in depth the implications of the EU ETS for
industrial competitiveness in the UK and the wider EU. It presents
our analysis of combined insights from economic modelling and a
stakeholder interview programme.
The EU ETS scheme started in 2005 in order to help the EU meet
its targets under the Kyoto Protocol (8% reduction in
greenhouse gas emissions from 1990 levels).
The scheme is the world's largest carbon-trading scheme. It
provides an incentive for installations to reduce their carbon
emissions, because they can then sell their surplus allowances.
Installations are included in the scheme on the basis of their
Carbon Dioxide (CO2) emitting activities. Industries that are
- Electricity generation
- Iron & steel
- Mineral processing (for example: cement manufacture)
- Pulp and paper processing
More information on the EU ETS can be found on the DECC website.