The European Union Emissions Trading System (EU ETS)
The EU ETS was established in 2003 by a Directive of the European Parliament and the European Council, and came into operation in 2005. It is the cornerstone of EU policy towards combatting climate change by reducing GHG emissions cost-effectively. It is the first multinational cap-and-trade system at the level of installations and covers 45% of GHG emissions of the EU. It covers 31 countries which, in total, account for 20% of global gross domestic product (GDP) (EDF et al. 2015).
The main objective of the EU ETS is to help EU Member States meet their commitments under the Kyoto Protocol to limit or reduce GHG emissions in a cost-effective way. The system does this by capping the overall level of emissions across EU Member States and permitting the trade of emissions allowances. Each allowance gives the emitter the right to emit 1 tonne of CO 2 or an equivalent amount of any other GHGs. The ETS, in contrast to traditional ‘command and control’ regulation, allows the market to identify the most cost-effective emission reductions.
Significant GHG emissions reductions: According to the EU Environmental Agency, CO 2 e emissions declined by approximately 19% between 2005 and 2013, a trend that is close to what is necessary to achieve the 21% emissions reduction target by 2020 (EDF, 2015). There are several reasons why emissions have been reduced in the EU (lower economic growth due to the global financial crisis starting around 2007-08, lower population growth, and other low carbon development programmes), but the EU ETS is deemed to have played an important part.
A carbon price embedded in companies’ decision-making processes: The EU ETS has raised awareness in companies whereby the decision makers have become more informed about climate change issues. A carbon price means that there is now a cost to emitting GHGs that influences a company’s bottom line and its decision-making process.
Cost-effective GHG emission abatement: research carried out by CDC Climate Research (2013) points at how the EU carbon price has been useful in promoting cost-effective emission abatements. The price of carbon has led to a reduction of 1,048 million tCO 2 -e between 2008 and 2012 through the use of carbon credits from the CDM and JI mechanisms. These lower carbon credits prices have enabled installations to reduce their costs of compliance with emissions targets. Cost savings by companies across the EU are estimated to be between EUR 4 and EUR 20 billion over the period 2008-12.
Investment stimulated low carbon technologies in the energy efficiency (EE) and renewable energy (RE) sectors: if prices of allowances are high enough, the market-driven nature of the EU ETS will trigger an increase in investments in energy efficiency measures, thus reducing energy costs and the financial risks associated with increasing energy prices. The EU ETS has supported EE and RE programs by providing financial incentives for developing innovative RE technology and carbon capture and storage projects through the NER300 fund. The revenues generated from the EU ETS also provide Member States with finances that can be used for low carbon and RE programs.
- European Parliament
- European Commission (EC)
- European Council
- EU Member State governments
- EC Climate Change Committee