EU ETS (Emissions Trading System)
Europe's cap-and-trade system for reducing industrial and power sector emissions.
What is EU ETS (Emissions Trading System)?
The EU Emissions Trading System (EU ETS) is the European Union's flagship policy to combat climate change and its key tool for reducing greenhouse gas emissions cost-effectively. It is a 'cap-and-trade' system that sets a cap on the total amount of greenhouse gases that can be emitted by installations covered by the system. Companies receive or buy emission allowances, which they can trade as needed. The cap is reduced over time, leading to a decline in overall emissions.
Why is EU ETS (Emissions Trading System) important?
The EU ETS is important because it is the world's largest and arguably most successful carbon market, covering over 40% of the EU's total greenhouse gas emissions. It puts a price on carbon, incentivizing businesses to invest in cleaner technologies and reduce their emissions, thereby playing a central role in the EU's efforts to achieve its climate targets.
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Frequently asked questions
It primarily covers emissions from power and heat generation, energy-intensive industrial sectors (e.g., oil refineries, steelworks, cement production), and increasingly, aviation and maritime transport.
By putting a price on carbon, it makes polluting more expensive. Companies that reduce their emissions below their allocated allowances can sell their surplus, while those that emit more must buy additional allowances, creating a financial incentive for decarbonization.
The 'cap' is the maximum amount of greenhouse gases that can be emitted by the installations covered by the system. This cap is reduced annually, leading to a linear decline in total emissions over time.