European Union Greenhouse Gas Emissions Trading Scheme (EU ETS)

EU European Commission - European Union

More than three years ago, the European Union Greenhouse Gas Emission Trading Scheme (EU ETS) began operation as the largest multi-country, multi-sector Greenhouse Gas emission trading scheme in the world. The framework for the scheme is based on Directive 2003/87/EC, which became law October 25, 2003.

The EU ETS currently covers more than 10,000 installations in the energy and industrial sectors which are collectively responsible for close to half of the EU's emissions of CO₂ and 40% of its total greenhouse gas emissions. Under the EU ETS, large emitters of carbon dioxide within the EU must monitor and annually report their CO₂ emissions. At the end of each year market participants are required to surrender an amount of emission allowances to the government that is equivalent to their CO₂ emissions in that year.

Allowances traded in the EU ETS are held in electronic registry accounts set up by member states. All of the registries are overseen by a central administrator at the EU who, through a Community transaction log, checks each transaction for any irregularities. In this way, the registries system keeps track of the ownership of allowances in the same way a banking system keeps track of financial transactions.

To help member states apply the scheme's framework, the European Environment Agency published a technical report based on member annual report information from January - April 2005. Member annual reports are required under Article 21 of the directive.

Back to Top

Management System and Data Management Implications

The EU has completed its first trading period. The results have shown that placing a price on carbon and trading greenhouse gas emissions works. However, the EU acknowledges that the environmental benefit of the first phase may be limited because there was an excessive allocation of allowances in some member states and some sectors, due to the reliance on incomplete emissions projections based on non-verified emissions data. Once verified emissions data for 2005 highlighted this over-allocation, the market reacted by lowering the market price of allowances. Verified emissions data has allowed the Commission to ensure that the cap on national allocations under the second phase is set at a level that results in real emissions reductions.

In addition to understanding the need for verified data, the experience so far has shown that greater consistency within the EU ETS is important to ensure that the EU achieves its emissions reductions objectives at the lowest cost and with minimal competitive distortions. The need for more unification is clearest with respect to how the cap on overall emissions allowances is set.

The second phase of the trading scheme will be important to its continued evolution, because it coincides with the first commitment period of the Kyoto Protocol, during which the EU and other industrialized countries must meet their targets to limit or reduce greenhouse gas emissions. During this period, the Commission has capped national emissions from EU ETS sectors at an average of around 6.5% below 2005 levels to help ensure that the EU as a whole, and member states individually, deliver on their Kyoto commitments.

In January 2008, the European Commission proposed a number of changes to the scheme in response to a review of the program's performance completed in November 2006. The proposed changes include centralized allocation of emission allowances by an EU authority, auctioning a greater share (60+ %) of allowances rather than allocating them freely, and including other greenhouse gases, such as nitrous oxide and perfluorocarbons . The recommended changes are under consideration for implementation in the emissions trading period after 2012. (i.e. in the 3rd Trading Period under the EU ETS). Also, the proposed caps for the 3rd Trading Period foresee an overall reduction of greenhouse gases for the sector of 21% in 2020 compared to 2005 emissions. It is also under consideration whether or not to extend the EU ETS to other industries (airlines).

Back to Top

Fast Facts

More Information

For details about how the IHS solutions can help your organization comply with EU ETS, call 800.289.6116 or email us.