About
The EU ETS is part of the EU's strategy to combat climate change and a key tool for helping EU Member States in reducing greenhouse gas emissions in a cost-effective way.
The EU ETS works on the "cap and trade" principle:
- A maximum cap is set on the total amount of greenhouse gases that can be emitted by all entities covered by the system.
- Within that limit, entities are allowed to buy and sell a fixed amount of so-called "allowances" as they require. One allowance gives the holder the right to emit one tonne of CO2 or the equivalent amount of another greenhouse gas.
All operators carrying out an activity covered by the EU ETS must hold greenhouse gas emission permits. Entities covered by the EU ETS must monitor and report their emissions each year and surrender enough emission allowances to cover their annual emissions (for the previous year). Otherwise, fines or other penalties will be imposed. If a company reduces its emissions, it may keep the spare allowances to cover its future needs or it could sell them to another company that is short of allowances.
The cap is reduced over time so that the amount of emissions gradually decreases.
The EU ETS covers more than 10,000 installations in the power sector and energy intensive industry. In 2012, the aviation sector was included into the EU ETS, however, only for intra-European flights. From 2024, a phase-in of the shipping industry has started. Read more about the EU ETS and the shipping industry here.
As part of the 'Fit for 55 package' presented on 14 July 2021, the EU has revised EU ETS in line with the overall target of reducing greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels.
The revision of the EU ETS was published in the Official Journal on 16 May 2023, and some of the features of this latest revision include:
General
- The ambition to cut carbon emissions covered by the EU ETS has been raised to 62% by 2030 (compared to 2005 levels).
- Free allowances to industry sectors will be phased out from 2026 and disappear by 2034 in connection with the implementation of CBAM.
- A separate system related to combustion-related emissions from activities not covered by the current EU ETS was proposed, named ETS2. This new system will cover and address the CO2 emissions from fuel combustion in buildings, road transport and additional sectors, and will become fully operational in 2027.
- Waste incineration plants will be included in the EU's emissions trading system starting in 2024, but will only be required to monitor and report their emissions.
- To increase the annual reduction of the number of allowances in the system from 2.2% to 4.3%, and eventually to 4.4% annually.
- New requirements for full allocation of free allowances, including requirements for energy efficiency as well as requirements for a climate neutrality plan for certain installations.
Aviation
- On 8 February 2023, a trilogue agreement on the revision of the EU ETS' application to the aviation sector was entered into. It was agreed that the EU ETS will apply for intra-European flights, while the Carbon Offsetting and Reduction Scheme for International Aviation ('CORSIA') developed by the International Civil Aviation Organization ('ICAO'), will apply to extra-EU flights to and from non-EU states participating in CORSIA ('clean cut') until 31 December 2026.
- The implementation of CORSIA will be assessed by the Commission after 2025 and further measures may be adopted, including applying the EU ETS to emissions from departing flights from 2027.
- Starting from 1 January 2025, aircraft operators are required to monitor, report, and verify non-CO2 effects. Aircraft operators will not be required to surrender allowances for non-CO2 effects for the time being, as is done for CO2 emissions, but this will be further investigated by the EU Commission after 2026.
- In addition, it was agreed to phase out free allocations of allowances for the aviation sector as follows: 25% decrease for 2024, 50% for 2025 and 100% for 2026 and onwards.
Who does it impact?
- EU/EEA Member States.
- Entities covered by the EU ETS as well as entities in sectors that will be included in the EU ETS.
Status: In force
The EU ETS operates in all EU countries in addition to Iceland, Liechtenstein and Norway.
Being in operation since 2005, the EU ETS is the world's first international emissions trading system. It remains the biggest one, accounting for over three-quarters of international carbon trading. The regime is continuously evolving to adapt to observed trading and cover new sectors.
Relation to other initiatives and regulations
The most recent revisions of the EU ETS forms a part of the EU's Fit for 55-package.
Participants
The EU ETS applies to the EU Member States as well as the three members of the European Economic Area, Norway, Iceland and Liechtenstein.
Thommessen's comments
Intending to create a financial incentive for participating emitters to cut their emissions, or alternatively pay others to do so, the EU ETS aims at providing flexibility in the carbon trading system ensuring that emissions are cut where it costs the least.
As part of the 'Fit for 55 package', the EU ETS was revised to align the scheme with the EU's objective of reducing emissions by 55% before 2030 and to achieve climate neutrality in the EU by 2050. Many of the provisions of the revised EU ETS came into force on 1 January 2024.
The revised EU ETS Directive brings new sectors into the system, including emissions from maritime transport, road transport and the building sectors. All companies in sectors with large emissions should have an understanding of the EU ETS, and be mindful of the newly revised extensions of the scheme, as well as the new obligations that must be complied with.
The work on the next major revision of the EU ETS Directive is underway. The goal is to strengthen the EU ETS and the Market Stability Reserve (MSR) to ensure cost-effective emission reductions in line with the target of climate neutrality by 2050. Several significant changes are being considered, including the inclusion of carbon removal and waste incineration. The revision is to be completed by the end of 2026. The EU's emissions trading system has significant implications for the sectors it covers. We therefore encourage stakeholders who are subject to or affected by the regulations, as well as those who risk being included, to keep track of the development.