Updated: July 2023

The EU Emissions Trading Scheme is seen by many EU leaders as a cornerstone in EU climate policy. It covers 42% of EU greenhouse gas emissions. Unfortunately, several flaws in the present scheme makes it an ineffective tool to reduce greenhouse gases because of excess emissions and thus very low emissions costs.

Restriction of Excess Emisisons

In 2010, it was clear for everybody that there were excess emissions in the EU-ETS, leading to unexpectedly low prices. In March 2011, the European Commission suggested to reduce allowances. The proposal was welcomed by most EU countries, but because of resistance from Poland, the proposal was delayed.

In July 2012, the Commission proposed to reduce allowances in the coming auctions for 2013 and set them aside for later. This was agreed among the EU countries, but in 2013 the Parliament first objected and then agreed to a less ambitious arrangement.
The agreement is that allowances for 900 million tons of CO2 emissions are set aside from 2013-14 until 2018.
Because of the large number of excess emissions, the set-aside has not raised the price of allowances to a level where it would be be able to reduce emissions (such as above 15 euros per ton), but it has probably avoided the collapse of the EU-ETS market (a collapse is if the allowance price reaches 0).

In July 2015, however, the European Commission's Summer Package proposes a revison of the ETS system in line with the 2030 climate and energy policy framework agreed by the EU leaders in October 2014.
According to this revision, a reduction of the emissions allowance quantity by 2.2 % every year from 2021 would increase the price of CO2 emission. The EU ETS should continue to inspire other international partners, such as China, to use carbon pricing as a cost-effective driver for a gradual but sustainable decarbonisation of their economies for the benefit of future generations.

Read INFORSE-Europe's opinion in the Press Release dated ( pdf file 137 kB).
Follow the development at the Commission's website.

Functioning of the EU Emission Trading Scheme (EU-ETS)

The aim of the EU-ETS Directive is to reduce greenhouse gas emissions in a cost-efficient way, with the introduction of a greenhouse gas emissions ceiling on major emitters and a mechanism for trading among them.
All greenhouse gas emitters in the EU that are covered by the EU-ETS must have enough greenhouse gas "allowances" to be allowed to emit their greenhouse gases.
The EU countries' governments allocate greenhouse gas allowances to companies in their respective countries.
These allowances can be traded between companies if they choose to do so.

Each year, companies must submit a number of allowances that corresponds to their actual emissions.
If they do not have enough allowances, they will have to pay a fine.
The holding and tracking of allowances are done through national electronic registers.

The sectors covered are energy, iron, cement, glass, ceramics, pulp, paper, and board.
Only larger installations are covered, e.g. combustion installations above 20 MW input.

Every year, the total number of allowances given or auctioned is reduced with 1.74% compared with the previous year.

The first phase of the scheme was 2005 - 2007, before the Kyoto Protocol's commitment period.
In this phase, allowances were given for free to participating installations and there was a low level of penalty for non-compliance of 40 euros per ton of CO2.
Due to large allowances given by countries, the market price of the allowances fell to close to zero during the 2005-2007 period.

The second phase followed the Kyoto Protocol commitment period 2008 - 2012.
In this period, at least 95% of the allowances are given for free, but the countries could decide to auction up to 5% of the allowances.
The penalty for non-compliance was increased to 100 euros per ton of CO2.

The third phase is covering 2013-2020 with allowances to be auctioned to most powerplants and to the part of the industry least vulnerable to international competition.
In this phase, unused emissions from the second phase can be carried over, a decision that results in a large excess of allocated allowances, leading to low costs of emissions.

A fourth period is foreseen for the period 2021-2030, for which the European Commission has proposed to revise the ETS Directive in order for it to be in line with the 2030 targets and reducing by 43 % the emissions from sectors covered by ETS.
To achieve this, the Commission proposes to reduce the number of emissions allowances by 2.2 % per year rather than the previous 1.74 %.
Other improvements of the EU-ETS are also proposed, such as a gradual phase-out of the free allocation of allowances from 2026 until the end of phase 4, mechanisms to facilitate the transition to low-carbon technologies, and a reinforcement of the mechanism to reduce the excess of emissions allowances and improve the ETS system's resilience to future shocks.

You can read more about the proposed revisions on the Commission's website.

External allowances feed into EU-ETS

With the "link" directive (see below), companies can buy emissions from projects that should reduce emissions as CDM-projects as specified by the Kyoto Protocol and following UNFCCC guidelines.
This has added to the excess of emissions, in particular because of a large influx on Chinese CDM quotas that result from questionable projects with very little greenhouse gas reduction effects.
The types of CDM projects that can be used for EU-ETS allowances were reduced in 2013, but the "link" directive is still a loophole that makes the EU-ETS less likely to become effective.

Airlines included
On September 2011, the EU established the rules for allocation of free emissions to airlines, stating that the aviation industry will become part of the EU ETS from 2012.
The effect of the rules is that airlines get about 85% of their emissions for free.
The inclusion of airlines caused protests from China, USA and many other countries.
The EU gave in to the protests and excluded extra-EU flights from the EU-ETS until 2020.
Flights to airports near the EU's external borders are also exempted from EU-ETS since the Regulation n°421/2014.

EU Single Registry
In 2012, the European Commission activated the single registry, replacing the national registries. It covers all EU Member countries plus Norway, Iceland and Liechtenstein and records the national plans with the allowances assigned to each Member State, the accounts of the companies or physical persons who hold these allowances, the transfers of allowances, the annual verified emissions from installations, and the annual reconciliation (settle and fitting) of allowances and verified emissions.
The verification, recording and authorization of transactions are now held by the European Union Transaction Log (EUTL).

INFORSE-Europe Analysis: Limits of the EU-ETS
The EU Emission Trading Scheme is regarded as one of the cornerstones of the EU climate policy, but the first periods have shown a number of weaknesses in the systems:

- Large variations in prices of allowances, reducing the incentives for long-term investments to reduce emissions.
- Unjustified windfall profits for companies with large CO2 emissions that receive free allowances and that can increase their product prices with the quota prices.
Nuclear powerplants also enjoy these windfall profits.
- Reduced incentives to continue with reductions when allowances are sufficient and prices are low. This is because a number of previous policies are abandoned for the companies included in the EU-ETS, such as CO2 taxes.
- The uncertainty regarding future systems and CO2 costs have rendered actors unsure if they should aim at low or high emissions.
- The large influx of questionable allowances from the CDM (Clean Development Mechanism) of the Kyoto Protocol.

The CDM influx is less prominent in the third period, but with the ETS allowances currently allocated until 2020, there are too many allowances allocated, if the EU countries are to reduce emissions in line with limiting global warming to 2’C. The current reduction rate of 1.74% per year is too slow: It will only result in phase-out of emissions by 2068. The carry-over of allowances from the second period and from CDM projects adds to the problem.
In conclusion, because of the flaws the EU-ETS is not the cornerstone of the EU climate policies it was meant to be.

INFORSE-Europe Proposals to Improve the EU-ETS

To improve the EU-ETS and achieve larger greenhouse gas reductions, INFORSE-Europe proposes the following changes:
- There should be a minimum (floor) price for allowances of 20 euros per ton of CO2.
- Allowances carried over from one period to the third period must be limited, by degrading them by a factor 2-3 or more (two-three or more unused allowances from the previous period shall give only one allowance in the next period).
- The number of industry sectors that receive free allowances should be reduced, and instead of free allowances, companies should be offered support, including grants and loans for the transition to low-carbon technologies.
- Much stricter rules than the current ones must be introduced to limit the use of allowances from CDM projects in EU-ETS. Only projects that are clearly contributing directly to poverty reduction and basic needs of those that implement the measures should be eligible. The use of external (CDM) credits should be limited to 10% of reductions (for instance 10% of reductions is 2% of total allowances if reductions are 20%)
- A windfall tax shall be introduced for nuclear power. The tax shall be equal to the extra revenue that the nuclear power plants will gain because of increased electricity prices caused by the EU-ETS.

Follow also the development at Climate Action Network's site at www.climnet.org/EUenergy/NAPs.htm.
and the Commission's site http://ec.europa.eu/environment/climat/emission.htm

Legislation

Directive (EU) 2023/959 amending Directive 2003/87/EC establishing a system for greenhouse gas emission allowance trading within the Union and Decision (EU) 2015/1814 concerning the establishment and operation of a market stability reserve for the Union greenhouse gas emission trading system
This revision of the ETS Directive puts into effect the ameliorations mentioned above, so that the Directive is in line with the EU Green Deal and Fit for 55 tagets.
Read the revised Directive here.


Regulation n°421/2014, amending the Directive (2003/87/EC) on gas emission allowance trading within the Community, on April 16th 2014.
This amendment concerns the derogation of the Aviator sector concerning the external borders of EU. It has been done in advance of the implementation, by 2020, of an international agreement applying a single global market-based measure.
Read the Directive.

Directive (2009/29/EC) of 23/4 2009 to amend the 2003 Directive (2003/87/EC) to improve and extend the greenhouse gas emission allowance trading system (until 2020).
Read the Directive on the EU Law website.Read the consolidated text of EU-ETS dir. 2003/87/EC including amendments with dir. 2009/29/EC and other amendments from 2009 and earlier, on the EU Law website.

Agreement to Include Airline Emissions into the EU-ETS
On November 19, 2008, a Directive (2008/101/EC) was agreed to include aviation in the EU-ETS in 2012. Emissions from plane will be reduced by 3% in 2012 (compared to the 2004-2006 level) and by 5% in 2013. 85% of the emission certificates will be allocated for free. Read the Directive on the EU Law website.

Link Directive: Directive 2004/101/EC
In 2004 this Directive was approved. It allows, subject to some limitations, for CDM credits to be used as EU-ETS allowances. Credits from projects generating sinks and from hydropower above 20MW are not allowed in the EU-ETS.

Read the directive at the EU Law website.

Read about the development and problems of EU-ETS at http://www.sandbag.org.uk/

A Bit of History
The European Climate Change Programme for EU's implementation of the Kyoto Protocol identified in 2000 a cap-and trade system for greenhouse gas emission from large emmitter as a possible cornerstone in EU climate policy. One reason for this conclusion was that since 1992 the EU countries had discussed a common energy/CO2-tax, but were not able to agree on such a tax

In 2001, the EU Commission the proposed a directive for the EU-ETS, covering the period until the end of the Kyoto Protocol, 2012.
In 2003, the directive was adopted.
In 2004, the use of CDM credits in EU-ETS was included with the "link" directive.

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