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EU Emissions trading scheme (EU ETS)
In January 2005, the European Union launched an Emission Trading Scheme gathering the largest European energy-intensive industries. The European Union Emission Trading Scheme (EU ETS) is the biggest multinational trading scheme, representing more than 70% of the world’s total trade. In 2007, its turnover was more than $64 billion, which was double that in 2006.
Under the EU ETS, each of the roughly 12,000 emitters concerned are given a free allocation of EU allowances (EUA). The amount allocated to each emitter is determined by member states in their National Allocation Plan (NAP) and approved by the European Commission. One EUA gives its holder the right to emit one ton of CO2. The EU ETS is organized in phases:
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Phase I - 2005-2007: The first commitment phase is now terminated and EUAs delivered in this phase are not valid anymore. The main problem of this “learning” phase was the over abundance of EUAs, resulting in a collapse of EUA prices. |
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Phase II - 2008-2012: The second commitment phase coincided with the first commitment period of the Kyoto Protocol. The total amount of allowances has been reduced in order to prevent the same EUA collapse as in phase one. |
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Phase III - 2013-2020: The post-2012 ETS is not yet clearly established but will probably see the inclusion of other greenhouse gases and sectors not yet in the scheme. The allocation methodology of the EUAs will also probably change to one of auctioning. |
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At the end of each calendar year, installations under the EU ETS must hand over a number of EUAs equivalent to their verified CO2 emissions in that same year. Any installations with leftover allowances can sell or save them for the following year (within one trading period). Those that have not retained enough allowances to cover their emissions will have to pay a dissuasive fine for each excess ton emitted. In the initial phase (2005-2007) the penalty was € 40 per ton; since 2008 it has risen to € 100.
The “cap-and-trade” approach seeks to encourage countries to reduce their GHG emissions as it rewards those countries meeting their emissions targets (their cap) and provides financial incentives to others to do so as quickly as possible.
Under the EU ETS, an installation has the incentive to abate its emissions when the EUA price rises above its abatement cost. Furthermore, it has the incentive to reduce its emissions beyond its own needs and bring the excess reductions to market. Overall, the net reduction in emissions is the same as it would be under a straightforward cap but they are reduced at a lesser economic cost. |
