12-01-2023

Emissions Trading System (ETS)

5 minutes read

The Emissions Trading System (ETS) is an emissions trading system that provides a trading approach to reducing gas emissions and greenhouse gas. It is a market instrument that provides strong incentives for businesses to pursue cost-effective ways of reducing their emissions.

What is the EU Emissions Trading System (ETS)?

The EU ETS is the world's largest cap-and-trade system and it has been used as an effective way to meet European Union emission targets since 2005. Through the ETS, businesses are provided with permits for the amount of carbon dioxide they can emit, creating a strong incentive for them to invest in reduction technologies or purchase additional permits from other companies if they cannot reduce their own emissions enough.

Why was the EU ETS designed?

The ETS was established by the European Union in 2005 and covers around 11,000 energy-intensive businesses across all sectors of the economy, accounting for around 45% of the union's total emissions. The system is designed to reduce CO2 emission levels across Europe while creating an international trading system that allows businesses to buy and sell permits. The ETS has been successful in achieving emission reductions at a lower cost than traditional regulatory measures and has become an example for other countries to follow when developing their own carbon reduction policies. It also offers additional benefits such as supporting investment in low-carbon technologies, encouraging innovation and providing climate finance for developing countries through the transfer of tradeable aspects from developed nations.

How does the EU ETS work?

The Emissions Trading System is a trading scheme designed to reduce emissions of specified pollutants, such as carbon dioxide, by creating an economic incentive to do so. The system operates by allowing regulated operators to buy and sell emission rights or carbon credits on a market. Operators are given a number of available allowances which are distributed either through auctioning or allocating based on the need for emission reduction. The European Union's ETS is the world's first and largest multi-national emissions trading system and it covers over 11,000 large industrial installations in the energy and manufacturing sector across EU Member States. It also allows entities covered by the EU ETS to trade Union Allowances (EUAs) with other EU countries that have an obligation under this scheme.