European Union Emissions Trading System

The European Union Emissions Trading System (EU ETS) is a carbon emission trading scheme (or cap and trade scheme) that began in 2005 and is intended to lower greenhouse gas emissions in the EU. Cap and trade schemes limit emissions of specified pollutants over an area and allow companies to trade emissions rights within that area. The ETS covers around 45% of the EU's greenhouse gas emissions.^[1]

As from 2027 road transport and buildings and industrial installation that fell out of EU ETS will be covered by a new EU ETS2. The "old" ETS and the new EU ETS2 allowances will be traded independently. A major difference to the ETS is that ETS2 will cover the CO2 emissions upstream - whereby accredited fuel supplierss who places the fuel on the EU market will be obliged to cover that fuel with ETS2 emission allowances. The ETS2 covers around 40% of the EU's greenhouse gas emissions.

The scheme has been divided into four "trading periods". The first ETS trading period lasted three years, from January 2005 to December 2007. The second trading period ran from January 2008 until December 2012, coinciding with the first commitment period of the Kyoto Protocol. The third trading period lasted from January 2013 to December 2020. Compared to 2005, when the EU ETS was first implemented, the proposed caps for 2020 represent a 21% reduction of greenhouse gases. This target was achieved six years early as emissions in the ETS fell to 1.812 billion (10⁹) tonnes in 2014.^[2]

The fourth phase started in January 2021 and will continue until December 2030. The emission reductions to be achieved over this period are unclear as of November 2021, as the European Green Deal necessitates tightening of the current EU ETS reduction target for 2030 of -43% concerning to 2005. The EU Commission proposes in its "Fit for 55" package to increase the EU ETS reduction target for 2030 to −61% compared to 2005.^[3][4]

EU countries view the emissions trading scheme as necessary for meeting climate goals. A strong carbon market guides investors and industry in their transition from fossil fuels.^[5] A 2020 study found that the EU ETS successfully reduced CO₂ emissions even though the prices for carbon were set at low prices.^[6] A 2023 study on the effects of the EU ETS identified a reduction in carbon emissions in the order of -10% between 2005 and 2012 with no impacts on profits or employment for regulated firms.^[7] The price of EU allowances exceeded 100€/tCO₂ ($118) in February 2023.^[5] A 2024 study further demonstrated that the EU ETS has incidentally contributed to reduce atmospheric levels of air pollutants in the EU including sulfur dioxide, fine particulate matter, and nitrogen oxide.^[8] This reduction has translated in local health co-benefits, alongside the system's primary goal of mitigating climate change.