The basics of the EU Emissions Trading Scheme (ETS)

In the fight against climate change, one thing above all is important: reducing greenhouse gases, also known as CO2, which are driving climate warming and increasing the hole in the ozone layer.

In order to achieve measurable and, above all, weighty results, the European Union agreed on a trading system that would relate to emissions and not only reduce them, but also offset them.

What is the EU Emissions Trading Scheme (ETS)?

Simply broken down, the ETS provides for a limited amount of permitted emissions for each company. If these are exceeded, a financial compensation payment must be made, which benefits measures aimed at combating climate change. Two other emissions trading mechanisms are interlinked with the ETS: Joint Implementation (JI) and the Clean Development Mechanism (CDM). These are project-based mechanisms that also generate CO2 trading certificates and are intended to help industrialized countries such as the USA, France, Canada or Japan to reduce their carbon dioxide emissions and thus fulfill their obligations under the Kyoto Protocol.

This emissions trading system is part of the first Kyoto Protocol adopted in 2005 and has been implemented since then. It has been divided into a total of three phases - so-called trading periods:

1st phase: 2005 - 2007

2nd phase: 2008 - 2012

3rd phase: 2013 - 2020

Participants in this emissions trading system are 10,000 to 12,000 companies belonging to some of the most important industries (electricity, steel and aviation). However, not all industries participate; currently, the share is around 40 percent of the European corporate landscape.
It does not include the land and water transport industries, the agricultural industry, the construction industry or energy power plants.

What does emissions trading look like in concrete terms?

The basic idea is the acquisition of emission certificates, i.e. pollution rights. In general, each company - in Germany there are about 1800 - is provided with a certain amount of CO2 certificates. If the company consumes more than this quota due to its competitive and production orientation, it is obliged to buy more on the emissions market.

There, companies that fall short of the pollution allowances they have been granted can sell the free capacities and thus make a financial profit. This is intended to reduce CO2 emissions in the long term, promote the development of environmentally friendly technologies and counteract climate change with the proceeds from the sale of the certificates or from the penalties.

The penalties are incurred if the companies covered emit more emissions than they were allowed by the pollution allowances. The amount of the penalty is currently 100 euros per ton of CO2.

What is the volume of trading in CO2 allowances?

Until now, the largest share of emission allowances was distributed to companies by the respective EU member state. In the second period, this share amounted to just under 90 percent; since 2013, a larger share of between 20 and 40 % has been auctioned to the highest-bidding companies. Towards the end of the third phase, this share is to be increased to 70 %.

This increase will entail an increase in the financial volume of the emissions system. This should make saving CO2 financially attractive for those companies that remain below their pollution allowances.
In the long term - the EU Commission hopes - this will reduce the amounts of carbon dioxide that are emitted today and are mainly responsible for climate change and rising sea levels.