What is the EU ETS?

The EU Emissions Trading System (ETS) is a ‘cap-and-trade’ system. The cap is a threshold, defining the total amount of greenhouse gases that can be emitted by the operators covered by the system. It is reduced annually, in line with the EU’s climate target.

The ETS objective is to reduce emissions by 62% from 2005 to 2030.

Currently, the system is applicable in all EU member states, plus Iceland, Lichtenstein and Norway, and includes emissions of Carbon Dioxide (CO2), Nitrous Oxides (N2O), Hydrofluorocarbons (HFCs), Perfluorocarbons (PFCs) and Sulphur Hexafluoride (SF6).

Who does the EU ETS apply to?

Participation in the EU ETS scheme is mandatory for companies in the following activities:

  1. Electricity and heat generation;
  2. Energy-intensive industry sectors, including:
    1. Oil refineries;
    2. Steelworks’
    3. Production of iron, aluminium, metals, cement, lime, glass, ceramics, pulp, paper, cardboard, acids and bulk organic chemicals;
  3. Aviation (within the European Economic Area and departing flights to Switzerland and the UK);
  4. Maritime Transport;
  5. Incineration of municipal waste.

EU ETS ‘Cap and Trade’ work?

The cap is expressed in emission allowances; one allowance gives the right to emit one tonne of CO2eq (carbon dioxide equivalent).

Companies must purchase, and then surrender (use) EU allowances covering their emissions.

Emission allowances can be purchased in the primary market through auctions on the European Energy Exchange (EEX). There is also a secondary market in which allowances can be sold bilaterally or through various derivatives provided by financial institutions. To purchase ETS allowances, companies need to open a trading account or a maritime operator holding account in the Union Registry.