(1 min. read)
On the basis of the commitments of the Kyoto Protocol under the United Nations Framework Convention on Climate Change (‘UNFCCC’), the EU has created the first carbon trading compliance mechanism globally. The EU Emissions Trading System (‘ETS’), first established in 2003, with Directive 2003/87/EC on a system for greenhouse gas emission allowance trading within the Union, was recently -in May 2023- revised, as part of EU’s climate targets and the ‘Fit for 55’ package.
According to the ETS as it currently stands, tens of thousands of operators above a certain size in electricity and heat generation, energy-intensive industry sectors (i.e. oil refineries, steel works, production of iron, aluminum, metals, cement, lime, glass, ceramics, pulp, paper, cardboard, acids and bulk organic chemicals), aviation and maritime transport, are allocated an absolute limit (‘cap’) of CO2 emissions which they are allowed to emit. Allowances, e.g. permitted caps, reduce over time. In a nutshell, the system works as follows: each operator is allocated a specific limit of allowed emissions volumes; should he surpass this limit, he should buy credits (allowances) from another emitter who has not consumed all of his allowances. The objective of this mechanism is hence straightforward: it is designed to create market incentives to reduce emissions.
Further reading:
Directive (EU) 2023/959 of the European Parliament and of the Council of 10 May 2023 amending Directive 2003/87/EC establishing a system for greenhouse gas emission allowance trading within the Union and Decision (EU) 2015/1814 concerning the establishment and operation of a market stability reserve for the Union greenhouse gas emission trading system https://eur-lex.europa.eu/eli/dir/2023/959/oj
European Commission’s page on the ETS https://climate.ec.europa.eu/eu-action/eu-emissions-trading-system-eu-ets_en
European Parliament Legislative Train ‘Fit for 55’ Package – ETS https://www.europarl.europa.eu/legislative-train/package-fit-for-55/file-revision-of-the-eu-emission-trading-system-(ets)
The EU Emissions Trading System explained [https://www.youtube.com/watch?v=fJrFSLfaeeE]
EU Council infographic on the revised ETS https://www.consilium.europa.eu/en/infographics/fit-for-55-eu-emissions-trading-system/
