EMISSIONS

ETS Overview

The European Emission Trading Scheme (EU ETS) is the first and most successful international scheme for the trade of carbon permits. It was launched in 2005 as an instrument of the EU member states in the fight against climate change.

© European Union, 1995-2017

Coverage

In 2016, the EU ETS represented 16,782 operators – out of which 1,383 were aircraft operators and 15,399 were industrial installations. There are 11,515 open and active industrial installations with specific compliance obligations. The EU ETS has grown over time to cover 31 states – as of 2016, they include all the 28 EU member states as well as three of the four EFTA member states: Iceland, Liechtenstein and Norway. 

The EU ETS covers CO2 emissions from installations such as power stations, combustion plants, oil refineries, and iron and steel works; as well as factories making cement, glass, lime, bricks, ceramics, pulp, paper and board. Nitrous oxide emissions from certain processes are also covered. In 2013, the EU ETS was expanded further to the petrochemicals, ammonia and aluminum industries, as well as additional gases. The European Union hopes to link up the EU ETS with compatible systems around the world to create a backbone of the global carbon market.

 Aviation: All airline carriers that take off or land at EU airports – accounting close to 3,000 airlines – have to submit to the obligation of carbon emissions reporting and compliance. In November 2012, the obligation for flights outside the EU was frozen and aircraft operators complied only for internal EU flights.   In October 2016, ICAO – the International Civil Aviation Organization – managed to strike a deal with all members states after six years of negotiation: the name of the world’s first market mechanism is CORSIA (Carbon Offsetting and Reduction Scheme for International Aviation,) and it will deal with climate change by helping ICAO meet the goal of a carbon neutral growth after 2020. It has several phases:

  • 2021-2023 – voluntary phase for countries that are eager to participate at the beginning of Phase IV: around 65 countries, or approximately 85% of global aviation, have declared that they want to be part of the scheme. From the pool of biggest countries in terms of aviation, only Russia and India have not yet declared their early participation.
  • 2024-2026 – first implementation phase, and still voluntary.
  • 2027-2035 – second implementation phase, which will include the majority of countries; except the least developed and very small states who currently amount for less than 0.5% of global traffic.

CORSIA will cover only international flights; while domestic flights will be covered under nationally-determined contributions aimed towards the Paris Agreement. The baseline for emissions will be an average based on the period between 2019 and 2020. The compliance will be done every three years, meaning that the first surrender takes place in 2023. A country, having signed up to participate in the voluntary phases of the scheme, may decide to opt out until 2026 with a 6-month prior notice. 

Market Rules: Primary Market

Phase III auctioning - Primary market of carbon allowances

Auctioning is the default method of allocating allowances within the EU emissions trading system (EU ETS). This means that businesses have to buy an increasing proportion of allowances through auctions. In 2013, over 40% of all allowances were auctioned, and the ETS legislation set the goal of completely phasing out free allocation by 2027. Auctioning is the most transparent allocation method and puts into practice the principle that polluters should pay.

Auctioning is also an effective way of distributing allowances to the market, and it encourages businesses to take the full cost of carbon in consideration when making their decisions.

Two auctioning platforms are already in place. The first one is the European Energy Exchange (EEX) in Leipzig, and it is the most common platform for the majority of countries participating in the EU ETS; it also acts as Germany's own auctioning platform. The second auction platform is the ICE Futures Europe (ICE) in London, which also acts as the United Kingdom's platform.

EEX has been awarded the role of common transitional auction platform, and is responsible for the auction of allowances on behalf of all 24 Member States. It is also Germany’s transitional platform. In this capacity, the EEX holds weekly auctions of EU allowances (EUAs) on its spot market – three days per week for the EU and one day per week for Germany – as well as the auction of EU aviation allowances for both platforms.

Given the improved overview of the number of allowances that were allocated free of charge, and which resulted in a decision of the EU Commission concerning National Implementation Measures (NIMs), the amount of allowances to be auctioned in accordance with Article 10(1) of Directive 2003/87/EC was also reviewed. Taking into account the limit set by Article 10a(5) of Directive 2003/87/EC, the allocation in respect to heat production pursuant to Article 10a(4) set out in the table below, and the size of the new entrants’ reserve, the Commission estimates that the amount of allowances to be auctioned in the period between 2013 to 2020 is 8,176,193,157.

Market Rules: Secondary Market

An EU ETS operator may access the secondary carbon market to buy allowances, or Kyoto Units, through multiple routes:

  • Trading directly with other companies covered by the ETS;
  • Buying or selling from intermediaries – banks, specialist traders, or using the service of a broker.
  • Joining one of the several exchanges that list carbon allowance products.