The EU emission trading system is the cornerstone of EU's policy to combat climate change and a key tool for economical and efficient reduction of greenhouse gas emissions. It is the world's first major carbon market and remains the largest carbon market.
EU emission trading system:
Operating in all EU countries, as well as in Iceland, Liechtenstein and Norway (European Economic Area-European Free Trade Union countries),
Restricting emissions from approximately 10,000 facilities in the energy sector and manufacturing sector and aircraft operators operating between these countries,
Covering about 40% of the EU's greenhouse gas emissions.
"Limits and Transactions" System
Within the cap, operators purchase or receive emission quotas and can trade with each other as needed. The limit on the total number of available quotas ensures that they are valuable. Price signals incentivize emission reductions and promote investment in innovative low-carbon technologies, while the flexibility brought by transactions ensures emissions reductions at the lowest cost.
After each year, operators must hand over sufficient quotas to fully cover their emissions or they will be subject to huge fines. If a device reduces emissions, it can retain a backup quota to meet its future needs, or sell it to another operator that lacks quota.
Most of the revenue from quota sales in the EU emission trading system enters the budgets of member states. Quota are also auctioned to provide funds to support low-carbon technological innovation and energy transformation.
Industry and gases covered
The EU emissions trading system covers the following sectors and gases, focusing on emissions that can be measured, reported and verified with high accuracy:
- Carbon dioxide (CO2) from:
- Power generation and heating,
- Energy-intensive industrial sectors, including oil refineries, steel plants and the production of iron, aluminum, metal, cement, lime, glass, ceramics, pulp, paper, cardboard, acids and bulk organic chemicals,
- Aviation within the European Economic Area.
- Nitrous oxide (N2O)From the production of nitric acid, adipic acid, glyoxylic acid and glyoxal.
- Perfluorocarbon (PFC)From the production of aluminum.
Companies in these industries must participate in the EU emissions trading system, however:
- In some industries, only operators exceeding a certain size are included.
- If the government takes fiscal or other measures to reduce the same amount of emissions, some small facilities can be excluded.
In the field of aviation, EU ETS will only be available for flights between airports in the European Economic Area until at least December 31, 2023. Starting from 1 January 2019, aircraft operators must also monitor and report emissions in the European Economic Area.
EU Emission Trading System (EU ETS)It is the cornerstone of the EU's policy to combat climate change and a key tool for reducing greenhouse gas emissions in a cost-effective way. It is the first and largest international system for greenhouse gas emission quota trading, covering more than 11,000 power stations and factories in 31 countries, as well as airlines.
EU ETS Phase 4 includes several key changes to the previous structure of the system, such as:
- Market Stable Reserve (MSR):MSR is a mechanism launched in 2015 and started operation in 2019 to address the problem of oversupply of emission quotas accumulated within the system and to curb carbon prices. MSR automatically adjusts the supply of sold quotas in the market.
- Linear Reduction Coefficient (LRF):LRF is the reduction in maximum permissible emissions per year. In the fourth phase, LRF increased from 1.74% to 2.2% per year to achieve a more significant reduction in greenhouse gas emissions.
- Free distribution and carbon leak:The fourth phase introduced changes in the allocation of free quota methods. Industry facing significant risks of transferring emissions outside the EU (carbon leak) will receive a higher percentage of free quotas. The industry recognition system will be more targeted and dynamic, and the industry list will be updated every 5 years.
- Innovation and Modernization Fund:Two new funds will be established using quota auction revenue. The Innovation Fund will support the demonstration of innovative technologies, and the Modernization Fund will promote investment in the modernization of the power sector and the broader energy system in 10 low-income EU member states and to improve energy efficiency.
Ahmed Sakr
Product Compliance Consultant
ComplyMarket UG (haftungsbeschraenkt)
