The EU ETS is the foundation of the EU's climate change policy and is an important tool for reducing greenhouse gas emissions in a cost-effective way. This is the world's first major carbon market and is still the largest market today.
EU Emissions Trading System:
It operates in all EU countries and in Iceland, Liechtenstein, Norway (EEA-EFTA countries).
Not only does it limit emissions from around 10,000 facilities in the energy sector and manufacturing, but so does aircraft operators operating between these countries.
It covers approximately 40% of the EU's greenhouse gas emissions.
"Cap and Trade" system
Within the limit, businesses can purchase or receive emission allowances and trade with each other if necessary. Because there is a limit to the total number of allowances available, those allowances are always worth it. Price signals encourage emission reductions and encourage investment in innovative low-carbon technologies, while trading offers the flexibility to ensure emissions are reduced at the lowest costs.
After each year, businesses must give up sufficient allowances to cover their emissions in full, otherwise they will be subject to a high fine. If the facility reduces emissions, it can either keep reserve allocations to meet future needs or sell them to another operator with a lack of allocation.
Proceeds from the sale of allowances in the EU ETS are primarily directed into member state budgets. Allowances to fund low-carbon technology innovation and the energy transition will also be auctioned.
Target sectors and gas
EU ETS focuses on emissions that can be measured, reported and verified with high levels of accuracy, covering the following areas and gases:
- Carbon dioxide (CO2) origin:
- electricity and heat generation,
- Petroleum refineries, iron, aluminum, metal, cement, lime, glass, ceramics, pulp, paper, cardboard, acid, energy-intensive industry sector including the production of 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 areas are required to participate in the EU ETS, as follows:
- In some sectors, only operators over a certain size are included;
- Certain small facilities can be excluded if the government takes fiscal or other measures to reduce emissions equally.
In the aviation field, Until at least December 31, 2023, the EU ETS applies only to flights between airports within the European Economic Area. From January 1, 2019, aircraft operators are also required to monitor and report emissions in the European Economic Area.
European Union Emissions Trading System (EU ETS)This is the basis of EU policies to combat climate change and is an important tool for reducing greenhouse gas emissions in a cost-effective way. It is the first and largest international system for trading greenhouse gas emission allowances, covering over 11,000 power plants, industrial plants, and even airlines from 31 countries.
Phase 4 of the EU ETS contains some important changes to the previous structure of the system, including:
- Market Stable Reserve (MSR):The MSR was introduced in 2015 to deal with the surplus of emission allowances that had accumulated within the system and had been suppressing carbon prices, and was in operation in 2019. MSR automatically adjusts the supply of sales quotas to the market.
- Linear Reduction Factor (LRF):LRF is the annual reduction at the maximum allowable emissions limit. In Phase 4, LRF increased from 1.74% to 2.2% per year to achieve a greater reduction in greenhouse gas emissions.
- Free allocation and carbon leakage:In Phase 4, the method of assigning free tiers will change. Industry with a significant risk of transferring emissions outside the EU (carbon leakage) will receive a higher percentage of free allowances. These industry-determining systems will become more targeted and dynamic, with the list of sectors updated every five years.
- Innovation and Modernization Fund:Two new funds will be established using the proceeds from the allowance auction. The Innovation Fund supports demonstrations of innovative technologies, and the Modernization Fund will encourage investment in modernizing and improving energy efficiency in the electricity sector and broader energy systems in 10 low-income EU member countries.
Ahmed Sakr
Product Compliance Consultant
ComplyMarket UG (Haftungsbeschraenkt)
