The EU RCDE is a cornerstone of the EU policy to combat climate change and its key tool to reduce greenhouse gas emissions in a profitable way.It is the world's first major carbon market and remains the largest.
The EU trade rights trade system:
It operates in all EU countries more Iceland, Liechtenstein and Norway (EEE-AELC states),
It limits the emissions of about 10,000 facilities of the energy sector and the manufacturing industry, as well as the aircraft operators operating between these countries,
It covers about 40% of EU greenhouse gas emissions.
A system of 'limits and trade'
Within the limit, operators buy or receive issuance rights, which can exchange with each other as necessary. The limit of the total issue of issues available guarantees that they have a value. The price signal encourages emission reduction and promotes investment in innovative technologies with low carbon emissions, while trade provides flexibility that guarantees that emissions are reduced where you least cost to do it.
After each year, an operator must deliver enough issuance rights to completely cover their emissions, otherwise strong fines are imposed. If an installation reduces its emissions, you can keep the leftover rights to cover your future needs or sell them to another operator that has few rights.
Income from the sale of issuance rights in the EU RCDE is mostly allocated to the budgets of the Member States. Rights are also auctioned to supply funds that support innovation in low carbon technologies and energy transition.
Covered sectors and gases
The EU ETS covers the following sectors and gases, focusing on emissions that can be measured, notified and verified with a high level of precision:
- Carbon dioxide (CO2) from:
- Electricity and heat generation,
- Industrial sectors that consume a lot of energy, including petroleum refineries, steel and production of iron, aluminum, metals, cement, lime, glass, ceramics, pulp, paper, cardboard, acids and organic chemicals in bulk.
- aviation within the European economic space.
- nitrous oxide (N2O)of the production of nitric, adipic and glioxylic acids and glioxal acids.
- perfluorocarbons (PFC)from aluminum production.
Participation in the US is mandatory for companies in these sectors, but:
- In some sectors, only operators are included above a certain size,
- Certain small facilities can be excluded if governments implement fiscal or other measures that reduce their emissions in an equivalent amount,
In the aviation sector, up to at least December 31, 2023, the US will be applied only to flights between airports located in the European Economic Space.As of January 1, 2019, aircraft operators must monitor and inform their emissions also for the European economic space.
The European Union emission trade system (EU ETS)It is the cornerstone of the EU policy to combat climate change and a key tool to reduce greenhouse gas emissions in a profitable way.It is the first and largest international system for the trade of greenhouse gases emission rights, which covers more than 11,000 power plants and industrial plants in 31 countries, as well as airlines.
Phase 4 of the US includes several key changes in the previous system structures, such as:
- Market stability reserve (MSR):The MSR is a mechanism that was introduced in 2015 and came into operation in 2019 to address the surplus of issuance rights that had accumulated in the system and was suppressing the price of carbon.The MSR automatically adjusts the offer of rights sold to the market.
- Linear reduction factor (LRF):The LRF is the annual reduction of the maximum emission stop allowed.For phase 4, the LRF has increased from 1.74% to 2.2% per year, in order to achieve a more significant reduction in greenhouse gas emissions.
- Free assignment and carbon leak:Phase 4 introduces changes in the way of assigning free rights. The industries that run a significant risk of moving their emissions outside the EU (carbon leak) will receive a greater proportion of free emission rights. The system to determine these industries will be more specific and dynamic, with the list of sectors updated every five years.
- Innovation and modernization funds:Two new funds will be created with the income of the issuance rights auction. The Innovation Fund will support the demonstration of innovative technologies and the Modernization Fund will facilitate investments to modernize the energy sector and the broader energy systems and increase energy efficiency in 10 EU member states of lower income.
Ahmed Sakr
Product Compliance Consultant
Complymarket UG (haftungsbeschraenkt)
