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EU ETS - European Union Emission Trade Scheme

EU ETS Market

Based on the European Union's commitment under the Kyoto Protocol to reduce greenhouse gas emissions, the EU has developed a comprehensive scheme for trading of CO2 emissions among large emitting companies within the EU. The EU greenhouse gas emissions trading scheme (EU ETS), which involves all 25 EU member states, started on 1st of January 2005, from which has approximately 12,000 installations across the 25 Member States of the European Union were required to surrender allowances equal to their annual emissions.

The EU ETS is the first Carbon Dioxide Trading Scheme in the world and is considered to be the most cost-effective way to reach the Kyoto target. The Community Independent Transaction Log (CITL) records the issuance, transfer, cancellation, retirement and banking of allowances that take place in the registry.

It is mandatory for each Member State to have a national registry. The number of registries that have gone online can be seen from the CITL website. These registries will ensure the accurate accounting of all units under the Kyoto Protocol plus the accurate accounting of allowances under the Community scheme for greenhouse gas emission allowance trading.

The aim and functioning of the EU ETS market

The EU ETS is a cap-and-trade system based on the idea that creating a price for carbon through a market-based system provides the most cost-effective way for EU member states to meet their Kyoto obligations. EU Member State governments are required to set an emission cap for all installations covered by the Scheme.

The allocation of allowances to each installation for any given period is to be stated in the National Allocation Plans (NAPs) that the national governments are responsible for delivering to the Commission before each allocation phase. The first phase runs from 2005-2007 and the second phase will run from 2008-2012 to coincide with the first Kyoto Commitment Period.

The EU ETS initially covers energy activities, production and processing of ferrous metals, mineral industry and pulp and paper production, and does only apply to emissions of CO2 in the first allocation phases. However, the design of the scheme allows for further inclusion of other greenhouse gases under future allocation periods.

Emissions trading allow companies to emit in excess of their allocation of allowances by purchasing allowances from the market. Similarly, a company that emits less than its allocation of allowances can sell its surplus allowances on the market. In addition the Linking Directive, Directive 2004/101/EC, that allows companies covered by the EU ETS to use carbon credits generated from the project based flexible mechanisms (this means Joint Implementation and Clean Development Mechanism), provides new opportunities for companies to fulfil their emission reduction commitment.

To learn more about the EU ETS system please visit the links below:

Further links can be found in the database.

Market trends

Ever since carbon became a commodity with a direct financial value, the market trend indicates increasing innovation and new capital entering into the field. Reducing climate change risk and promoting investment in clean energy systems has proved to be a long-term venture that requires billions of dollars of annual investment.

The EU ETS, has been functioning from January 2005, and recently the EU Member States submitted the mandatory verification reports that makes up the companies compliance with their allocation plans for the previous year. Results indicated a general over-allocation compared to actual emissions, which immediately was reflected in carbon prices at the EU ETS market, which went down by 2/3 of its value. Following this plunge, prices are now increasing on the market again, thus creating more confidence in market signals.

In early May 2006, the outlook for the EU ETS prices for 2008-2012 rebounded to around €20-24 as the market focused on the likelihood of tighter compliance caps in EU ETS Phase II, reflecting the commitment of Member States to meeting their Kyoto Protocol targets.

In a recent report from the International Emission Trading Association the state and trends of the carbon market 2006 is outlined.

PDF IconDownload the full report

For further information on current carbon trends and price development at the carbon markets, visit the link below:

Further links can be found in the database.