The European market for tradable CO2 emission quotas

The central tool of the European approach is a CO2 emissions trading market called the European Union Emissions Trading Scheme (EU ETS). It caps the CO2 emissions of over 11,000 installations of the industrial sectors with the highest GHG emission levels in the 27 member countries: energy production, mineral industries (cement, lime, glass, ceramic), metallurgy (steel, iron), and paper. The ETS is based on the 2003/87/CE Directive.

The principle is to set an emissions cap for each country. This cap results in an annual allocation of credits divided among installations (1 credit = 1 ton of CO2). The allocation method is detailed in each National Allocation Plan (NAP) and amended by the European Commission, in charge of the scheme.

What is the EU carbon quota system?

The compliance of installations is verified each year before the 30th of April: each installation must surrender to the European Commission a number of permits corresponding to their emissions over the previous year. A system of national and Union level (Community International Transaction Log) registries enables the accounting of allowances and emissions.

 Two periods have been established for the market: 2006-2007 as a test phase, and 2008-2012 corresponding to the Kyoto engagement period. The European Council in March 2007 set reduction objectives as far out as 2020, so the market will likely continue at least until that date.

 About 6.3 billion tons of CO2 equivalent (tCO2e) have been allocated over the 2005-2007 period. During the second period, the annual allocation will be 2.1 billion tCO2e.

The auctioning of permits

The auctioning of permits was possible during the first period up to a limit of 5% of total allocations. This limit has been raised to 10% for the second period but few countries have chosen to take advantage of this opportunity.

If emissions exceed available allowances, the installations in the ETS can buy credits from the Kyoto project mechanisms (CERs and ERUs) for compliance needs, as these were made fungible into the ETS by Directive 2004/101/EC.

A “domestic offset projects” system is also under development to make emissions credits available for trade on the basis of abatements realized in sectors not yet covered by the ETS. It is intended to make the flexibility of project mechanisms available within one’s own country.

How does the European Union carbon emissions trading scheme work