European Trading System
The EU emissions allowance trading system is a regional, market-based system for managing the reduction of carbon dioxide emissions. Companies who invest in climate improving measures can earn emission allowances which in turn may be sold on the open market. The EU trading system may be linked to other regional trading systems.
The Kyoto Protocol defines three flexible mechanisms: i) Emissions trading (IET); ii) Joint Implementation (JI); and iii) Clean Development Mechanism (CDM).
The Kyoto Protocol’s system of emissions trading, International Emissions Trading (IET) may take place between countries with quantitative commitments under the Kyoto Protocol or between companies which are authorised by states to participate in trading.
On the 1st January 2005 the EU introduced a system of emission trading known as the European Union Greenhouse Gas Emission Trading Scheme EU-ETS, a regional trading system developed in accordance with the Kyoto Protocol. This trading system is one of the pillars in the EU Climate Change Program aimed at creating possible paths for the EU to reach its own commitment under the Kyoto Protocol, and is also one of the most comprehensive market-based systems in the world for the reduction of carbon dioxide emissions.
The Linking Directive
The Linking Directive brings together European and International climate policy. The directive regulates the actual connection of the CDM and JI to the European trading system, in other words how CERs and ERUs are to be managed in the registry system and how companies can use them to meet their commitment.
Certified Emissions Reductions from CDM projects (CERs) were included in the European trading system from its beginning.
Emission Reductions Units from JI projects (ERUs) were not included in the trading system until 2008. This is due to the start of the first commitment period (2008) and that ERUs are converted allocated AAUs (Assigned Amount Units) which correspond to emissions reductions under JI projects. In JI projects the host country has its own commitment to the Kyoto Protocol, and the AAUs come into existence after the parties’ AAU’s have been issued in the national registries.
The linking of the CDM and JI to the EU trading system means that there are more emissions allowances within the trading system than was originally the case under criteria stipulated by the EU. Nevertheless the benefits to the climate are guaranteed due to the fact that this increased number of emissions allowances in the system is offset by real, measured emissions reductions outside the system.
