Emissions trading in the EU
Emissions trading is one of the EU’s most important tools for achieving the commitment to reducing greenhouse gas emissions. The goal is to create an effective European emissions trading market with the least possible negative impact on economic development and employment within the Union.
The EU ETS was launched in January 2005 and today comprises approximately 10,000 industrial and energy production industries, including around 1500 aircraft operators. EU ETS operates in the 27 member states of the EU, as well as in Norway, Liechtenstein and Iceland (EEA-EFTA states).
Since 2020, the Swiss emissions trading system is linked to EU ETS.
The trade is regulated by an EU directive (2003/87/EC), which covers all EU member states and is in the national law of each country.
The EU ETS is a so-called Cap-and-trade system and covers about 40 % of the total volume of EU greenhouse gas emissions. The system sets an emission cap for all participants in the system. Then emission allowances are created that allow the release of greenhouse gases where every allowance corresponds to 1 tonne of carbon dioxide equivalents.
The level of the cap determines the number of allowances in the system and is designed to decrease annually from 2013 by 1.74 % per year. The annual decrease between 2021 and 2030 is 2.2 %. The gradual reduction allows companies to slowly adapt to meet increasingly ambitious emission reduction targets.
The total reduction between 2005 and 2020 amounted to 21 %.
Carbon leakage is the term used for businesses that are in risk of moving their business to countries with less ambitious emission reduction targets if they would have to pay in full for their emissions in the EU ETS.
Each year, part of the allowances is allocated free of charge to industrial sectors where there is a risk of so-called carbon leakage.
All other emission allowances in the system are sold through auctioning.
After each year, an operator included in the ETS must surrender one allowance per tonne of carbon dioxide equivalents released during the previous year. If the operator does not have sufficient allowances, either proactive measures must be taken to reduce emissions or allowances must be purchased on the market, by auction or from other participants in the system.
The first (2005-2007) and second phase (2008-2012)
The first phase in the EU ETS lasted from 2005 to 2007 and was considered a pilot phase. It was used to test price formation on the emission market and to establish the necessary infrastructure for monitoring, reporting and verification of emissions. The emission cap was based largely on estimates as there were insufficient reliable emission data available.
The second phase lasted from 2008 to 2012, allowing EU Member States to fulfil their Kyoto Protocol commitments within the EU ETS. Changes in the ETS Directive during 2004 allowed operators in the system to use international credits (CER / ERU) generated under the Kyoto Protocol’s flexible mechanisms (CDM / JI) to fulfil their commitments. In the second trading period between 2008-2012, over 95 % of the allowances were distributed free of charge.
The third phase (2013-2020)
The third phase of the EU ETS was running between 2013 and 2020. Aircraft operators were included 2012, and from 2013 there were also some additional sectors in the ETS. Below are all sectors that were included in the third phase.
- Incineration plants with an installed capacity of more than 20 MW and smaller combustion plants connected to district heating networks with a total capacity of more than 20 MW
- Mineral oil refineries
- Coking plants
- Iron and steel industry
- Mineral industry (cement, lime, glass, ceramics)
- Paper and pulp industry
- Aluminium production
- Aviation in Sweden
- Most of the energy plants connected to a district heating network are covered, even though the plants themselves are less than 20 MW.
Further description of the types of facilities covered by the Swedish Emissions Trading Act and Emissions Trading Regulation. The total coverage in Sweden is also apparent from the reported emissions from Swedish plants, published annually by the Swedish Environmental Protection Agency.
Free allocation of allowances was based on joint predefined benchmarks that were developed for different products, such as crude iron or paper. For more information on benchmarks and decisions on free allocation, visit the Swedish Environmental Protection Agency website.
In the third phase of the EU ETS, auctioning was the main allocation principle. In 2013, 40 % of the annual emissions allowance was to be auctioned. The responsible authority for auctioning emission allowances in Sweden is the National Debt Office.
The fourth phase (2021-2030)
The fourth phase runs from 2021 to 2030. During this phase, a new annual reduction factor of 2.2 % applies. The auction share during the fourth phase has not changed. 57 % of the total number of allowances will be auctioned off between 2021 and 2030, the rest will be allocated free of charge.
During the period, the profit from the sale of 600 million allowances will go to a fund that will support innovative technology to reduce emissions.
A modernisation fund will also be set up to support renewal in energy infrastructure and support a reduction in greenhouse gas emissions in member states with per capita GDP below 60% of the EU average.