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 Emissions Trading System (EU ETS) was launched in January 2005 and today comprises approximately 13,000 industrial and energy production industries, including aircraft operators. In addition to the 28 member states of the EU, there are also facilities in Norway, Liechtenstein and Iceland in the ETS.

The trade is regulated by an EU directive (2003/87/EC), which covers all EU member states and is implemented in the national law of each country.

Cap-and-trade system

The EU ETS is a so-called Cap-and-trade system and covers about 45 percent 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 cent per year. A decrease of 21 percent by 2020 compared with 2005. The gradual reduction allows companies to slowly adapt to meet increasingly ambitious emission reduction targets.

Carbon leakage

Each year, some of the allowances are allocated free of charge to certain participants in the system, for example in those sectors where there is a risk of so-called carbon leakage. 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. Other emission allowances in the system are sold through auctions.

After each year, an operator included in the ETS must surrender an allowance per tonne of carbon dioxide equivalent released during the previous year. If the operator does not have sufficient allowances, either 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 and second phase of the EU ETS

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. 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 percent of the allowances were distributed free of charge.

The third and current phase

The third phase of the EU ETS is running between 2013 and 2020. Aircraft operators have been included since 2012, and from 2013 there are also some additional sectors in the ETS. Below are all sectors that are 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
  • aluminum 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 Emissions Trading Act and the Emissions Trading Regulation. The total extent in Sweden is also apparent from the reported emissions from Swedish plants, published annually by the Swedish Environmental Protection Agency.

Free allocation of allowances is based on common, predefined benchmarks that have been 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 is the main allocation principle. In 2013, 40 percent of the annual emissions allowance will be auctioned. The responsible authority for auctioning emission allowances in Sweden is the National Debt Office.