EU Emissions Trading Scheme

  

Since 2005, some 10,000 large industrial plants in the EU have been required to buy and sell permits to release carbon dioxide into the atmosphere. A so-called 'emissions trading scheme' enables companies that exceed individual CO2 emissions targets to buy allowances from 'greener' ones to help reach the EU's targets under the Kyoto Protocol. However, pollution credits were grossly overallocated by several countries during the initial implementation phase, forcing down carbon prices and undermining the scheme's credibility, which has prompted the EU to consider toughening up the system.

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Overview

To minimise the economic costs of its commitments to combat climate change under the Kyoto Protocol, EU countries have agreed to set up an internal market enabling companies to trade carbon dioxide pollution permits. 

Under the EU Emissions Trading Scheme (EU ETS), some 10,000 energy-intensive plants across the EU are able to buy and sell permits to emit carbon dioxide, representing around 40% of the EU's total CO2 emissions. Industries covered by the scheme include: power generation, iron & steel, glass, cement, pottery and bricks.

An emission cap is defined, for each individual plant, via a National Allocation Plan (NAP) submitted by member states and approved by the Commission. Companies that exceed their quotas are allowed to buy unused credits from those that are better at cutting their emissions.

Originally, a fine of €40 per excess tonne of CO2 emitted was imposed on plants exceeding their individual target, which rose to €100 in 2008. For comparison, carbon prices fluctuated between €8-30 a tonne in 2005-06 (one tonne = one allowance). By offering a much cheaper alternative to fines, the Commission hopes that the EU ETS will stimulate innovation and create incentives for companies to reduce their carbon emissions.

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