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EU Emissions Trading System (ETS)

The EU Emissions Trading System (EU ETS) is a cornerstone of the European Union's policy to combat climate change and its key tool for reducing greenhouse gas emissions from power-generation and industry cost-effectively. The first, and by far the largest, international system for trading greenhouse gas emission allowances, the EU ETS covers more than 11,000 power stations and industrial plants (stationary installations) in 31 countries, as well as airlines that operate within the EU. The ETS covers about 45% of EU emissions, but only about 29% of total emissions in Ireland.

Emissions trading is a “cap and trade” system where an EU-wide limit, or cap, is set for participating installations. The cap is reduced over time so that total emissions fall. Within that limit “allowances” for emissions are auctioned or allocated for free (outside the power-generation sector). Individual installations must report their CO2 emissions each year and surrender sufficient allowances to cover their emissions. If their available allowances are exceeded, an installation must purchase allowances. On the other hand, if an installation has succeeded in reducing its emissions, it can sell any surplus allowances remaining.

The EU ETS is designed to bring about reductions in emissions at least cost, and to date has played an increasingly important role in assisting European industry implement the type of reductions envisaged within the EU’s agreed limit of at least an overall 20% reduction of GHG emissions across the EU by 2020.

EU ETS was launched in 2005 as the world’s first international company-level ‘cap-and trade’ system for reducing emissions of greenhouse gases cost-effectively. It is established under Directive 2003/87/EC and amendments, and is implemented in Ireland under Statutory Instrument (SI) No. 490 of 2012 and amendments, and SI No. 261 of 2010 and amendments. EU ETS is implemented in distinct phases or ‘trading periods’. After Phase I was introduced as a three-year pilot which ran until 2007, Phase II operated between 2008 and 2012.

The current phase (Phase III) of EU ETS runs from 2013 to 2020. It has introduced much greater use of auctioning of allowances and limited EU centralised free allocation. It also allowed for the setting up of a Market Stability Reserve to withdraw the surplus of allowances from the market and increase the price of allowances within the ETS.

Under Phase IV, which will run from 2021-2030, the sectors covered by EU ETS must reduce their emissions by 43% by 2030 compared to 2005 levels. Further changes in the design of the system are therefore required to be implemented from 2021 to stabilise and further increase the price of carbon and incentivise emissions reduction. After more than 28 months of discussion, agreement was reached on Phase IV on 8 December 2017, and the revised ETS Directive was published on 19 March 2018. Key elements include a tighter cap on emissions, a strengthening of the mechanism to remove the surplus of allowances from the market, and changes to reduce the administrative burden on small industries.

EU ETS is run on a day to day basis in Ireland by the EPA, and information on the operation of the scheme in Ireland is available on the ETS section of the EPA website. Further information on the EU ETS can be found on the European Commission website.