European Emissions Trading Scheme

The EU Emissions Trading Scheme (EU ETS) started in 2005 and is the world’s largest cap-and-trade scheme. According to the World Bank, more than 6.3 billion European CO2 emission rights were traded in 2009; this represents a value of $ 118 billion. The EU ETS currently covers more than 10,000 installations in the energy and industrial sectors which are collectively responsible for close to half of the EU's emissions of CO2. Currently, the installations get CO2 emission rights for free from the EU member states' governments.

In January 2008, the European Commission proposed a number of changes to the scheme, including centralized allocation (no more national allocation plans) by an EU authority, a turn to auctioning a greater share (60+ %) of permits rather than allocating freely, and inclusion of other greenhouse gases, such as nitrous oxide and perfluorocarbons. These changes will become effective from January 2013 onwards (i.e. Phase III of the EU ETS) and last until 2020. The EU ETS has recently been extended to the airline industry as well; starting in 2012, all intra-EU flights and all flights entering and departing from EU airports will be covered by the scheme.

Companies participating in the EU ETS can also fulfill their obligations through investments outside of the EU, through the Kyoto Protocol’s flexible mechanisms, joint implementation (JI) or the clean development mechanism (CDM).  Under these mechanisms, eligible projects can generate ‘carbon credits’ that can be used by the investing party towards their emissions reductions targets. The use of these ‘carbon credits’ by European companies is capped at around 10 percent of allocation. Starting in 2013 (i.e. Phase III), the use of certain types of ‘carbon credits’ will be not be allowed anymore.