Disclosure Frameworks

EU Emissions Trading Systems (ETS)

The EU Emissions Trading System - often referred to as ETS - affects all EU member states. By its nature, it continually flexes and expands to ensure the likelihood of meeting ambitious climate targets - and it can have huge financial repercussions for organizations not meeting the requirements. Learn more about what it is and how it might impact your organization, with Minimum. 

What is the EU emissions trading system?

The EU ETS, or European Union Emissions Trading System, is a cap-and-trade program implemented by the European Union to control greenhouse gas emissions within its member states. It was launched on January 1 2005, and has since undergone several phases with refinements and expansions to its coverage and rules.

The system encourages emission reduction and fosters a transition to cleaner practices. By and large, the EU ETS applies to two sectors: 

  • Energy and industry - This includes power plants, refineries, and manufacturing installations.
  • Aviation - Flights within the European Economic Area (EEA) are subject to the EU ETS. This covers both domestic and international flights.

Annually, a restricted quantity of EU Allowances (EUAs) is allocated for market trading. This allocation diminishes each year to align with the EU's objective of achieving a 55% reduction in greenhouse gas (GHG) emissions by 2030 compared to 1990, ultimately reaching net zero emissions by 2050. Businesses exceeding their cap must buy allowances, while those with surplus can sell. 

What gasses are covered by EU ETS?

The EU ETS encompasses greenhouse gas emissions from approximately 10,000 installations in the energy sector and manufacturing industry, along with aircraft operators conducting flights within the EU and departing to Switzerland and the United Kingdom. Within that, it’s particularly concerned with the following greenhouse gasses:

Carbon Dioxide (CO2)

From electricity and heat generation and energy-intensive industry sectors

Nitrous Oxide (N2O)

From production of nitric, adipic and glyoxylic acids and glyoxal

Perfluorocarbons (PFCs)

From the production of aluminum

Starting in 2024, the EU ETS will extend its coverage to include emissions from maritime transport as well.  It’s also likely to evolve even further following that, as its scope flexes to meet the requirements for hitting climate targets. 

For more information about the scope of the EU ETS, it’s best to check the European Union’s website directly for the most up to date information. 

How does it work?

The EU sets an overall cap on the total amount of certain greenhouse gasses that can be emitted by installations covered by the system. This cap is gradually reduced over time to achieve emission reduction goals in the following ways:

Emission allowances - Cap and Trade

Emission allowances in an Emissions Trading System (ETS), such as the EU ETS, represent the permissible amount of greenhouse gas emissions a company or installation can release. 

These allowances are set by regulatory authorities to achieve overall emission reduction goals. Allocated annually, allowances can be freely distributed or auctioned. Allowances create a financial incentive for industries to reduce emissions efficiently.

Allocation process

Allowances, each representing the right to emit one ton of CO2 equivalent, are distributed among installations. Installations include industries like power plants, factories, and aviation. Some allowances are auctioned, while others may be allocated for free.

Trading mechanism

Companies can buy or sell allowances based on their emissions. If a company reduces its emissions and has surplus allowances, it can sell them to a company that exceeds its allocated limit. This market-based approach incentivizes emission reduction, encourages innovation, and ensures overall compliance with environmental targets. 

Compliance and penalties

Companies must surrender enough allowances to cover their actual emissions at the end of each compliance period. Failure to comply results in penalties. This mechanism creates a financial incentive for companies to reduce emissions.

Participants must monitor and report their emissions accurately. This transparency ensures accountability and facilitates the functioning of the trading system.

How Minimum can help

Minimum can help organizations to understand their existing carbon output, and create plans to mitigate climate related risks in the future.  Our Emissions Data Platform seamlessly collects and processes emissions data from every corner of your organization and supply chain - no matter the format. Making it the ideal platform for emissions audits and all-round business intelligence. 

Learn more about how Minimum's Emission Data Platform can help to power you all the way to Net Zero today.

FAQs about the emissions trading system

Is the UK still in the EU emissions trading scheme?

No, the UK is no longer a part of EU ETS. Instead, the UK Emissions Trading Scheme (UK ETS) replaced the UK’s participation in the European Union Emissions Trading Scheme (EU ETS) on 1 January 2021. 

The UK ETS Regulators play a crucial role in upholding adherence to the UK ETS Regulations. This includes overseeing operational tasks like the issuance of permits (for installations) and ensuring compliance with emissions plans (for aviation).

How is EU ETS linked to Cap and Trade?

The EU ETS is within itself a Cap and Trade system. The European Union sets a cap on the total allowable greenhouse gas emissions from covered industries - this cap decreases over time to align with emission reduction targets. 

If a company reduces its emissions and has surplus allowances, it can sell them to other companies facing challenges in meeting their cap. This creates a market for emission allowances, fostering a flexible and market-driven approach to emission reduction.