EU Emissions Trading Scheme 

How it works currently

1. Developed a National Allocation Plan (NAP)
   • Member State proposed a limit (‘cap’) on total emissions from relevant  installations
   • The plans were approved by the European Commission, in many cases after some revision.
2. Distributes Allowances
   • The ‘Cap’ is converted into allowances, known as EUAs (1 tonne of Carbon Dioxide = 1 EUA)
   • The Member States distribute these allowances to installations in the scheme in their country according to their approved plan.
   • Up to 10% of the allowances may be auctioned instead of being given for free. These auctions will be largest in the UK and in Germany.
3. Operates the Scheme
   • Installations must monitor and report verified carbon emissions
   • At the end of each year, installations must surrender sufficient allowances to cover their emissions and can buy additional allowances or sell any surplus
   • Joint Implementation (JI) and Clean Development Mechanism (CDM) credits can be used within the scheme, through the 'Linking Directive', agreed in 2004)

How it will work in the future - Phase III

Phase III will start in 2013 and run until 2020. The biggest changes in Phase III will be:

• Design
  Scheme will be designed at a European level, rather than by each country individually.
• ‘Cap’ will reduce over time
  The ‘cap’ will decline by at least 1.74% a year, so that emissions in 2020 will be at least 21% below their level in 2005
• More will be covered
  Scheme will include the production of all metals (including Aluminium) and potentially aviation. For some sectors, it will include the emission of other greenhouse gases in addition to carbon dioxide. 
• Allowances
  Much greater proportion of allowances will be auctioned (rather than given to installations)
  Use of Clean Development Mechanism (CDM) allowances will be more tightly restricted

Background

The scheme started in 2005 in order to help the EU meet its targets under the Kyoto Protocol  (8% reduction in greenhouse gas emissions from 1990 levels). 

The scheme is the world's largest carbon-trading scheme. It provides an incentive for installations to reduce their carbon emissions, because they can then sell their surplus allowances.

Installations are included in the scheme on the basis of their Carbon Dioxide (CO2) emitting activities.  Industries that are covered include:

• Electricity generation
• Iron & steel
• Mineral processing (for example: cement manufacture)
• Pulp and paper processing

The latest on the draft National Allocation Plan (NAP) and the EU ETS can be found on the DEFRA website.

Other EU market instruments

For information on mandatory product labelling and voluntary sector agreements, visit the EU website.