B2.8.1 European Trading Scheme (ETS)


The European Emissions Trading Scheme (ETS) is a Europe wide scheme which aims to reduce emissions of carbon dioxide and combat the serious threat of climate change. It was established to help meet the European Union’s greenhouse gas emissions reduction target of 8% below 1990 levels under the Kyoto Protocol.

The scheme started in 2005 and requires companies in specific sectors to meet binding carbon emissions targets. Industries in the ETS include power generation, iron and steel, glass and cement.

The scheme is divided into phases for which Member States must develop a National Allocation Plan (NAP) approved by the European Commission. These plans must set an overall ‘cap’ on the total amount of emissions allowed from all the installations covered by the scheme. This is converted to allowances where 1 allowance equals 1 tonne CO2. The allowances are then distributed by Member States to installations in the scheme.

Installations covered by the Scheme are required to monitor and report their emissions annually. If a company used all of their allocation they may purchase additional allowances. Conversely, a company that has successfully reduced emissions may sell surplus allowances.

The scheme has received criticism because some feel that the emissions limits were too low. Some companies discovered that they could meet the targets relatively easily and were able to sell their surplus of credits. Some Governments were also accused of distributing permits free of charge, therefore allowing polluters to continue polluting.

Such a scheme can only meet the objective of reducing air pollution if the limits are low enough to encourage a reduction in emissions.