The EU Emissions Trading System (EU ETS) is a cornerstone of the European Union’s policy to counter climate change. It is an important tool for reducing greenhouse gas emissions cost-effectively. It is the first and biggest international scheme for the trading of greenhouse gas emission allowances, the EU ETS covers some 11,000 power stations and industrial plants in 30 countries.
EU ETS was launched in 2005 and works on the “cap and trade” principle. That means there is a “cap”, or limit, on the total amount of certain greenhouse gases that can be emitted by the factories, power plants and other installations in the system. Within this cap, companies receive emission allowances which they can sell to or buy from one another as needed.
At the end of each year each company must surrender enough allowances to cover all its emissions, lest heavy fines are imposed. If a company reduces its emissions, it can keep the spare allowances to cover its future needs or else sell them to another company that is short of allowances. The flexibility that this emissions trading system brings ensures that CO2 and other emissions are cut where it costs least to do so.
The number of allowances is reduced over time so that total emissions fall. In 2020 emissions will be 21% lower than in 2005. The ETS is growing reasonably fast and is becoming stronger. The ETS now operates in 30 countries. It covers the 27 EU member states plus Iceland, Liechtenstein and Norway. It covers CO2 emissions from installations such as power stations, combustion plants, oil refineries and iron and steel works, as well as factories making cement, glass, lime, bricks, ceramics, pulp, paper and board.
Nitrous oxide emissions from certain industrial processes are also covered. Between them, the installations currently in the scheme account for almost half of the EU’s CO2 emissions and 40% of its total greenhouse gas emissions.
Airlines are expected to join the scheme in 2012. The European Union ETS will be further expanded to include the following industries: petrochemicals, ammonia and aluminium, in 2013, when the third trading period will start. At the same time a series of important changes to the way the EU emissions trading system works will take effect in order to strengthen the system.
The EU ETS has put a price on carbon emissions. The EU ETS has shown that it is possible to trade in greenhouse gas emissions. Emissions from installations in the scheme are falling as intended. The changes to be introduced in 2013, notably a progressive move towards auctioning of allowances, will further enhance its efficacy. The success of the EU ETS has inspired several countries and regions, across the globe. Some of them are planning to launch cap and trade schemes of their own. They all may operate in different names. Allowances may be called certificates. The EU hopes to link up the ETS with compatible systems around the world to form the backbone of climate change prevention induced by ETS. Ultimately the allowances should be tradeable globally.
Countering and mitigating or slowing climate change is a top priority for the EU. Actually it should be the top priority for the world to prevent climate change. Europe is working hard to cut its greenhouse gas emissions substantially while encouraging other nations and regions to follow suit. At the same time, the EU is developing a strategy for adapting to the impacts of climate change that can no longer be prevented. Controlling and countering climate change carries a cost, but doing nothing will be far more expensive in the long run. Moreover, investing in the green technologies that cut emissions will also create jobs and boost the economy.
To prevent the most severe impacts of climate change, the scientific evidence shows that the world needs to limit global warming to no more than 2ºC above the pre-industrial temperature. That is just 1.2°C above today’s level. To stay within this ceiling, we have to stop the rising trend in worldwide greenhouse gas emissions before 2020, at least reduce the global emissions by 50 % by the middle of this century.
The EU is showing the way forward through its strategy to fight climate change and the policies that it already implements or has proposed to the member states and the European Parliament. Initiatives it has taken to cut its climate emissions include:
- Continually improving the energy efficiency of a wide array of equipment and household appliances
- Mandating increased use of renewable energy sources, such as wind, solar, hydro and biomass, and of renewable transport fuels, such as bio fuels;
- Supporting the development of carbon capture and storage (CCS) technologies to trap and store CO2 emitted by power stations and other large installations;
- Developing a comprehensive EU adaptation strategy that strengthens Europe’s resilience to climate change.
The EU has even offered to increase its emissions reduction to 30% by 2020, on condition that other major emitting countries in the developed and developing worlds commit to do their fair share under a future global climate change agreement. This agreement should take effect at the start of 2013 when the Kyoto Protocol‘s first commitment period would have expired in 2012.