Principles of emissions trading
EU Emissions Trading System for companies
Stationary installations in the industry and energy sector have participated in the EU’s Emissions Trading System since 2005. Since 2012, aviation has also been included. Companies emitting greenhouse gases receive a limited allocation of emission allowances from the competent authority (in Austria the Federal Ministry Agriculture, Forestry, Regions and Water Management). If a company emits more greenhouse gas emissions than its allocation, it may buy allowances from other companies. Allowances are traded by joining an exchange that lists carbon allowance products, via brokers (for example banks), or directly between operators.
The pilot phase of the EU Emissions Trading System (EU ETS) from 2005 to 2007 was an opportunity to gain first experiences of emissions trading and to prepare Europe for international emissions trading starting from 2008. The second phase of the EU ETS from 2008 to 2012 coincided with the first commitment period under the Kyoto-Protocol. In the first and second trading period, companies participating in the EU ETS were provided with a free allocation of EU Allowances (EUAs) by the national authorities based on national allocation plans.
The third phase of the EU ETS (2013-2020) coincided with the second commitment period under the Kyoto-Protocol. In this phase, a centralised approach was used, i.e. the EU provided free allocations (on the national level) to certain internationally competing operators. Since 2013, most of the EUAs had no longer been allocated free of charge but auctioned. In the fourth phase of the EU ETS (2021-2030), the use of project credits generated pursuant to the Kyoto Protocol, which operators had been allowed to use (up to a certain limit) to meet their surrender obligations, will no longer be possible. In addition, free allocations will be adjusted annually, based on installations’ activity data. Any surpluses of allowances which, since 2019, have been transferred to the market stability reserve, will be subject to a cancellation mechanism from 2023 onwards if they exceed a predefined amount.
EU emissions trading under the Effort Sharing Decision
For sectors not covered by the EU ETS, such as transport, buildings and agriculture, the EU also allocates tradable units to Member States under the Effort Sharing Regulation (EU) 842/2018 (Annual Emission Allocation Units – AEA). These units enable emissions trading between Member States in the non-ETS sector. In the period from 2021 to 2030, emissions and sinks from the land use sector are also included in emissions trading under the Effort Sharing Regulation.
What are the advantages of emissions trading as an instrument?
An emissions trading system was first established in the 1990s in the USA to combat acid rain. It showed that a market-based instrument was able to deliver a cost-effective reduction in sulphur dioxide emissions within a short space of time. One necessary condition for the functioning of the emissions trading system is that emitters are allocated only a limited number of allowances for a certain activity. With the possibility of trading in allowances on the market, emission reductions will usually be implemented at installations where they can be achieved in the most cost-effective way. On the other hand, installations where an emission reduction is only possible at high expense will purchase allowances instead. This keeps the cost of the emission reductions at the lowest possible level from an economic point of view, as the trade in emission allowances balances the reduction costs between the participants.
More information on emissions trading is available on the European Commission’s website at the following link: