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 for Climate Action, Environment, Energy, Mobility, Innovation and Technology). 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
The EU allocates tradable units (Annual Emission Allocations – AEAs) to Member States also to sectors that are not covered by the EU ETS (transport, buildings and agriculture) under the Effort Sharing Regulation (EU) 842/2018 (until 2020: Effort Sharing Decision No 406/2009). With these units, emissions trading is possible between Member States in non-ETS-sectors. For compliance for the period from 2013 to 2020, Member States may use Kyoto units from JI and CDM projects up to a quantity representing 3 % - or up to 4 % in some countries (including Austria) – of their greenhouse gas emissions in 2005. From 2021 onwards, this will no longer be possible. However, it is planned that the use of credits from forestry sinks will be possible to a limited extent in the period from 2021 to 2030.
Emissions trading under the Kyoto Protocol
Emissions trading under the Kyoto Protocol concerns the commitment periods from 2008 to 2012 and 2013 to 2020. It is one of the flexible mechanisms laid down in the Kyoto Protocol. For the first commitment period, Austria acquired a so-called assigned amount (AA), divided into tradable units (Assigned Amount Units, AAUs), based on Austria’s greenhouse gas emissions and its reduction target. The rules of the Kyoto Protocol state that AAUs can be purchased from other countries if the amount of AAUs is not sufficient to cover the country’s own emissions. In addition, it is possible to buy credits generated by projects carried out under the other two flexible mechanisms (Clean Development Mechanism, CDM, und Joint Implementation, JI). Emission reduction projects in a developing country or threshold country that has not committed itself to an emission reduction under the Kyoto Protocol are referred to as CDM projects. Emission reduction projects in a country that has committed itself to an emission reduction under the Kyoto Protocol are known as Joint Implementation (JI) projects. In the first Kyoto commitment period (2008-2012), Austria was assigned 344 million AAUs for five years. Compared to that, Austria’s greenhouse gas emissions in the same five-year period amounted to 415 million tonnes of CO2 equivalent. Austria made up the difference by purchasing AAUs from other countries and credits from JI and CDM projects and there were further credits from the Austrian forest sinks that Austria was able to use.
As the rules of the Protocol for the second commitment period entered into force on 31.12.2020, the calculation mechanism described above has to be carried out for the years from 2013 to 2020 as well. For this period, emissions that are subject to the EU ETS are calculated by the EU for all EU Member States, and emissions governed by the Effort Sharing Decision have to be calculated by Austria.
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: