The world's largest carbon market explained
The European Union Emissions Trading System (EU ETS) is the cornerstone of the EU's climate policy and the world's first major carbon market. Since its launch in 2005, it has evolved into a sophisticated mechanism for pricing carbon emissions and driving decarbonization across Europe's most carbon-intensive industries.
The EU ETS operates on a "cap-and-trade" principle. The system sets an overall limit (cap) on the total amount of greenhouse gases that covered installations can emit. Within this limit, companies can buy and sell emission allowances as needed, creating a market price for carbon emissions.
Each European Union Allowance (EUA) represents the right to emit one tonne of CO₂ equivalent. At the end of each year, companies must surrender enough allowances to cover their actual emissions, or face substantial penalties.
The cap decreases each year, ensuring that total emissions fall over time while the trading mechanism ensures emission reductions happen where they're most cost-effective.
The EU ETS covers approximately 40% of the EU's greenhouse gas emissions across multiple sectors:
Coal, gas, and other fossil fuel power plants across all EU member states
Steel, cement, aluminum, chemicals, paper, and other energy-intensive industries
Flights within the European Economic Area since 2012
Large ships calling at EU ports (being phased in from 2024)
The system covers over 10,000 installations across 27 EU countries plus Iceland, Liechtenstein, and Norway, making it the world's largest international system for trading greenhouse gas emission allowances.
Allocation and distribution of allowances occurs through several mechanisms:
Companies that reduce their emissions below their allocated allowances can sell surplus allowances to others, creating financial incentives for emission reductions. Those that exceed their allocation must purchase additional allowances, making pollution expensive.
The EU ETS creates a market price for carbon that reflects the true cost of emission reductions across covered sectors. This price discovery mechanism:
The EU ETS has evolved through several phases, each bringing important improvements:
The initial phase focused on learning and establishing the infrastructure. Price volatility was high due to over-allocation of allowances.
Aligned with the Kyoto Protocol, this phase saw the inclusion of additional gases and the development of international linking.
Introduced centralized allocation, increased auctioning, and expanded scope to include aviation and additional industries.
The current phase features the Market Stability Reserve, stricter allocation rules, and preparation for further expansion.
The EU ETS requires robust monitoring and reporting to ensure environmental integrity:
This comprehensive system ensures that emission data is accurate, comparable, and reliable across all participating countries and sectors.
The Union Registry is the central database that tracks all allowances from creation to surrender or cancellation. This system provides:
The registry's transparency and security make it possible to verify that allowance deletions are permanent and additional.
The EU ETS has become a model for carbon pricing worldwide. Similar systems have been developed in:
The EU is also developing international cooperation mechanisms, including potential linking with other carbon pricing systems and the new global Article 6 mechanisms under the Paris Agreement.
The EU ETS continues to evolve with several major developments planned:
Understanding the EU ETS helps organizations make informed decisions about their climate strategy. Through EUA deletion, you can directly participate in this proven climate mechanism.
Whether you're an individual looking to offset personal emissions or a business seeking comprehensive carbon management, we're here to help you make real climate impact.
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