FAQ: What is the EU Emissions Trading System (EU ETS)?

The EU Emissions Trading System (EU ETS) is a cap-and-trade mechanism designed to reduce greenhouse gas emissions in the power, heavy industry, aviation, and maritime sectors by pricing pollution. It operates by setting a decreasing cap on total emissions, divided into EU Allowances (EUAs), which companies can trade or buy at auction. While the system has raised over €152 billion since 2005, its effectiveness has been historically hampered by an oversupply of permits and the extensive use of free allocations to prevent 'carbon leakage'. A separate system, ETS2, will be introduced in 2027 to cover buildings and road transport. The document highlights concerns regarding the environmental integrity of the current cap relative to the EU's carbon budget and the lack of transparency in how member states spend auction revenues.

• The EU ETS targets a 62% reduction in emissions from its original covered sectors by 2030 compared to 2005 levels. The upcoming ETS2, starting in 2027, aims to reduce emissions in buildings and road transport by 42% over the same period.
• The system's cap is reduced annually via the linear reduction factor (LRF). The LRF is set at 4.3% for 2024-2027 and will increase to 4.4% from 2028 to 2030.
• The EU ETS has faced significant oversupply issues; in 2022, the oversupply stood at approximately 1.13 billion pollution permits. The Market Stability Reserve (MSR) was introduced in 2019 to combat this by removing allowances from circulation.
• Free allocations are used to prevent 'carbon leakage'—the risk of companies moving production to countries with weaker climate policies. In 2022, over 89% of industrial climate pollution was subsidised through these free allowances.
• The EU ETS has generated over €152 billion in revenue for member states since 2005. However, free allocations between 2021 and 2030 are estimated to result in €400 billion of foregone auctioning revenue, assuming a carbon price of €80 per tonne.
• There are concerns regarding the use of ETS revenues by member states. For example, in 2021, Poland and Hungary used their revenues to fund fossil fuel heating systems, spending €11.6 million and €25.2 million respectively.
• The 2024 cap of 1.39 billion EUAs allows for emissions that exceed the estimated total annual carbon budget for the EU (which is less than one gigatonne per year for 2020-2050).

APA

Tamellini, E. S. L. (2024). FAQ: What is the EU Emissions Trading System (EU ETS)? Carbon Market Watch. https://carbonmarketwatch.org/2024/02/29/faq-what-is-the-eu-emissions-trading-system-eu-ets/

Chicago

Tamellini, Eleanor Scott Lidia. FAQ: What is the EU Emissions Trading System (EU ETS)? Carbon Market Watch, 2024. https://carbonmarketwatch.org/2024/02/29/faq-what-is-the-eu-emissions-trading-system-eu-ets/.

Wikipedia

{{cite report |last1=Tamellini |first1=Eleanor Scott Lidia |title=FAQ: What is the EU Emissions Trading System (EU ETS)? |publisher=Carbon Market Watch |date=29 February 2024 |url=https://carbonmarketwatch.org/2024/02/29/faq-what-is-the-eu-emissions-trading-system-eu-ets/ |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{tamellini2024faq, author = {Tamellini, Eleanor Scott Lidia}, title = {{FAQ: What is the EU Emissions Trading System (EU ETS)?}}, institution = {Carbon Market Watch}, year = {2024}, month = feb, url = {https://carbonmarketwatch.org/2024/02/29/faq-what-is-the-eu-emissions-trading-system-eu-ets/}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }