EU ETS 101

The EU ETS is a 'cap and trade' system covering power, industry, and aviation across the EU and several other European nations. While it has successfully reduced emissions in the power sector, the document argues that free allocation of permits has led to stagnant industrial emissions and significant windfall profits for companies. The guide details the role of the Market Stability Reserve in managing oversupply and discusses the proposed Carbon Border Adjustment Mechanism as a potential replacement for carbon leakage protections.

• The EU ETS operates as a 'cap and trade' system that sets a cumulative limit on greenhouse gas emissions for the electricity, heavy industry, and aviation sectors, which is gradually lowered to meet climate targets.
• Emission reductions have been uneven across sectors; while electricity and heat production emissions fell by nearly 45% since 2011, industrial emissions only decreased by 1.3% between 2013 and 2019.
• The system has historically suffered from a massive oversupply of pollution permits, which depressed carbon prices and undermined the 'polluter pays' principle; the oversupply stood at approximately 1.6 billion permits in 2020.
• The Market Stability Reserve (MSR), operational since 2018, manages oversupply by removing allowances from auctions to limit the number of EUAs in circulation.
• Free allocation of emission permits, justified by the theoretical risk of 'carbon leakage', has allowed energy-intensive industries to generate up to €50 billion in windfall profits between 2008 and 2019.
• The aviation sector is the only covered sector where emissions have consistently increased, partly because 85% of required allowances are received for free.
• The proposed Carbon Border Adjustment Mechanism (CBAM) would require importers of certain goods (iron, steel, cement, fertiliser, aluminium, and electricity) to buy carbon certificates, potentially replacing free allocations.
• EU ETS auction revenues are largely managed by member states, but reporting on their use for climate action is often vague or low quality, with some states spending revenues on fossil fuel heating systems.
• The Innovation Fund and Modernisation Fund use ETS revenues to support low-carbon technology demonstrations and energy sector upgrades in lower-income member states, respectively.

APA

Stoefs, W. (2022). EU ETS 101. Carbon Market Watch. https://carbonmarketwatch.org/wp-content/uploads/2022/03/CMW_EU_ETS_101_guide.pdf

Chicago

Stoefs, Wijnand. EU ETS 101. Carbon Market Watch, 2022. https://carbonmarketwatch.org/wp-content/uploads/2022/03/CMW_EU_ETS_101_guide.pdf.

Wikipedia

{{cite report |last1=Stoefs |first1=Wijnand |title=EU ETS 101 |publisher=Carbon Market Watch |date=February 2022 |url=https://carbonmarketwatch.org/wp-content/uploads/2022/03/CMW_EU_ETS_101_guide.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{stoefs2022ets, author = {Stoefs, Wijnand}, title = {{EU ETS 101}}, institution = {Carbon Market Watch}, year = {2022}, month = feb, url = {https://carbonmarketwatch.org/wp-content/uploads/2022/03/CMW_EU_ETS_101_guide.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }