As of the start of Phase II, the EU ETS covers all 27 member countries of the European Union, as well as three non-EU countries: Norway, Iceland, and Lichtenstein.
Market Features and Rules
The European Union Emissions Trading Scheme (EU ETS) became effective January 1, 2005, creating the world's largest market in greenhouse gas emissions to date. The program establishes a mandatory carbon dioxide cap-and-trade system, in which sources are allocated a certain number of emission "allowances" based on historic performance and other parameters.
Specific emissions targets are established by national governments in the form of National Allocation Plans (NAPs), which specify how many allowances will be awarded to emitters in each regulated industry. Each country, in turn, determines how many allowances to allocate to each sector falling under regulation.
Participants reducing emissions below their cap can sell the resulting excess allowances. Those companies that find reducing emissions internally to be prohibitively expensive, or those needing to increase production, can buy allowances on the open market.
If a participant is not able to surrender sufficient allowances to cover its annual emissions by the reconciliation date, it will be financially penalize. Financial penalties for non-compliance were 40 euro/tCO2e in Phase I of the ETS and are 100 euro/tCO2e in Phase II.
The ETS was established primarily to help EU member states achieve their Kyoto Protocol targets, as well as provide companies and governments with experience in developing, operating and participating in carbon markets. The first phase of the EU ETS operated from 2005 to 2007, and the second phase runs from 2008 to 2012. Additional gases and sectors under regulation are able to be added in successive phases.
Phase II of the EU ETS scheme encompasses the years 2008-2012 for compliance with Kyoto commitments. The European Commission has proposed expanding the list of regulated gases beyond C02, and it is expected that all six greenhouse gases regulated by the Kyoto Protocol will be included in Phase III when it begins in 2013. Emissions from the aviation industry are planned to enter into the scheme in 2012. In addition, a 'linking directive' established in 2004 allows for EU ETS linkages with CDM and JI credits starting in 2008.
Carbon Forestry Rules
The EU ETS Linking Directive allows companies in the scheme to use emission reduction credits (offsets) from Kyoto Protocol projects (covered by the CDM or JI) to count towards their targets. However, credits from forestry projects are excluded from this directive and are not permitted to be used to meet EU ETS compliance targets at the present time.
Market Participants
All 27 member states of the European Union and three non-EU countries (Norway, Iceland, and Lichtenstein), as well as companies owning installations with significant emissions in the regulated sectors, are regulated by the EU ETS. Four general sectors are explicitly covered by the scheme:
- Energy activities (combustion installations > 20 MWth, mineral oil refineries, coke ovens)
- Ferrous metals
- Building materials (cement, brick, glass)
- Pulp and paper
In Phase I, more than 12,000 individual installations were regulated, accounting for about 40% of all EU greenhouse gas emissions. It is expected that aviation will be added to the list of covered sectors starting in 2010, and the maritime transport and forestry sectors by 2012.
Market Activity, Value, and Volume
Trading activity and prices per tonne have fluctuated over the nearly four years of the EU ETS. In 2006, the EU ETS transacted 1,044 MtCO2e valued at $24.4 billion. Just one year later in 2007, a confirmed 2,061 MtCO2e valued at $50.1 billion were transacted on the EU ETS. Transaction volume nearly doubled between 2006 and 2007.
Forestry Credits
Registered Companies with compliance obligations under the EU ETS are not yet able to use emissions reductions credits from forestry projects to meet their targets. Therefore, it is not possible to determine the land area protected or restored directly because of the EU ETS.
