European Union Emissions Trading System
The European Union Emissions Trading System (EU ETS) is a carbon emission trading scheme (or cap and trade scheme) which began in 2005 and is intended to lower greenhouse gas emissions by the European Union countries. Cap and trade schemes limit emissions of specified pollutants over an area and allow companies to trade emissions rights within that area. The EU ETS covers around 45% of the EUs greenhouse gas emissions.
The scheme has been divided into four "trading periods". The first ETS trading period lasted three years, from January 2005 to December 2007. The second trading period ran from January 2008 until December 2012, coinciding with the first commitment period of the Kyoto Protocol. The third trading period lasted from January 2013 to December 2020. Compared to 2005, when the EU ETS was first implemented, the proposed caps for 2020 represents a 21% reduction of greenhouse gases. This target has been reached six years early as emissions in the ETS fell to 1.812 billion (109) tonnes in 2014.
The fourth phase started in January 2021 and will continue until December 2030. The emission reductions to be achieved over this period are unclear as of November 2021, as the European Green Deal necessitates tightening of the current EU ETS reduction target for 2030 of −43% with respect to 2005. The EU commission proposes in its "Fit for 55" package to increase the EU ETS reduction target for 2030 to −61% compared to 2005.
EU countries view the emissions trading scheme as necessary to meeting climate goals. A strong carbon market guides investors and industry in their transition from fossil fuels. A 2020 study found that the EU ETS successfully reduced CO2 emissions even though the prices for carbon were set at low prices. A 2023 study on the effects of the EU ETS identified a reduction in carbon emissions in the order of -10% between 2005 and 2012 with no impacts on profits or employment for regulated firms. The price of EU allowances exceeded 100€/tCO2 ($118) in February 2023.