How the system works
A number of emission allowances are issued and works as the "currency" of the carbon market, Companies that do not have enough allowances to cover their emissions are punished with fines.
- Don't have enough allowances? Reduce your emissions, or buy extra allowances.
- Do you have extra allowances? Sell them or save them for next year.
Over time, the cap on the total amount of greenhouse gas that companies can emit is reduced. Fewer allowances are issued, technologies to reduce emissions are developed and overall emissions are reduced.
Today, the cap and trade system covers around half of the EU's emissions and more than three-quarters of the international carbon market.
The cap and trade system
The ETS works on the principle of 'cap and trade'. A cap is a limit on the total amount of greenhouse gases that can be emitted by the installations and operators covered by the system. The cap is reduced annually in line with the EU's climate targets, ensuring that emissions are reduced over time. Since 2005, the EU ETS has helped reduce emissions from power and industrial installations by 37%.
From 2024, the shipping industry will be included in the ETS
In January 2024, the ETS will be extended to cover emissions from all ships with a gross weight of over 5,000 tonnes operating on EU routes.
The shipping industry will be implemented in three stages. The first phase, starting on 1 January 2024, will include emission permits for 40% of emissions. In 2025, the ETS will cover 70% of emissions, and in 2026, 100% of confirmed emissions will be taxed.
The first type of shipping to be affected will be passenger and cargo ships with a gross weight of more than 5,000 tonnes operating on EU routes.
- 50% of emissions are covered for routes to and from the EU.
- 100% of emissions are covered for routes between two EU ports and when ships are in EU ports.
Summary
- ETS makes companies pay for their greenhouse gas emissions, helps reduce emissions, and generates revenue to finance the EU's green transition.
- Operates in all EU countries plus Iceland, Liechtenstein and Norway (EEA-EFTA states),
- Covers emissions from around 10,000 installations in the energy sector and manufacturing industry, as well as airline operators flying within the EU and departing to Switzerland and the UK - or around 40% of EU emissions.
- Will also cover emissions from maritime transport from 2024.
More information on the ETS can be found here: EU emission trading system
