These studies used mathematical models of several cities and their emission sources in order to compare the cost and effectiveness of various control strategies. US Environmental Protection Agency. The starting point for determining the linear factor of 1. Right now, our emissions levels put us on a dangerous trajectory of unmanageable climate change , and so countries around the world have promised to reduce and eventually phase-out their emissions through the landmark Paris Agreement. If a company reduces its emissions so that it has more allowances than it needs, it can sell the remaining not needed allowances at the market. Will small installations be excluded from the scope?
Under the program, which is essentially a cap-and-trade emissions trading system, SO 2 emissions were reduced by 50% from levels by Some experts argue that the cap-and-trade system of SO 2 emissions reduction has reduced the cost of controlling acid rain by as much as 80% versus source-by-source reduction.
Putting a price on carbon
To achieve this, an emissions market requires:. Our Members Our Members: IETA in the News. Emissions Trading Library. From Kyoto to Paris. Policy Submissions General Submissions. Alternatively, it has to purchase additional allowances to comply with its surrender obligation. Those facing difficulty in remaining within their allowance limit have a choice between several options:.
This flexibility ensures that emissions are reduced in the most cost-effective way. You can check out a cartoon video that explains the Emissions Trading Scheme in an easily understandable way.
This video is courtesy of the Climate and Pollution Agency, Norway. The system covers emissions of carbon dioxide CO 2 from power and heat generation and a wide range of energy-intensive industry sectors including oil refineries, steel works and production of iron, aluminium, metals, cement, lime, glass, ceramics, pulp, paper, cardboard, acids and bulk organic chemicals. Nitrous oxide emissions from the production of certain acids and emissions of perfluorocarbons from aluminium production are also included.
In Ireland approximately installations are covered by the scheme. Learn more about the Emissions Trading Scheme for Aviation. The European Commission has set up a standardised and secured system of registries across Member States based on United Nations data exchange standards to track the issue, holding, transfer and cancellation of allowances.
The main difference as compared to the proposal is that auctioning of allowances will be phased in more slowly. In their NAPs for the first and the second trading periods, Member States determined the total quantity of allowances to be issued — the cap — and how these would be allocated to the installations concerned.
This approach has generated significant differences in allocation rules, creating an incentive for each Member State to favour its own industry, and has led to great complexity. As from the third trading period, there will be a single EU-wide cap and allowances will be allocated on the basis of harmonised rules. National allocation plans will therefore not be needed any more. From , the total number of allowances will decrease annually in a linear manner. The starting point of this line is the average total quantity of allowances phase 2 cap to be issued by Member States for the period, adjusted to reflect the broadened scope of the system from as well as any small installations that Member States have chosen to exclude.
The linear factor by which the annual amount shall decrease is 1. The starting point for determining the linear factor of 1. The division that minimises overall reduction cost amounts to:.
All absolute figures indicated correspond to the coverage at the start of the second trading period and therefore don't take account of aviation, which will be added in , and other sectors that will be added in phase 3. The final figures for the annual emission caps in phase 3 will be determined and published by the Commission by 30 September The linear factor of 1.
It may be revised by at the latest. No, flexibility for installations will not be reduced at all. In any year, the allowances to be auctioned and distributed have to be issued by the competent authorities by 28 February. The last date for operators to surrender allowances is 30 April of the year following the year in which the emissions took place. So operators receive allowances for the current year before they have to surrender allowances to cover their emissions for the previous year.
Allowances remain valid throughout the trading period and any surplus allowances can now be "banked" for use in subsequent trading periods. In this respect nothing will change.
The system will remain based on trading periods, but the third trading period will last eight years, from to , as opposed to five years for the second phase from to For the second trading period Member States generally decided to allocate equal total quantities of allowances for each year. The linear decrease each year from will correspond better to expected emissions trends over the period.
These figures are based on the scope of the ETS as applicable in phase 2 to , and the Commission's decisions on the national allocation plans for phase 2, amounting to million tonnes.
These figures will be adjusted for several reasons. Firstly, adjustment will be made to take into account the extensions of the scope in phase 2, provided that Member States substantiate and verify their emissions accruing from these extensions. Secondly, adjustment will be made with respect to further extensions of the scope of the ETS in the third trading period. Thirdly, any opt-out of small installations will lead to a corresponding reduction of the cap.
Fourthly, the figures do not take account of the inclusion of aviation, nor of emissions from Norway, Iceland and Liechtenstein. Industrial installations will receive transitional free allocation. And in those Member States that are eligible for the optional derogation, power plants may, if the Member State so decides, also receive free allowances.
It is estimated that at least half of the available allowances as of will be auctioned. While the great majority of allowances has been allocated free of charge to installations in the first and second trading periods, the Commission proposed that auctioning of allowances should become the basic principle for allocation.
This is because auctioning best ensures the efficiency, transparency and simplicity of the system and creates the greatest incentive for investments in a low-carbon economy. These rules will fully harmonise allocations and thus all firms across the EU with the same or similar activities will be subject to the same rules.
The rules will ensure as far as possible that the allocation promotes carbon-efficient technologies. The adopted rules provide that to the extent feasible, allocations are to be based on so-called benchmarks, e. Such rules reward operators that have taken early action to reduce greenhouse gases, better reflect the polluter pays principle and give stronger incentives to reduce emissions, as allocations would no longer depend on historical emissions.
All allocations are to be determined before the start of the third trading period and no ex-post adjustments will be allowed.
Taking into account their ability to pass on the increased cost of emission allowances, full auctioning is the rule from onwards for electricity generators. However, Member States who fulfil certain conditions relating to their interconnectivity or their share of fossil fuels in electricity production and GDP per capita in relation to the EU average, have the option to temporarily deviate from this rule with respect to existing power plants.
If the option is applied, the Member State has to undertake to invest in improving and upgrading of the infrastructure, in clean technologies and in diversification of their energy mix and sources of supply for an amount to the extent possible equal to the market value of the free allocation.
However, an exception will be made for installations in sectors that are found to be exposed to a significant risk of 'carbon leakage'. This risk could occur if the EU ETS increased production costs so much that companies decided to relocate production to areas outside the EU that are not subject to comparable emission constraints.
The Commission will determine the sectors concerned by 31 December The share of these industries' emissions is determined in relation to total ETS emissions in to CO 2 costs passed on in electricity prices could also expose certain installations to the risk of carbon leakage.
In order to avoid such risk, Member States may grant a compensation with respect to such costs. In the absence of an international agreement on climate change, the Commission has undertaken to modify the Community guidelines on state aid for environmental protection in this respect. Under an international agreement which ensures that competitors in other parts of the world bear a comparable cost, the risk of carbon leakage may well be negligible. Therefore, by 30 June , the Commission will carry out an in-depth assessment of the situation of energy-intensive industry and the risk of carbon leakage, in the light of the outcome of the international negotiations and also taking into account any binding sectoral agreements that may have been concluded.
The report will be accompanied by any proposals considered appropriate. These could potentially include maintaining or adjusting the proportion of allowances received free of charge to industrial installations that are particularly exposed to global competition or including importers of the products concerned in the ETS.
Member States will be responsible for ensuring that the allowances given to them are auctioned. Each Member State has to decide whether it wants to develop its own auctioning infrastructure and platform or whether it wants to cooperate with other Member States to develop regional or EU-wide solutions. The distribution of the auctioning rights to Member States is largely based on emissions in phase 1 of the EU ETS, but a part of the rights will be redistributed from richer Member States to poorer ones to take account of the lower GDP per head and higher prospects for growth and emissions among the latter.
Nine Member States benefit from this provision. Any auctioning must respect the rules of the internal market and must therefore be open to any potential buyer under non-discriminatory conditions. By 30 June , the Commission will adopt a Regulation through the comitology procedure that will provide the appropriate rules and conditions for ensuring efficient, coordinated auctions without disturbing the allowance market. All allowances which are not allocated free of charge will be auctioned.
The ETS covers installations performing specified activities. Since the start it has covered, above certain capacity thresholds, power stations and other combustion plants, oil refineries, coke ovens, iron and steel plants and factories making cement, glass, lime, bricks, ceramics, pulp, paper and board. As for greenhouse gases, it currently only covers carbon dioxide emissions, with the exception of the Netherlands, which has opted in emissions from nitrous oxide.
As from , the scope of the ETS will be extended to also include other sectors and greenhouse gases. CO 2 emissions from petrochemicals, ammonia and aluminium will be included, as will N2O emissions from the production of nitric, adipic and glyocalic acid production and perfluorocarbons from the aluminium sector.
The capture, transport and geological storage of all greenhouse gas emissions will also be covered. These sectors will receive allowances free of charge according to EU-wide rules, in the same way as other industrial sectors already covered. A large number of installations emitting relatively low amounts of CO 2 are currently covered by the ETS and concerns have been raised over the cost-effectiveness of their inclusion.
As from , Member States will be allowed to remove these installations from the ETS under certain conditions. For combustion installations, an additional capacity threshold of 35MW applies. In addition Member States are given the possibility to exclude installations operated by hospitals.
The installations may be excluded from the ETS only if they will be covered by measures that will achieve an equivalent contribution to emission reductions.
For the second trading period, Member States allowed their operators to use significant quantities of credits generated by emission-saving projects undertaken in third countries to cover part of their emissions in the same way as they use ETS allowances. For existing installations, and excluding new sectors within the scope, this will represent a total level of access of approximately 1.
New sectors and new entrants in the third trading period will have a guaranteed minimum access of 4. For the aviation sector, the minimum access will be 1. The precise percentages will be determined through comitology.
On the quality side only credits from project types eligible for use in the EU trading scheme during the period will be accepted in the period
A 'cap and trade' system
While most emission trading systems are national or regional in character, the European Union has established a common emission system for CO 2 emissions (the EU ETS), to which some other European countries have also linked up. An agreement has also been made on seeking to link the EU ETS and a future Australian emission trading system. This note describes the EU Emissions Trading System (EU ETS) (formerly called the EU Emissions Trading Scheme). It explains how the EU ETS operates in Phase III (), including allocation of EU allowances and auctioning. It explains security issues in the EU ETS, the EU ETS registries and trading of allowances in the EU ETS. Emissions Trading Overview The EU emissions trading system (EU ETS) is a cornerstone of the European Union's policy to combat climate change and its key tool for reducing industrial greenhouse gas emissions cost-effectively.