The European Union Emissions Trading System (EU ETS), also known as the European Union Emissions Trading Scheme, was the first large emissions trading scheme in the world, and remains the biggest. It was launched in 2005 to combat climate change and is a major pillar of EU climate policy. As of January 2013, the EU ETS covers more than 11,000 factories, power stations, and other installations with a net heat excess of 20 MW in 31 countries—all 27 EU member states plus Croatia, Iceland, Norway, and Liechtenstein. The installations regulated by the EU ETS are collectively responsible for close to half of the EU's emissions of CO2 and 40% of its total greenhouse gas emissions.
Under the 'cap and trade' principle, a cap is set on the total amount of greenhouse gases that can be emitted by all participating installations. 'Allowances' for emissions are then auctioned off or allocated for free, and can subsequently be traded. Installations must monitor and report their CO2 emissions, ensuring they hand in enough allowances to the authorities to cover their emissions. If emission exceeds what is permitted by its allowances, an installation must purchase allowances from others. Conversely, if an installation has performed well at reducing its emissions, it can sell its leftover credits. This allows the system to find the most cost-effective ways of reducing emissions without significant government intervention.
The scheme has been divided into a number of "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 began in January 2013 and will span until December 2020. Compared to the 2005, when the EU ETS was first implemented, the proposed caps for 2020 represents a 21% reduction of greenhouse gases.
The EU ETS has seen a number of significant changes, with the first trading period described as a 'learning by doing' phase. Phase III sees a turn to auctioning a majority of permits rather than allocating freely; harmonisation of rules for the remaining allocations; and the inclusion of other greenhouse gases, such as nitrous oxide and perfluorocarbons. In 2012, the EU ETS was also extended to the airline industry, though this has been paused for one year given the possibility of a global system for these emissions. The price of EU ETS carbon credits has been lower than intended, with a large surplus of allowances, in part because of the impact of the recent economic crisis on demand. In 2012, the Commission said it would delay the auctioning of some allowances. It is also considering more significant long-term reforms to reduce oversupply.
Other countries and regions are now developing similar systems. Australia's trading scheme will be linked with the EU ETS from 2015, and the EU "hopes to link up the ETS with compatible systems around the world to form the backbone of a global carbon market."
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