EU Emissions Trading System

Directive 2003/87/EC, established by the European Parliament and the Council on October 13, 2003, introduced the European Union Emissions Trading System (EU ETS), a cornerstone of the EU's strategy to combat climate change by reducing greenhouse gas (GHG) emissions in a cost-effective and economically efficient manner. ​

Key Features of the Directive: -> Cap-and-Trade Mechanism - The EU ETS operates on a 'cap-and-trade' principle, setting a maximum limit on the total GHG emissions allowed from covered installations. Within this cap, companies receive or purchase emission allowances, which they can trade as needed. This system incentivizes companies to reduce emissions - those that can do so at lower costs may sell their excess allowances to others facing higher reduction expenses. ​ -> Scope of Application - Initially, the directive targeted large emitters of CO₂ in the power and heat generation sectors, as well as energy-intensive industries such as cement, steel, and paper production. -> Emission Allowances and Allocation - Companies are required to monitor and report their emissions and surrender a corresponding number of allowances annually. The total number of allowances issued is reduced over time to decrease overall emissions. Allocation methods have evolved, with a growing emphasis on auctioning allowances rather than free allocation, aligning with the 'polluter pays' principle. ​

Evolution and Amendments: Since its inception, Directive 2003/87/EC has undergone several amendments to enhance its effectiveness and align with evolving climate goals:​

• Phase 3 (2013-2020): Introduced a centralized allocation system and a single EU-wide cap on emissions, replacing the previous system of national caps.​
• Phase 4 (2021-2030): Aims for a 62% reduction in GHG emissions by 2030 compared to 2005 levels. Notable revisions include a steeper annual reduction in the cap and the inclusion of maritime transport emissions. ​

Impact and Significance: The EU ETS stands as the world's first and largest international emissions trading system, covering approximately 45% of the EU's GHG emissions. It serves as a model for carbon markets globally and plays a critical role in the EU's commitment to achieving climate neutrality by 2050. ​

By establishing a market-driven approach to emission reductions, Directive 2003/87/EC has effectively integrated environmental considerations into economic decision-making, demonstrating the EU's leadership in addressing global climate challenges.​

🔗 EC, EP