EU Emissions Trading System

The EU-wide Emissions Trading System (EU ETS) was established in 2005. An emission allowance must be surrendered for every tonne of CO2 emitted. Since the total number of emission allowances is fixed across the EU and is annually reduced, the system guarantees emission reductions in the long run without imposing specific emission targets on individual market participants. The scarcity of allowances, combined with their tradability, has created a functioning market for emissions allowances. The “carbon price” determined by supply and demand is a yardstick that shows which carbon reduction measures are more economical than paying for allowances.