The European Union is a major player in the fight against climate change and one of its climate policy instruments is the EU Emissions Trading System (EU ETSLaunched in 2005, the EU ETS remains an emissions trading scheme, covering about 401TPTP3T of the Union's greenhouse gas emissions.

Definition and objectives

The EU ETS is a cap and trade, which sets a maximum limit (cap) on total allowable emissions of carbon dioxide (CO₂) and other greenhouse gases set by legislation. Within this cap, companies can buy and sell emission allowances (EU Allowances - EUAs), creating a strong economic incentive to reduce pollution where costs are lowest. The main objective of the scheme is to reduce emissions in a cost-effective manner, contributing to the achievement of climate targets set at European and global level (e.g. Paris Agreement).

Legal framework

From a legal point of view, the system was first regulated by Directive 2003/87/ECwhich entered into force in 2005. It was amended in 2009 by a directive (Directive 2009/29/EC) which extended the scope and introduced auctioning for the allocation of allowances. Another change came in 2018 (Directive (EU) 2018/410), when it was decided to increase the annual pace of cap reduction. In 2021, the Fit for 55 made further changes to ensure that the EU can reduce emissions by at least 55% by 2030 compared to 1990 levels. In addition, the ETS has been extended to include maritime transport, and in future there will be a separate scheme for buildings and road transport.

How the system works EU ETS

Setting the cap: A maximum limit is determined for the total CO₂ emissions of the sectors covered (electricity, heavy industry, intra-EU aviation and, from 2024, maritime transport).

Issuance of allowances: Each allowance (EUA) allows one tonne of CO₂ to be emitted. Some of the allowances are issued free of charge to industries at risk of relocation (e.g. steel, cement) and the rest are sold at auction.

Trading: Companies that emit less than their allocation can sell surplus allowances to those who fail to reduce their emissions, incentivising total reductions at minimal cost to the economy.

Annual reduction of the cap: The cap decreases each year, ensuring that long-term climate goals are met.

Examples in EU member states

In GermanyThe increase in the price of emission allowances has contributed to the phasing out of lignite-fired power plants and increased investment in renewables and gas. In Poland, where coal still plays an important role, the ETS has brought free allocations and EU funds to modernise the power sector, but the pace of change remains slow. In Romania, areas such as Oltenia are still dependent on lignite and coal, and ETS costs are being felt by companies. However, some of the money raised from the sale of allowances is being used to modernise grids and support renewable energy projects, in line with the REPowerEU plan.

Benefits and limitations EU ETS

This system has both advantages and limitations. On the one hand, it helps to reduce emissions in a controlled way and is economically efficient, because each company decides where and how it reduces its pollution. It also encourages investment in cleaner technologies and generates significant revenue for member states, which can be used for energy projects and to support affected industries. On the other hand, the price of allowances can be volatile, making long-term investment planning difficult. There is also a risk that some companies will move production outside the EU if these costs increase too much. In addition, countries still dependent on coal, such as Poland, are more affected by transition costs and need additional financial support, such as that provided through the Just Transition Fund.