The European Union (EU), having ratified the Kyoto Protocol (Kyoto), has voluntarily imposed stricter commitments than those under Kyoto, and has committed to reduce emissions of greenhouse gases to 92% of 1990 levels by 2012. As a result, it has implemented a trading system for emission reductions of greenhouse gases known as the European Union Emission Trading Scheme, which came into effect on Jan. 1, 2005. It is the first regulatory enforced commercial market for Certified Emission Reductions (CERs). The scheme is based on Directive 2003/87/EC, which entered into force on Oct. 25, 2003.
In order to reduce emissions of greenhouse gases, the European Union Emission Trading Scheme imposes caps on the amount of European Union Allowances permissible in any EU member state. In turn, each EU member state must draft a National Allocation Plan (NAP), which must be approved by the European Commission, setting out how the maximum annual volume of EUAs in that EU member state is to be divided between the various sectors of GHG emitters, and setting limits on individual emitters. These caps are deliberately challenging, so as to encourage emission reduction of greenhouse gases and the development of a trading market in emission reduction credits.
As of February of 2008, around 10,000 large industrial plants in the EU were required to buy and sell permits to release carbon dioxide into the atmosphere. However, after pollution credits were grossly overallocated by several member states in an initial implementation phase of the scheme, forcing carbon prices down and undermining the scheme's credibility, the EU started to toughen up the system.
Allowance Trading Activity Logged
Allowances traded in the European Union Emission Trading Scheme are held in accounts in electronic registries set up by member states. All of the registries are overseen by a central administrator at EU level that, through the Community independent transaction log, checks each transaction for irregularities. In this way, the registries system keeps track of the ownership of allowances in the same way as a banking system keeps track of the ownership of money.
- 2005-2007: This was the first time period of trading (and first round of NAPs).
- Dec. 2006: The Commission adopts a legislative proposal to include aviation into the EU's emissions trading scheme.
- 2008-2012: This is the second trading period (coincides with period under which Kyoto commitments are to be achieved), with an EU-wide CO2 cap set at 2.08 billion tonnes.
- Jan. 23, 2007: The Commission unveiled a EU-ETS legislative proposal for the post-2013 period of trading as part of a larger package on renewable energies and climate change.
- 2013: A revised scheme is due to come into force.