The EU's cap and trade system
The EU Emissions Trading System (EU ETS) operates based on the 'cap and trade' principle. This mechanism entails establishing a limit, known as the cap, on the total volume of greenhouse gases, primarily CO2, that industrial installations can release. Annually, the cap is adjusted in alignment with the European Union's climate goals, ensuring a gradual reduction in emissions over time. Since its inception in 2005, the EU ETS has played a crucial role in reducing emissions from power and industrial facilities by 37%.
The cap is quantified in emission allowances, with each allowance representing the authorization to emit one metric ton of carbon dioxide equivalent (CO2eq). Companies are required to annually surrender sufficient allowances to fully account for their emissions, or else face substantial fines.
The declining cap provides companies with assurance regarding the long-term scarcity of allowances, thereby ensuring the market value of these allowances. The price of allowances acts as a motivating factor for companies to explore cost-effective ways to reduce emissions, encouraging them to seek out methods where emissions can be minimized with the least expenditure.
Companies primarily purchase allowances through the EU carbon market, although they also receive a certain allocation of allowances for free. This free allocation is reduced over time. Power plants do not receive free allocations anymore since 2013.
Companies can engage in trading allowances with one another as the need arises. In cases where an installation or operator successfully reduces their emissions, they can offer them for sale.
Above graph shows you the EU's totals. Notice the declining number of 'free allocations'
Another key figure is 'verified emissions'. This figure tells you how much a company has emitted over a certain year, a figure in tonnes of CO2.
Which companies in, for example, Germany are the leading emitters of carbon dioxide, and have they shown improvement over the years? We can provide you with detailed data that precisely quantifies the historical emissions of European countries and companies.
Learn about the Carbon Border Adjustment Mechanism (CBAM).