European Union Emission Trading Scheme

The European Union Emissions Trading System (EU ETS), also known as the European Union Emissions Trading Scheme, was the first large greenhouse gas emissions trading scheme in the world, and remains the biggest. It was launched in 2005 to fight Global warming and is a major pillar of EU climate policy. As of 2013, the EU ETS covers more than 11,000 factories, power stations, and other installations with a net heat excess of 20 MW in 31 countries—all 28 EU member states plus Iceland, Norway, and Liechtenstein. The installations regulated by the EU ETS are collectively responsible in 2008 for close to half of the EU's anthropogenic emissions of CO₂ and 40% of its total greenhouse gas emissions. The taxation of electricity producers (power stations) for the emissions of CO₂ has been controversial, as globally governments have refused to accept the additional burden while many have repealed such schemes, e.g., Canada in 2011 and Australia in 2014.

Under the 'cap and trade' principle, a maximum (cap) is set on the total amount of greenhouse gases that can be emitted by all participating installations. 'Allowances' for emissions are then auctioned off or allocated for free, and can subsequently be traded. Installations must monitor and report their CO₂ emissions, ensuring they hand in enough allowances to the authorities to cover their emissions. If emission exceeds what is permitted by its allowances, an installation must purchase allowances from others. Conversely, if an installation has performed well at reducing its emissions, it can sell its leftover credits. This allows the system to find the most cost-effective ways of reducing emissions without significant government intervention.