European Union Emissions Trading Scheme Background
Since 2005, the European Union Emissions Trading Scheme (EU ETS) has helped lower greenhouse gas emissions throughout Europe
Cap & Trade
The EU ETS was launched in 2005 in order to help tackle climate change. It sets a Europe-wide annual cap on CO2 emissions which reduces each year. From 2005-2019 the reduction goal was approximately 1.5%. In 2020 the reduction was set at 1.74%, and from 2021 onward it is set at 2.2%. Companies under the programme may trade allowances known as EUAs, each equivalent to 1 tonne of CO2, setting a price per tonne for carbon.
EEX hosts primary EUA auctions on behalf of EU member states almost daily, as well as EUAA (aviation) auctions.
2005Phase 12005-2007: Pilot Phase
2007Phase 22007-2012: Cap lowered by 6.5%
2013Phase 32013-2020: Cap lowered by 20% (goal achieved prior to 2020)
2021Phase 42021-2030: Aim to increase pace of emissions cuts to 43% compared to 1990
Banks, trading houses, hedgefunds, trading firms
- 1 EUA is a certificate to emit 1 tonne of CO2 or CO2 equivalent
- Total annual cap is approximately 1.6bn EUAs
- The EU ETS covers approximately 11,000 energy intensive installations in the 28 EU Member states plus Iceland, Liechtenstein and Norway
- Sectors included: Energy intensive sectors including oil refineries, steel works and iron production, aluminium, metals, cement, lime, glass, ceramics, pulp, paper, cardboard, acids and bulk organic chemicals
- The EU ETS covers approximately 40% of the carbon footprint in Europe
- Ultimate aim is to reduce GHG emissions by 80-95% by 2050 compared to 1990
- Total emissions have been declining by 45mt per year during Phase 3 (between 2017 and 2018, emissions decreased almost twice as fast as the cap)
Historical Price Chart
Supporting Prices: Backloading and Market Stability Reserve (MSR)
Backloading was the first step to tackle the large surplus – it delayed the supply of EUAs into the market in the short term by postponing some auctions.
The MSR supports prices by removing surplus EUAs from the market. Beginning on 1st January 2019, it reduces new supply by cancelling government auctions, until the calculated surplus falls below a specified threshold.
Primary and Secondary Market
During Phase III of the scheme (2012-2020), 57% of the total amount of allowances will be auctioned, while the remaining allowances are available for targeted free allocation to industry. 2018’s secondary market volume exceeded 13 billion tonnes as either spot, futures or options contracts.
EU Aviation Allowances
EUAAs – Airlines flying into or out of Europe may comply with the EU ETS using EU Aviation Allowances (EUAAs) or EUAs.
CORSIA – Carbon Offsetting and Reduction Scheme for International Aviation
- Global market based measure to offset aviation emissions growth
- Phase I: 2021-2027 – Voluntary 85% coverage
- Phase II: 2027 – Mandatory ~99.5% coverage
Share of EU ETS Allowances by Country (2018)
EUA ETS Market Background
Key Benefits of Trading on EEX