EU Emissions Trading System (ETS)

The European Union Emissions Trading System (EU ETS) is the carbon market established by Directive 2003/87/EC adopted by the European Parliament and Council^[1]. Its purpose is to curtail greenhouse gas emissions in a cost-effective manner by attaching a price to carbon released by covered industrial and energy installations^[2]. This arrangement operates on the cap-and-trade principle: a restricted volume of emission allowances is placed on the market, which operators may trade according to their requirements.

Operation and scope

The directive lays down a Community framework for emissions allowance trading, applicable to the activities and greenhouse gases listed in the annex^[3]. Member States may, subject to Commission approval, extend this scheme to other activities or installations not covered by that annex, provided they meet criteria concerning the environmental integrity of the system and the reliability of the monitoring arrangement^[4]. The mechanism also promotes the uptake of more energy-efficient technologies, notably cogeneration^[3].

Link with the Carbon Border Adjustment Mechanism (CBAM)

The EU ETS finds direct continuation in the Carbon Border Adjustment Mechanism (CBAM), established by Regulation (EU) 2023/956^[5]. This instrument supplements the Community system by applying equivalent rules to goods imported into the customs territory of the Union, so as to forestall the risk of carbon leakage^[6]. The price of CBAM certificates therefore tracks closely that of EU ETS allowances, calculated on the basis of weekly auction averages^[7]. Third countries party to association agreements or to the Energy Community undertake decarbonisation processes intended to yield carbon pricing mechanisms equivalent to the EU ETS, or indeed their participation in the latter^[7].

Emissions calculation and electricity

For indirect emissions stemming from electricity consumption, the CBAM regulation provides for the use of default emission factors from the grid of the country of origin, or the factor from price-setting sources. An alternative value may be set if a third country demonstrates, on the basis of reliable data, that its electricity mix has a lower emission factor than the default value^[8]. Calculation of actual emissions is however permitted only under stringent conditions, requiring in particular a firm nomination of interconnection capacity and a direct contractual relationship between the purchaser and the producer of renewable or low-emission electricity^[7]. Third countries whose markets are coupled with that of the Union may benefit from a temporary exemption until 2030 for electricity exports, subject to the adoption of an equivalent carbon pricing mechanism^[7].

Evolution and adjustments

The CBAM scheme has been amended to align certain system boundaries with those of the EU ETS, thereby excluding finishing processes carried out by installations not covered by Directive 2003/87/EC^[5]. Verification of emissions by accredited verifiers remains mandatory for actual values, whilst default values are computed by the Commission to facilitate declarations^[5]. The regulation further stipulates that the Commission shall establish, where feasible, an average annual carbon price expressed in EUR per tonne of CO₂ equivalent, based on the best available data drawn from reliable public information^[5].