The EU Emissions Trading System (EU ETS) is a market that allows companies to buy and sell greenhouse gas emission allowances. The system is based on the “cap and trade” principle, under which a ceiling is set on the total amount of greenhouse gases that can be emitted by plants and aircraft operators covered by the system. The cap is reduced every year in line with the EU climate target, ensuring that emissions fall over time.
Participants in the EU ETS must purchase sufficient allowances to cover their emissions. Businesses can buy allowances on the EU carbon market, but they also receive some allowances for free. If a plant or operator reduces its emissions, it can keep the reserve allowances for future use or sell them.
The price of emission allowances is determined by the market. The price of allowances acts as an incentive for companies to reduce emissions how and where it costs least to do so. It also determines the revenue that the EU ETS generates from the sale of allowances.
Revenue from the EU ETS mainly flows into national budgets. Member States use this revenue to support investments in renewable energy, improved energy efficiency and low-carbon technologies that help further reduce emissions. The sale of allowances also feeds the EU ETS funds for low-carbon innovation and energy transition, the Innovation Fund and the Modernization Fund.
The 2023 review of the EU ETS has increased the system’s ambition to achieve the EU’s climate goals. Key changes include:
In conclusion, the EU ETS is an important system for climate change mitigation and the 2023 review strengthened the system and made it more ambitious.
