European Emissions Trading System

ETS covers around 11,000 most polluting corporations in the EU
The European Emissions Trading System (ETS) is a market-based approach designed to reduce greenhouse gas emissions in the European Union. In simpler terms, it is a system that allows companies to buy and sell emission allowances, incentivizing them to reduce their emissions in the most cost-effective way.
Here's a breakdown of the ETS for better understanding:
  1. 1.
    Companies and sectors: The ETS covers around 11,000 power stations, industrial plants, and airlines in the EU, across sectors like power generation, oil refining, iron and steel, cement, lime, glass, ceramics, and pulp and paper. Together, these companies and sectors account for about 40% of the EU's total greenhouse gas emissions.
  2. 2.
    Emission allowances: Companies under the ETS are given a specific number of emission allowances. Each allowance permits the release of one tonne of carbon dioxide (CO2) or an equivalent amount of other greenhouse gases. Companies can buy additional allowances if they need more or sell excess allowances if they reduce their emissions below their allocated limit.
  3. 3.
    Decreasing allocation: The total number of allowances is gradually reduced over time, making them scarcer and more expensive. This encourages companies to invest in greener technologies and reduce their emissions. The decrease in allowances is determined by the ETS's "cap," which is lowered each year to meet the EU's emissions reduction targets.
  4. 4.
    Alignment with Paris Agreement and net-zero goals: The ETS is a crucial tool for the EU to achieve its commitments under the Paris Agreement, which aims to limit global warming to well below 2°C (preferably 1.5°C) compared to pre-industrial levels. The EU's current 2030 target is to reduce greenhouse gas emissions by at least 55% compared to 1990 levels. By 2050, the goal is to reach net-zero emissions, meaning any remaining emissions are balanced by removing an equivalent amount from the atmosphere (e.g., through carbon capture and storage). The ETS helps achieve these targets by driving down emissions in the sectors it covers.
In summary, the European Emissions Trading System (ETS) is a tool used by the EU to encourage companies to reduce their greenhouse gas emissions. It covers major industries and accounts for a significant portion of the EU's total emissions. The ETS works by allocating emission allowances to companies, which they can trade as needed. The system reduces the total number of allowances over time, in line with the EU's commitments under the Paris Agreement and its 2030 and 2050 net-zero goals.