The European Union Emission Trading System (ETS) Explainer
Table of Contents What is the EU ETS? The European Union Emissions Trading System (EU ETS) is Europe’s primary regulatory instrument for reducing greenhouse gas (GHG) emissions. It works by setting a declining limit on the aggregate emissions it covers and by allocating an equivalent amount of tradable pollution permits to the regulated entities. These permits are called European Union Allowances (EUAs). The EU carbon market was adopted in 2003 through Directive 2003/87/EC and entered into force in 2005. Since its first compliance phase (2005-2008), this system has been subject to several reforms, which have gradually
The Elephant in the Room: Why “carbon price” and “carbon cost” are not interchangeable
At a Glance: As countries seek to reduce their national greenhouse gas emissions in a cost-effective manner, carbon pricing instruments are introduced in new jurisdictions and countries. The economic and financial implications for businesses go beyond the price tag that these instruments attach to their unabated emissions. There is more than meets the eye. Indeed, the financial burden, or “carbon cost”, borne by businesses is influenced by a range of factors, including the jurisdiction in which a company operates, the specific sectoral rules of the applicable carbon pricing regulation(s), or the market it competes in.
Free Allocation of Allowances under the EU ETS
At a Glance: What are EU ETS allowances? The European Union Emissions Trading System (EU ETS) is a cornerstone of the EU’s efforts to combat climate change. Launched in 2005, it is the world’s first and largest carbon market in terms of trading volume and value. The EU ETS covers various sectors, including power generation, heavy industry and aviation within the European Economic Area (EEA). It will soon be extended to maritime transport, while a parallel scheme will be established for fuels consumed by buildings and road vehicles. The EU ETS works by obliging all
The EU Carbon Border Adjustment Mechanism (CBAM)
The EU Carbon Border Adjustment Mechanism (CBAM) is an environmental policy designed to tackle carbon leakage. Carbon leakage refers to the situation where EU producers relocate their production facilities to regions outside the EU that lack carbon pricing mechanisms or have less stringent climate policies in place. It can also occur when customers choose to substitute EU products with cheaper imports that have higher embedded emissions.