EU Emissions Trading Scheme

overall rating:



Alice Kettlewell
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The EU Emissions Trading Scheme (EU ETS) is the first international carbon market and one of the most ambitious schemes in global climate change policy and governance. Operating in all EU states as well as Iceland, Lichtenstein, and Norway, the EU ETS is a market for trading carbon emission allowances. The EU ETS has capped the volume of greenhouse gases that a corporation can produce each year. If they exceed their limit, the corporation will face fines or must trade allowances with other firms. This initiative began in 2005 and has provided a financial incentive to cut emissions to prevent high costs of production as well as given corporations the opportunity to sell on their allowances for monetary gains. I have given the EU ETS a relatively high planetary score due to their pioneering and large scale role in tackling carbon emissions. However, in order to score full planets, they must continue to increase the scope of the scheme. Furthermore, while carbon markets have been seen as a key tool in which capitalism and ecological sustainability can coexist, I believe a complete ideological overhaul is needed as capitalism itself has been a fundamental driver in the climate crisis and cannot be the cure on its own.

What it's made of:


The EU ETS operates via permits, and businesses must apply for their likely annual emissions in terms of tons of carbon or European Emission Allowance (EUA). Companies face a fine of 100 Euros per excess tonne of carbon they emit and are thus incentivised to invest into emission efficiency within their business model. If companies do not use all of their allowance they may also trade their permit to other corporations for a profit. This additional cost of production to corporations that are high greenhouse gas emitters makes them less economically viable and promotes investment into other, more sustainable sectors. As I write this review (2nd of August 2021), the carbon price has reached a historic high of 54.43 Euros per ton. There has been criticism surrounding the cost of these permits as the OECD argue that they have been set too low in comparison to the environmental cost, therefore not acting as a strong enough deterrent to corporations. However, a counterargument to this suggests that the lower cost of permits may be due to lower demand as firms are decarbonising on their own accord. I believe this counterargument to an extent, however, either a middle ground should be reached or a combination of other policies such as a carbon tax must be adopted.

Controversies have arisen surrounding the allocation of free permits and between 2013-2020, around 43% of total allowances were given free of charge to sectors such as aviation. While this percentage has decreased each year, giving permits for free completely overrides the concept of the scheme and clearly demonstrates that many nations are still not committed to decarbonising.


How it's made:


The EU ETS follows a  ‘cap and trade’ principle where a limit to the net volume of greenhouse gases that may be emitted per year within the scheme is set. The cap is reduced annually so that total emissions reduce over time.  Many other countries such as China have chosen to create carbon markets as it is supposedly the most economically-efficient and low-cost form of reducing emissions as emissions are reduced where it is cheapest to do so. Corporations that would find it costly to reduce emissions may buy emission allowances from businesses that are more energy-efficient. Power plants and intensive industry have responded well to the EU ETS due to the increasing popularity of commercial low-emission technologies as well as available electricity generation data allowing for clear greenhouse gas targets. Since the scheme’s inception in 2005, EU power generation and energy-intensive industrial sectors emissions have been cut by 42.8%. This equates to a reduction of global carbon emissions by 3.8% over that period and a reduction of 1 billion tonnes of carbon. This may initially appear as a really impressive figure, however, over the timescale of 16 years, this is relatively small in comparison to the annual EU carbon emissions of 483.3 million tonnes. Furthermore, adopting a capitalist model where resources flow to where it is cheapest to do so may also ignore other high emitting industries in the region such as transport, agriculture, and residential sectors. The EU must therefore shift away from this monetary-focused emissions reduction strategy and look to the sectors that are most harmful to the planet even if it would be more financially challenging.  Furthermore, capitalism as a model has had detrimental impacts to the planet with its ethos of prioritising profits over the environment. Therefore, adopting this model in order to create a more sustainable planet appears to be contradictory and I believe that it may actually cause further damage in the future. 

Who makes it:


The EU ETS has been created by the European Union; this intergovernmental organisation has had a history of relatively weak environmental policy with a severe lack of accountability. However in 2019, the EU launched the European Green Deal in which they committed to a reduction of net greenhouse gases of 55% by 2030 in comparison to levels in 1990. This ‘Fit for 55’ scheme focuses on 8 major areas such as biodiversity, sustainable agriculture, and sustainable industry. The EU Commission Twitter page provides regular updates to any sectoral progress such as infographics on shifts in energy mixes or renewable hydrogen projects. I think that this is a great accessible resource to allow the public to understand real-time policy change in action and I hope that this progress is not simply a box-ticking ploy.

While I appreciate the scope of the EU Green Deal and creation of transparent targets and progress, I believe that it is neither ambitious nor impactful enough in a time of such a climate crisis, and as a set of such influential economic players, the EU should set their aspirations much higher.