EU Emissions Trading System

Definition

The EU Emissions Trading System (EU ETS) is a cap-and-trade program aimed at reducing greenhouse gas emissions across the European Union. It operates by setting a limit, or cap, on the total emissions from various sectors, allowing companies to buy and sell emission allowances to meet their reduction targets. This market-based approach encourages businesses to invest in cleaner technologies and lower their emissions over time, which is crucial for addressing climate change and managing greenhouse gas emissions.

5 Must Know Facts For Your Next Test

1. The EU ETS was launched in 2005 as the first major carbon market in the world, covering more than 11,000 power stations and industrial plants across the EU.
2. It has gone through several phases, with each phase gradually tightening the emission caps to encourage further reductions in greenhouse gas emissions.
3. Companies that reduce their emissions below their allotted cap can sell excess allowances to other companies that exceed their limits, creating a financial incentive for emission reductions.
4. The system has been credited with helping the EU achieve its target of reducing greenhouse gas emissions by at least 20% by 2020 compared to 1990 levels.
5. The EU ETS also includes provisions for aviation emissions, making it one of the few carbon trading systems that address air travel as part of its overall strategy.

Review Questions

• How does the EU Emissions Trading System utilize market mechanisms to encourage companies to reduce their greenhouse gas emissions?
  • The EU Emissions Trading System employs a cap-and-trade approach where a limit is set on total greenhouse gas emissions for participating sectors. Companies are allocated emission allowances, which they can trade with one another. If a company reduces its emissions and has leftover allowances, it can sell them, creating a financial incentive for companies to invest in cleaner technologies and ultimately lower their overall emissions.
• Evaluate the effectiveness of the EU ETS in achieving its goals related to climate change and greenhouse gas emissions reduction.
  • The effectiveness of the EU ETS has been demonstrated through significant emissions reductions since its implementation. The program has facilitated investments in renewable energy and energy efficiency, helping the EU meet its ambitious climate targets. However, challenges such as fluctuating carbon prices and allocation methods have raised questions about long-term sustainability and whether the system can continue to drive deeper cuts in emissions.
• Discuss the potential impacts of expanding the EU Emissions Trading System to include more sectors or countries on global greenhouse gas reduction efforts.
  • Expanding the EU Emissions Trading System to encompass more sectors or countries could significantly enhance global efforts to reduce greenhouse gases by creating a larger market for carbon allowances. This could lead to more coordinated climate action and facilitate technology transfers between nations. However, it would also require careful consideration of different economic contexts and regulatory frameworks to ensure fairness and effectiveness in achieving reduction targets across diverse regions.

Related terms

Cap-and-Trade: A market-based system where companies can buy and sell allowances for emissions, incentivizing reductions in greenhouse gas output.

Carbon Credits: Permits that allow the holder to emit a certain amount of carbon dioxide, which can be traded or sold in carbon markets.

Greenhouse Gas (GHG) Protocol: An international accounting tool that provides standards and guidance for companies and governments to measure and manage GHG emissions.