EU Emissions Trading System

Definition

The EU Emissions Trading System (EU ETS) is a cap-and-trade system established to reduce greenhouse gas emissions across the European Union. It sets a limit on the total amount of greenhouse gases that can be emitted by factories, power plants, and other installations, allowing companies with surplus allowances to sell them to other companies that need to increase their emissions. This market-based approach not only incentivizes emission reductions but also aligns with broader international climate agreements.

5 Must Know Facts For Your Next Test

1. The EU ETS was launched in 2005 and is one of the largest carbon markets in the world, covering more than 11,000 power stations and industrial plants across Europe.
2. The system operates under a cap that decreases annually, ensuring that total emissions decline over time, which is crucial for meeting international climate targets.
3. Companies are allocated a certain number of allowances based on their historical emissions and are required to monitor and report their emissions accurately.
4. If a company exceeds its allowances, it must purchase additional allowances or face significant fines, thereby creating a financial incentive for reducing emissions.
5. The EU ETS has faced criticism for over-allocation of allowances in the early years, leading to lower carbon prices and insufficient incentives for emission reductions.

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 uses a cap-and-trade mechanism that establishes a limit on total emissions. By allowing companies to buy and sell emissions allowances, it creates financial incentives for companies to reduce their emissions. Those that can cut emissions at lower costs can sell their surplus allowances, while those facing higher costs can buy allowances, thus promoting overall cost-effective reductions across the market.
• Discuss the relationship between the EU Emissions Trading System and the goals outlined in the Paris Agreement regarding global climate action.
  • The EU Emissions Trading System supports the goals of the Paris Agreement by setting a clear framework for reducing greenhouse gas emissions within the EU. By establishing legally binding targets and a cap that decreases over time, it aligns with the global aim of limiting temperature rise to well below 2 degrees Celsius. The trading system also encourages innovation and investment in cleaner technologies, contributing to broader international efforts toward sustainability and climate resilience.
• Evaluate the effectiveness of the EU Emissions Trading System in addressing challenges in global environmental governance and how it impacts international collaboration on climate change.
  • The effectiveness of the EU Emissions Trading System highlights both successes and challenges in global environmental governance. On one hand, it has demonstrated that market-based approaches can lead to significant reductions in greenhouse gas emissions while promoting economic efficiency. However, issues like over-allocation of allowances and fluctuating carbon prices raise questions about its reliability as a model for other regions. Its impact on international collaboration is profound as it sets an example of coordinated action but also reveals tensions between national interests and collective climate commitments.

Related terms

Cap-and-Trade: A market-based approach that sets a limit on emissions and allows companies to buy and sell allowances to stay within that limit.

Carbon Market: A marketplace for buying and selling carbon credits or emissions allowances, enabling organizations to offset their emissions.

Greenhouse Gases: Gases such as carbon dioxide and methane that trap heat in the atmosphere, contributing to climate change.