View source for Earth:European Union Emissions Trading System

{{short description|First large greenhouse gas emissions trading scheme in the world}}
[[File:EUA prices in the EU-ETS until 2021-10.png|thumb|Price of CO<sub>2</sub> in the EU Emissions Trading System|440x440px]]
[[File:EUA future real price.pdf|thumb|upright=2|Price of CO<sub>2</sub> in the EU Emissions Trading System|440x440px]]
The '''European Union Emissions Trading System''' ('''EU ETS''') is a "cap and trade" scheme where a limit is placed on the right to emit specified pollutants over an area and companies can trade emission rights within that area. It covers around 45% of the EUs greenhouse gas emissions.<ref>{{cite web | url=https://www.epa.ie/our-services/licensing/climate-change/eu-emissions-trading-system-/ | title=EU Emissions Trading System }}</ref>

Under the "cap and trade" principle, a maximum (cap) is set on the total amount of greenhouse gases that can be emitted by all participating installations. EU Allowances for emissions are then auctioned off or allocated for free, and can subsequently be traded. Installations must monitor and report their {{CO2}} emissions, ensuring they hand in enough allowances to the authorities to cover their emissions. If emission exceeds what is permitted by its allowances, an installation must purchase allowances from others. Conversely, if an installation has performed well at reducing its emissions, it can sell its leftover credits. This allows the system to find the most cost-effective ways of reducing emissions without significant government intervention.{{citation needed|date=October 2017}}

The scheme has been divided into a number of "trading periods". The first ETS trading period lasted three years, from January 2005 to December 2007. The second trading period ran from January 2008 until December 2012, coinciding with the first commitment period of the [[Chemistry:Kyoto Protocol|Kyoto Protocol]]. The third trading period lasted from January 2013 to December 2020. Compared to 2005, when the EU ETS was first implemented, the proposed caps for 2020 represents a 21% reduction of greenhouse gases. This target has been reached six years early as emissions in the ETS fell to 1.812 billion (10<sup>9</sup>) tonnes in 2014.<ref>{{cite web|url=http://www.environmentalistonline.com/article/2015-04-07/ets-emissions-decline-sharply|title=Transform -|website=www.environmentalistonline.com|access-date=19 April 2018}}</ref> The fourth phase started in January 2021 and will go until December 2030. The emission reductions to be achieved over this period are unclear as of November 2021, as the [[Earth:European Green Deal|European Green Deal]] necessitates tightening of the current EU ETS reduction target for 2030 of −43% with respect to 2005. The EU commission proposes in its "Fit for 55" package to increase the EU ETS reduction target for 2030 to −61% versus 2005.<ref name=":1">{{cite web|last=European Commission|title=Delivering the European Green Deal|url=https://ec.europa.eu/info/strategy/priorities-2019-2024/european-green-deal/delivering-european-green-deal_en|url-status=live|access-date=2021-11-01|archive-date=1 November 2021|archive-url=https://web.archive.org/web/20211101141918/https://ec.europa.eu/info/strategy/priorities-2019-2024/european-green-deal/delivering-european-green-deal_en}}</ref>

== History ==
The EU-ETS was the first large greenhouse gas [[Earth:Emissions trading|emissions trading]] scheme in the world.<ref>{{cite journal |last1= Ellerman, A. |first1=Denny |last2=Buchner |first2= Barbara K.
|title=The European Union Emissions Trading Scheme: Origins, Allocation, and Early Results |journal=Review of Environmental Economics and Policy |date=January 2007 |volume= 1 |issue=1 |pages= 66–87 |doi= 10.1093/reep/rem003 |s2cid=154964625 }}</ref>
It was launched in 2005 to fight [[Earth:Global warming|global warming]] and is a major pillar of EU energy policy.<ref>European Commission Climate Action, [http://ec.europa.eu/clima/policies/ets/index_en.htm Emissions Trading System] {{Webarchive|url=https://web.archive.org/web/20161120080622/http://ec.europa.eu/clima/policies/ets/index_en.htm |date=20 November 2016 }}.</ref> As of 2013, the EU ETS covers more than 11,000 factories, power stations, and other installations with a net heat excess of 20 MW in 31&nbsp;countries—all 27 EU member states plus Iceland, {{wipe|Norway}}, [[Finance:Liechtenstein|Liechtenstein]] and {{wipe|United Kingdom}}.<ref>{{cite web|title=Emissions Trading System (EU ETS)|url=http://ec.europa.eu/clima/policies/ets/index_en.htm|publisher=European Commission|access-date=5 June 2012|date=15 November 2010|archive-date=20 November 2016|archive-url=https://web.archive.org/web/20161120080622/http://ec.europa.eu/clima/policies/ets/index_en.htm|url-status=live}}</ref> In 2008, the installations regulated by the EU ETS were collectively responsible for close to half of the EU's anthropogenic emissions of [[Chemistry:Carbon dioxide|{{CO2}}]] and 40% of its total [[Earth:Greenhouse gas emissions|greenhouse gas emissions]].<ref>Wagner, M.: Firms, the Framework Convention on Climate Change & the EU Emissions Trading System. Corporate Energy Management Strategies to Address Climate Change and GHG Emissions in the European Union. Lüneburg: Centre for Sustainability Management, 2004, p.12 [http://www2.leuphana.de/umanagement/csm/content/nama/downloads/download_publikationen/47-4downloadversion.pdf CSM Lüneburg] {{Webarchive|url=https://web.archive.org/web/20170226212916/http://www2.leuphana.de/umanagement/csm/content/nama/downloads/download_publikationen/47-4downloadversion.pdf |date=26 February 2017 }}</ref><ref name="EC 2008">[http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/08/35&format=HTML&aged=0&language=EN&guiLanguage=en Questions and Answers on the Commission's proposal to revise the EU Emissions Trading System] {{Webarchive|url=https://web.archive.org/web/20120530054415/http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO%2F08%2F35&format=HTML&aged=0&language=EN&guiLanguage=en |date=30 May 2012 }}, MEMO/08/35, Brussels, 23 January 2008</ref> The EU had set a target for 2020 to cut greenhouse gas emissions by 20% compared with 1990, to reduce energy consumption by 20% compared to the 2007 baseline scenario, and to achieve a 20% share of gross final energy consumption from renewable energy sources—all of which was achieved.<ref>{{cite web|title=Trends and Projections in Europe 2021 — European Environment Agency|url=https://www.eea.europa.eu/publications/trends-and-projections-in-europe-2021|access-date=2021-11-01|website=www.eea.europa.eu|language=en|archive-date=1 November 2021|archive-url=https://web.archive.org/web/20211101114335/https://www.eea.europa.eu/publications/trends-and-projections-in-europe-2021|url-status=live}}</ref> A 2020 study estimated that the EU ETS had reduced {{CO2}} emissions by more than 1 billion tons between 2008 and 2016 or 3.8% of total EU-wide emissions.<ref>{{Cite journal|last1=Bayer|first1=Patrick|last2=Aklin|first2=Michaël|date=2 April 2020|title=The European Union Emissions Trading System reduced CO2 emissions despite low prices|journal=Proceedings of the National Academy of Sciences|volume=117|issue=16|pages=8804–8812|language=en|doi=10.1073/pnas.1918128117|issn=0027-8424|pmid=32253304|pmc=7183178|doi-access=free}}</ref>

The EU ETS has seen a number of significant changes, with the first trading period described as a "learning by doing" phase.<ref>{{Cite web |url=http://ec.europa.eu/clima/policies/ets/faq_en.htm |title=The EU Emissions Trading System (EU ETS) - European Commission |access-date=1 January 2013 |archive-date=25 October 2016 |archive-url=https://web.archive.org/web/20161025181110/http://ec.europa.eu/clima/policies/ets/faq_en.htm |url-status=dead }}</ref>
Phase III sees a turn to auctioning more permits rather than allocating freely (in 2013, over 40% of the allowances were auctioned<ref>{{cite web|url=https://ec.europa.eu/clima/policies/ets/auctioning_en|title=Auctioning – Climate Action – European Commission|last=Anonymous|date=23 November 2016|website=Climate Action – European Commission|access-date=19 April 2018|archive-date=18 April 2018|archive-url=https://web.archive.org/web/20180418165353/https://ec.europa.eu/clima/policies/ets/auctioning_en|url-status=live}}</ref>); harmonisation of rules for the remaining allocations; and the inclusion of other greenhouse gases, such as [[Chemistry:Nitrous oxide|nitrous oxide]] and perfluorocarbons.<ref name="EC 2008"/> In 2012, the EU ETS was also extended to the airline industry, though this only applies within the EEA.<ref name="ec transport">{{cite web|url=https://ec.europa.eu/clima/policies/transport/aviation_en|title=Reducing emissions from aviation – Climate Action – European Commission|last=Anonymous|date=23 November 2016|website=Climate Action – European Commission|access-date=19 April 2018|archive-date=22 June 2018|archive-url=https://web.archive.org/web/20180622053225/https://ec.europa.eu/clima/policies/transport/aviation_en|url-status=live}}</ref><ref name="EC 2007">[http://europa.eu/press_room/presspacks/energy/comm2007_02_en.pdf Limiting global climate change to 2 degrees Celsius – The way ahead for 2020 and beyond] {{Webarchive|url=https://web.archive.org/web/20070703105245/http://www.europa.eu/press_room/presspacks/energy/comm2007_02_en.pdf |date=3 July 2007 }}, Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions, Brussels, 10 October 2007.</ref><ref>{{cite web|url=http://europa.eu/rapid/press-release_MEMO-12-854_en.htm|title=European Commission – PRESS RELEASES – Press release – Stopping the clock of ETS and aviation emissions following last week's International Civil Aviation Organisation (ICAO) Council|website=europa.eu|access-date=19 April 2018|archive-date=26 February 2017|archive-url=https://web.archive.org/web/20170226055155/http://europa.eu/rapid/press-release_MEMO-12-854_en.htm|url-status=live}}</ref> The price of EU ETS carbon credits has been lower than intended, with a large surplus of allowances, in part because of the impact of the recent economic crisis on demand.<ref name="ec.europa.eu">{{cite web|url=http://ec.europa.eu/clima/policies/ets/index_en.htm|title=EU Emissions Trading System (EU ETS) – Climate Action – European Commission|last=Anonymous|date=23 November 2016|website=Climate Action – European Commission|access-date=19 April 2018|archive-date=20 November 2016|archive-url=https://web.archive.org/web/20161120080622/http://ec.europa.eu/clima/policies/ets/index_en.htm|url-status=live}}</ref> In 2012, the Commission said it would delay the auctioning of some allowances.<ref name="ec.europa.eu"/> In 2015, the EU passed the decision (EU) 2015/1814<ref name="auto">{{Cite web|url=https://eur-lex.europa.eu/eli/dec/2015/1814/oj|title=EUR-Lex - 32015D1814 - EN - EUR-Lex|website=eur-lex.europa.eu}}</ref> to establish a Market Stability Reserve that adjusts the annual supply of {{CO2}} permits based on the {{CO2}} permits in circulation in the previous year.<ref name="europarl.europa.eu">{{cite web|date=8 July 2015|title=Parliament adopts CO2 market stability reserve – News – European Parliament|url=http://www.europarl.europa.eu/news/en/news-room/content/20150703IPR73913/html/Parliament-adopts-CO2-market-stability-reserve|access-date=19 April 2018|website=europa.eu|archive-date=12 October 2015|archive-url=https://web.archive.org/web/20151012165256/http://www.europarl.europa.eu/news/en/news-room/content/20150703IPR73913/html/Parliament-adopts-CO2-market-stability-reserve|url-status=live}}</ref><ref>{{cite web|title=Market Stability Reserve|url=https://ec.europa.eu/clima/eu-action/eu-emissions-trading-system-eu-ets/market-stability-reserve_en|access-date=2021-11-01|website=ec.europa.eu|language=en|archive-date=1 November 2021|archive-url=https://web.archive.org/web/20211101114335/https://ec.europa.eu/clima/eu-action/eu-emissions-trading-system-eu-ets/market-stability-reserve_en|url-status=live}}</ref> In 2018, the Market Stability Reserve was amended by Directive (EU) 2018/410<ref name="auto1">{{Cite web|url=https://eur-lex.europa.eu/eli/dir/2018/410/oj|title=EUR-Lex - 32018L0410 - EN - EUR-Lex|website=eur-lex.europa.eu}}</ref> so that a certain amount of permits inside the reserve would be cancelled from 2023 onwards.

== Mechanisms ==
The first phase of EU ETS was created to operate apart from international climate change treaties such as the pre-existing United Nations Framework Convention on Climate Change (UNFCCC, 1992) or the [[Chemistry:Kyoto Protocol|Kyoto Protocol]] that was subsequently (1997) established under it. When the Kyoto Protocol came into force on 16 February 2005, Phase I of the EU ETS had already become operational. The EU later agreed to incorporate Kyoto flexible mechanism certificates as compliance tools within the EU ETS. The "Linking Directive" allows operators to use a certain amount of Kyoto certificates from flexible mechanism projects to cover their emissions.

The Kyoto flexible mechanisms are:
* [[Earth:Joint Implementation|Joint Implementation]] projects (JI) defined by Article 6 of the Kyoto Protocol, which produce [[Earth:Emission Reduction Unit|Emission Reduction Unit]]s (ERUs). One ERU represents the successful emissions reduction equivalent to one tonne of carbon dioxide equivalent (t{{CO2}}e).
* the [[Earth:Clean Development Mechanism|Clean Development Mechanism]] (CDM) defined by Article 12, which produces [[Earth:Certified Emission Reduction|Certified Emission Reduction]]s (CERs). One CER represents the successful emissions reduction equivalent to one tonne of carbon dioxide equivalent (t{{CO2}}e).
* International Emissions Trading (IET) defined by Article 17.

IET is relevant as the reductions achieved through CDM projects are a compliance tool for EU ETS operators. These Certified Emission Reductions (CERs) can be obtained by implementing emission reduction projects in developing countries, outside the EU, that have ratified (or acceded to) the Kyoto Protocol. The implementation of Clean Development Projects is largely specified by the Marrakech Accords, a follow-on set of agreements by the Conference of the Parties to the Kyoto Protocol.
The legislators of the EU ETS drew up the scheme independently but called on the experiences gained during the running of the voluntary UK Emissions Trading Scheme in the previous years,<ref>[http://www.decc.gov.uk/en/content/cms/what_we_do/change_energy/tackling_clima/ccas/uk_ets/uk_ets.aspx UK Emissions Trading Scheme] {{Webarchive|url=https://web.archive.org/web/20101121132657/http://decc.gov.uk/en/content/cms/what_we_do/change_energy/tackling_clima/ccas/uk_ets/uk_ets.aspx |date=21 November 2010 }} DECC</ref> and collaborated with other parties to ensure its units and mechanisms were compatible with the design agreed through the UNFCCC.

Under the EU ETS, the governments of the EU Member States agree on national emission caps which have to be approved by the EU commission. Those countries then allocate allowances to their industrial operators, and track and validate the actual emissions in accordance with the relevant assigned amount. They require the allowances to be retired after the end of each year.

The operators within the ETS may reassign or trade their allowances by several means:
* privately, moving allowances between operators within a company and across national borders
* [[Finance:Over-the-counter|over the counter]], using a [[Finance:Broker|broker]] to privately match buyers and sellers
* trading on the [[Finance:Spot market|spot market]] of one of Europe's climate exchanges

Like any other [[Finance:Financial instrument|financial instrument]], trading consists of matching buyers and sellers between members of the exchange and then settling by depositing a valid allowance in exchange for the agreed financial consideration. Much like a [[Finance:Stock market|stock market]], companies and private individuals can trade through brokers who are listed on the exchange, and need not be regulated operators.

When each change of ownership of an allowance is proposed, the national [[Earth:Emissions Trading Registry|Emissions Trading Registry]] and the European Commission are informed in order for them to validate the transaction. During Phase II of the EU ETS, the UNFCCC also validates the allowance and any change that alters the distribution within each national allocation plan.<ref>{{Cite journal|last1=Condon|first1=Madison|last2=Ignaciuk|first2=Ada|date=2013-06-01|title=Border Carbon Adjustment and International Trade: A Literature Review|url=https://scholarship.law.bu.edu/faculty_scholarship/991|journal=OECD Trade and Environment Working Papers|access-date=30 November 2020|archive-date=18 January 2021|archive-url=https://web.archive.org/web/20210118064646/https://scholarship.law.bu.edu/faculty_scholarship/991/|url-status=live}}</ref>{{rp|11}}

Like the Kyoto trading scheme, EU ETS allows a regulated operator to use [[Earth:Carbon credit|carbon credit]]s in the form of Emission Reduction Units (ERU) to comply with its obligations. A Kyoto [[Earth:Certified Emission Reduction|Certified Emission Reduction]] unit (CER), produced by a carbon project that has been certified by the UNFCCC's [[Earth:Clean Development Mechanism|Clean Development Mechanism]] Executive Board, or Emission Reduction Unit (ERU) certified by the [[Earth:Joint Implementation|Joint Implementation]] project's host country or by the Joint Implementation Supervisory Committee, are accepted by the EU as equivalent.

Thus one EU Allowance Unit of one tonne of {{CO2}}, or "EUA", was designed to be identical ("fungible") with the equivalent "[[Earth:Assigned amount units|assigned amount units]]" (AAU) of {{CO2}} defined under Kyoto. Hence, because of the EU's decision to accept Kyoto-CERs as equivalent to EU-EUA's, it is possible to trade EUA's and UNFCCC-validated CERs on a one-to-one basis within the same system. (However, the EU was not able to link trades from all its countries until 2008-9 because of its technical problems connecting to the UN systems.)<ref>{{cite web|url=https://arrestyourdebt.com/mercari-review/|archiveurl=https://web.archive.org/web/20160303201716/http://www.carbon-financeonline.com/index.cfm?section=lead&action=view&id=10948&linkref=cnews|url-status=dead|title=Mercari Reviews [2021]: Our Experience – Arrest Your Debt|first=Ryan|last=Luke|archivedate=3 March 2016|website=arrestyourdebt.com}}</ref>

During Phase II of the EU ETS, the operators within each Member State must surrender their allowances for inspection by the EU before they can be "retired" by the UNFCCC.

===Allocation===
The total number of permits issued (either auctioned or allocated) determines the supply for the allowances. The actual price is determined by the market. Too many allowances compared to demand will result in a low carbon price, and reduced emission abatement efforts.<ref name=newbery>{{Cite book |date=26 February 2009 |author=Newbery, D. |title=Memorandum submitted by David Newbery, Research Director, Electric Policy Research Group University of Cambridge. |contribution=Written evidence. |series=The role of carbon markets in preventing dangerous climate change. The fourth report of the 2009–10 session |publisher=UK Parliament House of Commons Environmental Audit Select Committee |url=https://publications.parliament.uk/pa/cm200910/cmselect/cmenvaud/290/290we33.htm |access-date=30 April 2010 |archive-date=24 April 2010 |archive-url=https://web.archive.org/web/20100424202414/http://www.publications.parliament.uk/pa/cm200910/cmselect/cmenvaud/290/290we33.htm |url-status=live }}</ref> Too few allowances will result in a high carbon price.<ref>{{cite journal |year = 2006 |title = Regulating by prices, quantities or both: an update and an overview |author = Hepburn, C. |journal = Oxford Review of Economic Policy
 |volume = 22 |issue = 2 |doi = 10.1093/oxrep/grj014 |url = http://www.economics.ox.ac.uk/members/cameron.hepburn/Hepburn%20(2006,%20Oxrep)%20Regulation%20by%20P%20or%20Q.pdf
 |pages = 226–247 |access-date = 30 August 2009 |url-status = dead |archive-url = https://web.archive.org/web/20090114050347/http://www.economics.ox.ac.uk/members/cameron.hepburn/Hepburn%20%282006%2C%20Oxrep%29%20Regulation%20by%20P%20or%20Q.pdf |archive-date = 14 January 2009 |df = dmy-all}}</ref>

For each EU ETS Phase, the total quantity to be allocated by each Member State is defined in the National Allocation Plan (equivalent to its UNFCCC-defined carbon account.) The European Commission has oversight of the NAP process and decides if the NAP fulfills the twelve criteria set out in the Annex&nbsp;III of the Emission Trading Directive (EU Directive 2003/87/EC). The first and foremost criterion is that the proposed total quantity is in line with a Member State's Kyoto target.

Of course, the Member State's plan can, and should, also take account of emission levels in other sectors not covered by the EU ETS, and address these within its own domestic policies. For instance, transport is responsible for 21% of EU greenhouse gas emissions, households, and small businesses for 17% and agriculture for 10%.<ref>[http://ec.europa.eu/environment/climat/pdf/m06_452_en.pdf Questions and Answers on Emissions Trading and National Allocation Plans for 2008 to 2012] {{Webarchive|url=https://web.archive.org/web/20100810053015/http://ec.europa.eu/environment/climat/pdf/m06_452_en.pdf |date=10 August 2010 }} EU November 2006</ref>

During Phase&nbsp;I, most allowances in all countries were given freely (known as [[Social:Grandfather clause|grandfathering]]). This approach has been criticized<ref>{{cite journal
 |url = http://www.carbontradewatch.org/publications/carbon-trading-how-it-works-and-why-it-fails.html
 |title = Carbon trading – how it works and why it fails – carbon trade watch
 |author1 = Tamra Gilbertson
 |author2 = Oscar Reyes
 |journal = Critical Currents: Occasional Paper Series
 |publisher = Dag Hamarskjold Foundation
 |issn = 1654-4250
 |date = 7 November 2009
|access-date = 6 June 2012
|archive-url = https://web.archive.org/web/20170825052419/http://www.carbontradewatch.org/publications/carbon-trading-how-it-works-and-why-it-fails.html
 |archive-date = 25 August 2017
|url-status = dead
}}</ref> as giving rise to [[Finance:Windfall gain|windfall profit]]s, being less efficient than auctioning, and providing too little incentive for innovative new competition to provide clean, renewable energy.<ref>{{cite web
 |title        = The environmental effectiveness of the EU ETS: analysis of caps
 |url          = http://assets.panda.org/downloads/171envteffectivenessaexecsummaryv60.pdf
 |first1       = C
 |last1        = Doble
 |first2       = H
 |last2        = Kinnunen
 |publisher    = ILEX Energy Consulting Ltd
 |date         = October 2005
 |access-date  = 6 June 2012
 |archive-date = 28 September 2011
 |archive-url  = https://web.archive.org/web/20110928092743/http://assets.panda.org/downloads/171envteffectivenessaexecsummaryv60.pdf
 |url-status   = live
}}</ref><ref>{{cite book
|url= http://www.climnet.org/component/docman/doc_download/1147-0506napreport.html
|title= National Allocation Plans 2005-7: Do they deliver?
|publisher= Climate Action Network Europe
|date= April 2006
|access-date= 6 June 2012 |isbn= 978-90-810372-1-1
|archive-url= https://web.archive.org/web/20120304133543/http://www.climnet.org/component/docman/doc_download/1147-0506napreport.html
|archive-date= 4 March 2012 |url-status= dead
}}</ref> On the other hand, allocation rather than auctioning may be justified for a few sectors that face international competition like the [[Chemistry:Aluminium|aluminium]] and steel industries.<ref name=neuhoff>{{Cite book
 |date         = 22 February 2009
 |author       = Neuhoff, K.
 |title        = Memorandum submitted by Karsten Neuhoff, Assistant Director, Electric Policy Research Group, University of Cambridge
 |series       = The role of carbon markets in preventing dangerous climate change. The fourth report of the 2009–10 session
 |publisher    = UK Parliament House of Commons Environmental Audit Select Committee
 |url          = https://publications.parliament.uk/pa/cm200910/cmselect/cmenvaud/290/290we22.htm
 |access-date  = 1 May 2010
 |archive-date = 24 April 2010
 |archive-url  = https://web.archive.org/web/20100424202417/http://www.publications.parliament.uk/pa/cm200910/cmselect/cmenvaud/290/290we22.htm
 |url-status   = live
}}</ref><ref name=carbont>{{cite web
|date=March 2009
|author=Carbon Trust
|title=Memorandum submitted by The Carbon Trust (ET19). In (section): Minutes of Evidence, Tuesday 21 April 2009. In (report): The role of carbon markets in preventing dangerous climate change. Produced by the UK Parliament House of Commons Environmental Audit Select Committee. The fourth report of the 2009–10 session
|publisher=UK Parliament website
|url=https://publications.parliament.uk/pa/cm200910/cmselect/cmenvaud/290/9042105.htm
|access-date=30 April 2010
|archive-date=24 April 2010
|archive-url=https://web.archive.org/web/20100424202423/http://www.publications.parliament.uk/pa/cm200910/cmselect/cmenvaud/290/9042105.htm
|url-status=live
}}</ref>

To address these problems,{{Citation needed|date=September 2011}} the European Commission proposed various changes in a January 2008 package, including the abolishment of NAPs from 2013 and auctioning a far greater share (ca. 60% in 2013, growing afterward) of emission permits.

From the start of Phase III (January 2013) there will be a centralized allocation of permits, not National Allocation Plans, with a greater share of auctioning of permits.<ref>[http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/08/796 Question and Answer on the revised EU ETS] {{Webarchive|url=https://web.archive.org/web/20081223120436/http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO%2F08%2F796 |date=23 December 2008 }} EUROPA, Brussels 2008</ref>

===Competitiveness===
Allocation can act as a means of addressing concerns over loss of [[Finance:Competition (companies)|competitiveness]], and possible "leakage" ([[Earth:Carbon leakage|carbon leakage]]) of emissions outside the EU. Leakage is the effect of emissions increasing in countries or sectors that have weaker regulation of emissions than the regulation in another country or sector.<ref>{{Citation
|year=2007
|section-url=http://www.ipcc.ch/publications_and_data/ar4/wg3/en/ch11s11-7-2.html
|section=Mitigation from a cross-sectoral perspective: 11.7.2 Carbon leakage
|title=Climate Change 2007: Mitigation. Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change
|editor=B. Metz
|location=Cambridge, UK, New York
|publisher=Cambridge University Press
|author=Barker, T.
|display-authors=0
|display-editors=etal
|access-date=1 May 2010
|archive-date=3 May 2010
|archive-url=https://web.archive.org/web/20100503032254/http://www.ipcc.ch/publications_and_data/ar4/wg3/en/ch11s11-7-2.html
|url-status=dead
}}</ref>
Such concerns affect the following sectors: cement, steel, aluminium, pulp and paper, basic inorganic [[Engineering:Chemical industry|chemicals]] and fertilisers/ammonia.<ref name=carbont/> Leakage from these sectors was thought to be under 1% of total EU emissions. Correcting for leakage by allocating permits acts as a temporary [[Finance:Subsidy|subsidy]] for affected industries, but does not fix the underlying problem. Border adjustments would be the economically efficient choice, where imports are taxed according to their carbon content.<ref name=newbery/><ref name=neuhoff/> One problem with border adjustments is that they might be used as a disguise for trade [[Finance:Protectionism|protectionism]].<ref name=grubb>{{cite web
|date=3 August 2009
|title=Climate Policy and Industrial Competitiveness: Ten Insights from Europe on the EU Emissions Trading System
|publisher=Climate Strategies
|author=Grubb, M.
|access-date=28 June 2010
|url=http://www.climatestrategies.org/component/reports/category/61/204.html
|display-authors=0
|archive-date=26 October 2011
|archive-url=https://web.archive.org/web/20111026202341/http://www.climatestrategies.org/component/reports/category/61/204.html
|url-status=live
}}</ref> Some adjustments may also not prevent emissions leakage.

===Banking and borrowing===
Within a certain trading period, banking and borrowing is allowed. For example, a 2006 EUA can be used in 2007 (banking) or in 2005 (borrowing). Interperiod borrowing is not allowed. Member states had the discretion to decide whether banking EUAs from Phase I to Phase II was allowed.<ref>{{cite web |url=http://mit.edu/mitei/research/spotlights/europe-carbon.html |title=Carbon emissions trading in Europe: Lessons to be learned |publisher=Massachusetts Institute of Technology Energy Initiative |author=Nancy Stauffer |date=29 May 2008 |access-date=25 October 2010 |archive-date=5 July 2010 |archive-url=https://web.archive.org/web/20100705170209/http://mit.edu/mitei/research/spotlights/europe-carbon.html |url-status=live }}</ref>

===Members===
{{Image frame|width=300
|content=
{{Highlighted world map by country|projection=mercator|scale=44|
AT=#1f77b4|
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CH=#2ca02c}}
|caption=
{{legend|#1f77b4|Participant countries in the EU ETS.}}
{{legend|#ff7f0e|The UK, a participant until 31 December 2020.}}
{{legend|#2ca02c|The Swiss ETS, linked to the EU ETS since 1 January 2020.}}
}}
The EU ETS operates in 30 countries: the 27 EU member states plus Iceland, Liechtenstein and Norway.<ref name=etsweb>{{Cite web |title=EU Emissions Trading System (EU ETS) |url=https://ec.europa.eu/clima/eu-action/eu-emissions-trading-system-eu-ets_en |access-date=2022-06-01 |website=ec.europa.eu |language=en}}</ref>

The United Kingdom left the EU on 31 January 2020 but remained subject to EU rules until 31 December 2020. The UK Emissions Trading Scheme (UK ETS) replaced the UK's participation in the EU ETS on 1 January 2021,<ref>{{OGL-attribution|Department of Business, Energy and Industrial Strategy, [https://www.gov.uk/government/publications/participating-in-the-uk-ets Participating in the UK Emissions Trading Scheme (UK ETS)], published 17 December 2021, accessed 15 January 2021}}</ref> but the UK government required organisations to continue to comply with their existing obligations under the 2020 scheme year, which ended on 30 April 2021.<ref>Department of Business, Energy and Industrial Strategy, [https://www.gov.uk/government/publications/eu-ets-obligations-and-access-to-eu-registry-systems-in-2021 EU ETS obligations and access to EU registry systems in 2021] {{Webarchive|url=https://web.archive.org/web/20210119012132/https://www.gov.uk/government/publications/eu-ets-obligations-and-access-to-eu-registry-systems-in-2021 |date=19 January 2021 }}, published 31 December 2020, accessed 15 January 2021</ref>

=== Linking ===
The EU ETS is linked to the {{Ill|Swiss Emissions Trading System|de|Emissionshandelssystem_der_Schweiz}} since 1 January 2020.<ref>{{Cite web |last=FOEN |first=Federal Office for the Environment |title=Linking the Swiss and EU emissions trading systems |url=https://www.bafu.admin.ch/bafu/en/home/themen/thema-klima/klimawandel-stoppen-und-folgen-meistern/schweizer-klimapolitik/emissionshandel/verknuepfung-der-emissionshandelssysteme-schweiz-eu.html |access-date=2022-06-01 |website=www.bafu.admin.ch |language=en}}</ref> Linking systems creates a larger carbon market, which can reduce overall compliance costs, increase market liquidity and generate a more stable carbon market.<ref>Burtraw, D., Palmer, K. L., Munnings, C., Weber, P., & Woerman, M., 2013: Linking by Degrees: Incremental Alignment of Cap-and-Trade Markets. SSRN Electronic Journal. doi:10.2139/ssrn.2249955</ref><ref>Flachsland, C., Marschinski, R., & Edenhofer, O., 2009: To link or not to link: benefits and disadvantages of linking cap-and-trade systems. Climate Policy, 9(4), 358–372. doi:10.3763/cpol.2009.0626</ref> Linking systems can also be politically symbolic as it shows willingness to undertake a common effort to reduce GHG emissions. Some scholars have argued that linking may provide a starting point for developing a new, bottom-up international climate policy architecture whereby multiple unique systems successively link their various systems.<ref>Ranson, M., & Stavins, R., 2013: Linkage of Greenhouse Gas Emissions Trading Systems – Learning from Experience. Discussion Paper Resources For The Future, No. 42</ref><ref>The House of Commons Energy and Climate Committee, 2015: Linking emissions trading systems. London.</ref><ref>{{Citation |last1=Richardson |first1=Andreas |title=Carbon Trading with Blockchain |date=2020 |url=http://link.springer.com/10.1007/978-3-030-53356-4_7 |work=Mathematical Research for Blockchain Economy |pages=105–124 |editor-last=Pardalos |editor-first=Panos |archive-url=https://web.archive.org/web/20211228024628/https://link.springer.com/chapter/10.1007%2F978-3-030-53356-4_7 |place=Cham |publisher=Springer International Publishing |language=en |arxiv=2005.02474 |doi=10.1007/978-3-030-53356-4_7 |isbn=978-3-030-53355-7 |access-date=2021-01-05 |archive-date=28 December 2021 |last2=Xu |first2=Jiahua |editor2-last=Kotsireas |editor2-first=Ilias |editor3-last=Guo |editor3-first=Yike |editor4-last=Knottenbelt |editor4-first=William |s2cid=218516785 |url-status=live}}</ref>

==Phase I 2005–2007==
In the first phase (2005–2007), the EU ETS included some 12,000 installations, representing approximately 40% of EU {{CO2}} emissions, covering energy activities (combustion installations with a rated thermal input exceeding 20&nbsp;MW, mineral oil refineries, coke ovens), production and processing of ferrous metals, mineral industry (cement clinker, glass and ceramic bricks) and pulp, paper and board activities.<ref>{{cite news |url=http://news.bbc.co.uk/2/hi/science/nature/4114921.stm |title=Q&A: Europe's carbon trading scheme |work=BBC News |date=20 December 2006 |access-date=30 July 2007 |archive-date=5 March 2007 |archive-url=https://web.archive.org/web/20070305091209/http://news.bbc.co.uk/2/hi/science/nature/4114921.stm |url-status=live }}</ref>

===Launch and operation===
The ETS, in which all 15 Member States that were then members of the [[Social:European Union|European Union]] participated, nominally commenced operation on 1&nbsp;January 2005, although national registries were unable to settle transactions for the first few months. However, the prior existence of the UK Emissions Trading Scheme meant that market participants were already in place and ready. In its first year, 362&nbsp;million tonnes of [[Chemistry:Carbon dioxide|{{CO2}}]] were traded on the market for a sum of €7.2&nbsp;billion, and a large number of futures and options.<ref>{{cite web |url=http://www.pointcarbon.com/wimages/Carbon_2006_final_print.pdf |title=Carbon 2006 market survey |publisher=Point Carbon |date=28 February 2006 |access-date=25 April 2006 |archive-date=29 June 2006 |archive-url=https://web.archive.org/web/20060629233955/http://www.pointcarbon.com/wimages/Carbon_2006_final_print.pdf |url-status=live }}</ref>

===Prices===
The price of allowances increased more or less steadily to a peak level in April 2006 of about €30 per tonne {{CO2}}.<ref>{{cite web |url=http://www.emissierechten.nl/marktanalyse.htm |title=Analyse van de CO<sub>2</sub>-markt (in Dutch) |publisher=Emissierechten |date=November 2007 |url-status=dead |archive-url=https://web.archive.org/web/20130411145740/http://www.emissierechten.nl/marktanalyse.htm |archive-date=11 April 2013  }}</ref> In late April 2006, a number of EU countries (the Netherlands, the Czech Republic, Belgium, France, and Spain) announced that their verified (or actual) emissions were less than the number of allowances allocated to installations. The spot price for EU allowances dropped 54% from €29.20 to €13.35 in the last week of April 2006. In May 2006, the European Commission confirmed that verified {{CO2}} emissions were about 80 million tonnes or 4% lower than the number of allowances distributed to installations for 2005 emissions.<ref name="ellerman">{{cite journal |first1= D |last1= Ellerman |first2= B |last2= Buchner |title= Over-Allocation or Abatement? A Preliminary Analysis of the EU ETS Based on the 2005–06 Emissions Data |url= http://18.7.29.232/bitstream/handle/1721.1/35837/MITJPSPGC_Rpt141.pdf |journal= Environmental and Resource Economics |volume= 41 |issue= 2 |year= 2008 |pages= 267–287 |doi= 10.1007/s10640-008-9191-2 |hdl= 10419/74119 |s2cid= 154860675 |access-date= 6 January 2013 |archive-url= https://web.archive.org/web/20150411151131/http://18.7.29.232/bitstream/handle/1721.1/35837/MITJPSPGC_Rpt141.pdf |archive-date= 11 April 2015 |url-status= dead }}</ref> In May 2006, prices fell to under €10/tonne. Lack of scarcity under the first phase of the system continued through 2006 resulting in a trading price of €1.2&nbsp;per tonne in March 2007, declining to €0.10 in September 2007. In 2007, carbon prices for the trial phase dropped to near zero for most of the year. Meanwhile, prices for Phase II remained significantly higher throughout, reflecting the fact that allowances for the trial phase were set to expire by 31 December 2007.<ref>{{cite journal
 |url = http://www.cccep.ac.uk/Publications/Working-papers/Papers/50-59/WP59_carbon-trading-caney-hepburn.pdf
 |title = Carbon Trading: Unethical, Unjust and Ineffective?
 |first1 = S
 |last1 = Caney
 |first2 = C
 |last2 = Hepburn
 |journal = Royal Institute of Philosophy Supplement
 |volume = 69
 |pages = 201–234
 |doi = 10.1017/S1358246111000282
 |year = 2011
 |s2cid = 58915278
 |access-date = 26 April 2012
|archive-url = https://web.archive.org/web/20130606021458/http://www.cccep.ac.uk/Publications/Working-papers/Papers/50-59/WP59_carbon-trading-caney-hepburn.pdf
 |archive-date = 6 June 2013
|url-status = dead
}}</ref>

===Verified emissions===
Verified emissions showed a net increase over the first phase of the scheme. For the countries for which data was available, emissions increased by 1.9% between 2005 and 2007 (at the time all 27 member states minus Romania, Bulgaria, and Malta).

{| class="wikitable sortable" style="text-align:right;"
|-
! rowspan="2" |Country
! colspan="3" style="text-align:center;"| Verified emissions
! style="text-align:center;"| Change
|-
! 2005||2006||2007||2005–2007
|-
| style="text-align:left;"| {{AUT}} ||33,372,826||32,382,804||31,751,165||−4.9%
|-
| style="text-align:left;"| {{BEL}} ||55,363,223||54,775,314||52,795,318||−4.6%
|-
| style="text-align:left;"| {{CYP}} ||5,078,877||5,259,273||5,396,164||6.2%
|-
| style="text-align:left;"| {{CZE}} ||82,454,618||83,624,953||87,834,758||6.5%
|-
| style="text-align:left;"| {{flagu|Germany}} ||474,990,760||478,016,581||487,004,055||2.5%
|-
| style="text-align:left;"| {{DEN}} ||26,475,718||34,199,588||29,407,355||11.1%
|-
| style="text-align:left;"| {{EST}} ||12,621,817||12,109,278||15,329,931||21.5%
|-
| style="text-align:left;"| {{flagu|Spain}} ||183,626,981||179,711,225||186,495,894||1.6%
|-
| style="text-align:left;"| {{FIN}} ||33,099,625||44,621,411||42,541,327||28.5%
|-
| style="text-align:left;"| {{flagu|France}} ||131,263,787||126,979,048||126,634,806||−3.5%
|-
| style="text-align:left;"| {{GRE}} ||71,267,736||69,965,145||72,717,006||2.0%
|-
| style="text-align:left;"| {{HUN}} ||26,161,627||25,845,891||26,835,478||2.6%
|-
| style="text-align:left;"| {{IRL}} ||22,441,000||21,705,328||21,246,117||−5.3%
|-
| style="text-align:left;"| {{flagu|Italy}} ||225,989,357||227,439,408||226,368,773||0.2%
|-
| style="text-align:left;"| {{LTU}} ||6,603,869||6,516,911||5,998,744||−9.2%
|-
| style="text-align:left;"| {{LUX}} ||2,603,349||2,712,972||2,567,231||−1.4%
|-
| style="text-align:left;"| {{LAT}} ||2,854,481||2,940,680||2,849,203||−0.2%
|-
| style="text-align:left;"| {{NED}} ||80,351,288||76,701,184||79,874,658||−0.6%
|-
| style="text-align:left;"| {{POL}} ||203,149,562||209,616,285||209,601,993||3.2%
|-
| style="text-align:left;"| {{POR}} ||36,425,915||33,083,871||31,183,076||−14.4%
|-
| style="text-align:left;"| {{SWE}} ||19,381,623||19,884,147||15,348,209||−20.8%
|-
| style="text-align:left;"| {{SLO}} ||8,720,548||8,842,181||9,048,633||3.8%
|-
| style="text-align:left;"| {{SVK}} ||25,231,767||25,543,239||24,516,830||−2.8%
|-
| style="text-align:left;"| {{flagu|United Kingdom}} ||242,513,099||251,159,840||256,581,160||5.8%
|-
! style="text-align:left;"| Total ||2,012,043,453||2,033,636,557||2,049,927,884||1.9%
|}
{{smalldiv|1=
:*Figures are in [[Tonne|tonne]]s of {{CO2}}
:*Source: European Commission Press Release 23&nbsp;May 2008<ref>{{cite web |url=http://europa.eu/rapid/pressReleasesAction.do?reference=IP/08/787&format=HTML&aged=0&language=EN&guiLanguage=en |title=Emissions trading: 2007 verified emissions from EU ETS businesses |publisher=European Commission Press Release |work=IP/08/787 |date=23 May 2006 |access-date=25 March 2009 |archive-date=25 December 2011 |archive-url=https://web.archive.org/web/20111225083942/http://europa.eu/rapid/pressReleasesAction.do?reference=IP%2F08%2F787&format=HTML&aged=0&language=EN&guiLanguage=en |url-status=live }}</ref>
}}

Consequently, observers accused national governments of abusing the system under industry pressure, and urged far stricter caps in the second phase (2008–2012).<ref>[http://www.emissierechten.nl/marktanalyse.htm Emissierechten] {{webarchive|url=https://web.archive.org/web/20130411145740/http://www.emissierechten.nl/marktanalyse.htm |date=11 April 2013 }} (in Dutch)</ref> This led to a stricter regime in the second phase.

==Phase II 2008–12==

===Scope===
The second phase (2008–12) expanded the scope of the scheme significantly. In 2007, three non-EU members, {{wipe|Norway}}, Iceland, and [[Finance:Liechtenstein|Liechtenstein]] joined the scheme.<ref>{{cite web |url=http://www.eubusiness.com/topics/environ/1193418125.05 |title=Iceland, Norway, Liechtenstein to join EU emissions trading system |publisher=EUbusiness Ltd |author=AFP |date=27 October 2007 |access-date=28 October 2010 |archive-date=19 March 2012 |archive-url=https://web.archive.org/web/20120319034335/http://www.eubusiness.com/topics/environ/1193418125.05 |url-status=live }}</ref> The EU's "Linking Directive" introduced the [[Earth:Clean Development Mechanism|CDM]] and [[Earth:Joint Implementation|JI]] credits. Although this was a theoretical possibility in phase I, the over-allocation of permits combined with the inability to bank them for use in the second phase meant it was not taken up.<ref>{{cite web
|url=http://www.iisd.ca/sd/euets/ymbvol115num1e.html
|title=Summary of the seminar on linking the Kyoto project-based mechanisms with the European Union Emissions Trading Scheme
|work=Linking in the EU ETS Bulletin
|publisher=International Institute for Sustainable Development (IISD)
|date=19 September 2005
|access-date=10 August 2011
|archive-date=5 April 2012
|archive-url=https://web.archive.org/web/20120405214714/http://www.iisd.ca/sd/euets/ymbvol115num1e.html
|url-status=live
}}</ref>

On 27 April 2012, the European Commission announced the full activation of the EU Emissions Trading System single registry. The full activation process included the migration of over 30,000 EU ETS accounts from national registries. The European Commission further stated that the single registry to be activated in June will not contain all the required functionalities for phase III of the EU ETS.<ref>{{cite web|title=EU Emissions Trading System Single Registry: Timetable Announced|url=http://www.natlawreview.com/article/eu-emissions-trading-system-single-registry-timetable-announced|publisher=McDermott Will & Emery|work=The National Law Review|date=12 May 2012|access-date=4 June 2012|archive-date=18 May 2012|archive-url=https://web.archive.org/web/20120518095709/http://www.natlawreview.com/article/eu-emissions-trading-system-single-registry-timetable-announced|url-status=live}}</ref>

===Aviation emissions===
Aviation emissions were to be included from 2012.<ref>{{cite web |url=http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/05/341&format=HTML&aged=0&language=EN&guiLanguage=en |title=Questions & Answers on Aviation & Climate Change |date=27 September 2005 |publisher=EU Europa |access-date=28 December 2021 |archive-date=18 October 2007 |archive-url=https://web.archive.org/web/20071018063025/http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO%2F05%2F341 |url-status=live }}</ref> The inclusion of aviation was considered important by the EU.<ref>{{cite web
|title=Questions & Answers on historic aviation emissions and the inclusion of aviation in the EU's Emission Trading System (EU ETS)
|url=http://ec.europa.eu/clima/policies/transport/aviation/faq_en.htm
|publisher=European Commission: DG Climate Action
|access-date=10 February 2012
|archive-date=23 February 2012
|archive-url=https://web.archive.org/web/20120223224728/http://ec.europa.eu/clima/policies/transport/aviation/faq_en.htm
|url-status=live
}}</ref> The inclusion of aviation was estimated to increase in demand for allowances by about 10–12 million tonnes of {{CO2}} per year in phase two. According to DEFRA, an increased use of JI credits from projects in Russia and {{wipe|Ukraine}}, would offset any increase in prices so there would be no discernible impact on average annual {{CO2}} prices.<ref>{{cite web
 |url=http://www.defra.gov.uk/environment/climatechange/trading/eu/pdf/including-aviation-icf.pdf
 |title=Including Aviation into the EU ETS: Impact on EU allowance prices
 |publisher=ICF Consulting for DEFRA
 |date=February 2006
 |url-status=dead
 |archive-url=https://web.archive.org/web/20060215004933/http://www.defra.gov.uk/environment/climatechange/trading/eu/pdf/including-aviation-icf.pdf
 |archive-date=15 February 2006 }}</ref>

The airline industry and other countries including China, India, Russia, and the United States reacted adversely to the inclusion of the aviation sector.<ref>{{cite news
|title=Trouble in the air, double on the ground
|url=http://www.economist.com/node/21547283
|access-date=10 February 2012
|newspaper=The Economist
|date=11 February 2012
|archive-date=9 February 2012
|archive-url=https://web.archive.org/web/20120209185018/https://www.economist.com/node/21547283
|url-status=live
}}</ref> The United States and other countries argued that the EU did not have jurisdiction to regulate flights when they were not in European skies; China and the United States threatened to ban their national carriers from complying with the scheme. On 27 November 2012 the United States enacted the European Union Emissions Trading Scheme Prohibition Act of 2011 which prohibits U.S. carriers from participating in the European Union Emission Trading Scheme.<ref name="Public Law 112–200 112th Congress">{{cite web|title=European Union Emissions Trading Scheme Prohibition Act of 2011|url=http://www.gpo.gov/fdsys/pkg/PLAW-112publ200/pdf/PLAW-112publ200.pdf|publisher=Government Printing Office|access-date=27 January 2012|date=27 November 2012|quote=An Act To prohibit operators of civil aircraft of the United States from participating in the European Union's emissions trading scheme, and for other purposes.|archive-date=2 February 2013|archive-url=https://web.archive.org/web/20130202201943/http://www.gpo.gov/fdsys/pkg/PLAW-112publ200/pdf/PLAW-112publ200.pdf|url-status=live}}</ref><ref name=NYT012613>{{cite news|title=Your Biggest Carbon Sin May Be Air Travel|url=https://www.nytimes.com/2013/01/27/sunday-review/the-biggest-carbon-sin-air-travel.html|access-date=27 January 2013|newspaper=The New York Times|date=26 January 2013|author=Elisabeth Rosenthal|archive-date=26 January 2013|archive-url=https://web.archive.org/web/20130126234647/http://www.nytimes.com/2013/01/27/sunday-review/the-biggest-carbon-sin-air-travel.html|url-status=live}}</ref> China threatened to withhold $60 billion in outstanding orders from Airbus, which in turn led to France pressuring the EU to freeze the scheme.<ref>{{cite news|url=https://www.reuters.com/article/us-eu-airlines-climate/insight-u-s-china-turned-eu-powers-against-airline-pollution-law-idUSBRE8B801H20121210|title=Insight: U.S., China turned EU powers against airline pollution law|first=Barbara|last=Lewis|date=10 December 2012|newspaper=Reuters|access-date=19 April 2018|archive-date=9 June 2018|archive-url=https://web.archive.org/web/20180609143001/https://www.reuters.com/article/us-eu-airlines-climate/insight-u-s-china-turned-eu-powers-against-airline-pollution-law-idUSBRE8B801H20121210|url-status=live}}</ref>

The EU insisted that the regulation should be applied equally to all carriers, and that it did not contravene international regulations. In the absence of a global agreement on airline emissions, the EU argued that it was forced to go ahead with its own scheme. But only flights within the EEA are covered; international flights are not.<ref name="ec transport" />

=== Other ===

Ultimately, the Commission intended that the third trading period should cover all greenhouse gases and all sectors, including aviation, maritime transport, and forestry.<ref>{{cite web |url=http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/05/712&format=HTML&aged=0&language=EN&guiLanguage=en |title=Stavros Dimas Speech to House of Commons London |publisher=EU Europa |date=21 November 2005 |access-date=28 December 2021 |archive-date=19 May 2011 |archive-url=https://web.archive.org/web/20110519104829/http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH%2F05%2F712&format=HTML&aged=0&language=EN&guiLanguage=en |url-status=live }}</ref> For the transport sector, the large number of individual users adds complexities, but might be implemented either as a cap-and-trade system for fuel suppliers or a baseline-and-credit system for car manufacturers.<ref>{{cite book |last1=Klooster |first1=Jeroen |last2=Kampman |first2=Bettina |year=2006 |url=http://www.naturvardsverket.se/Documents/publikationer/620-5550-X.pdf |title=Dealing with transport emissions |publisher=The Swedish Environmental Protection Agency |isbn=978-91-620-5550-9 |issn=0282-7298 |access-date=10 February 2012 |archive-date=23 April 2014 |archive-url=https://web.archive.org/web/20140423183726/http://www.naturvardsverket.se/Documents/publikationer/620-5550-X.pdf |url-status=live }}</ref>

The National Allocation Plans for Phase II, the first of which were announced on 29 November 2006, provided for an average reduction of nearly 7% below the 2005 emission levels.<ref>{{cite web |url=http://europa.eu/rapid/pressReleasesAction.do?reference=IP/06/1650&format=HTML&aged=0&language=EN&guiLanguage=en |title=Emissions trading: Commission decides on first set of national allocation plans for the 2008–2012 trading period |publisher=EU Europa |date=November 2006 |access-date=28 December 2021 |archive-date=19 May 2011 |archive-url=https://web.archive.org/web/20110519104729/http://europa.eu/rapid/pressReleasesAction.do?reference=IP%2F06%2F1650&format=HTML&aged=0&language=EN&guiLanguage=en |url-status=live }}</ref> However, the use of offsets such as Emission Reduction Units from JI and Certified Emission Reductions from CDM projects was allowed, with the result that the EU would be able to meet the Phase II cap by importing units instead of reducing emissions (CCC, 2008, pp.&nbsp;145,&nbsp;149).<ref name=ccc>{{cite book
|date=December 2008
|chapter=Carbon markets and carbon prices
|chapter-url=http://archive.theccc.org.uk/archive/pdf/7980-TSO%20Book%20Chap%204.pdf
|title=Building a low-carbon economy – The UK's contribution to tackling climate change
|series=The First Report of the Committee on Climate Change
|url=http://www.theccc.org.uk/reports/building-a-low-carbon-economy
|publisher=The Stationery Office
|access-date=26 April 2010
|archive-date=25 May 2010
|archive-url=https://web.archive.org/web/20100525004110/http://www.theccc.org.uk/reports/building-a-low-carbon-economy
|url-status=live
}}</ref>

According to verified EU data from 2008, the ETS resulted in an emissions reduction of 3%, or 50&nbsp;million tons. At least 80&nbsp;million tons of "carbon offsets" were bought for compliance with the scheme.<ref>{{cite web |last1=Gilbertson |first1=T. |last2=Reyes |first2=O |year=2009 |url=http://www.carbontradewatch.org/carbon-trade-fails |title=Carbon trading: how it works and why it fails |location=Uppsala |publisher=Dag Hammarskjöld Foundation |access-date=29 November 2009 |archive-date=6 January 2010 |archive-url=https://web.archive.org/web/20100106120306/http://www.carbontradewatch.org/carbon-trade-fails/ |url-status=live }}</ref>

In late 2006, European Commission started infringement proceedings against Austria, Czech Republic, Denmark, Hungary, Italy and Spain, for failure to submit their proposed National Allocation Plans on time.<ref>{{cite web
|url=http://www.europarl.europa.eu/comparl/envi/pdf/implementation/is20061127.pdf
|title=Member States' compliance with the Emissions Trading Scheme
|publisher=EU Europa Environment Committee
|date=27 November 2006
|access-date=14 October 2007
|archive-date=17 December 2008
|archive-url=https://web.archive.org/web/20081217185612/http://www.europarl.europa.eu/comparl/envi/pdf/implementation/is20061127.pdf
|url-status=live
}}</ref>

In July 2020, The Environment Committee of the European Parliament voted to include {{CO2}} emissions from the maritime sector in the European Union (EU) Emissions Trading System (ETS).<ref>{{cite news |title=EU to include ships in the ETS |url=https://www.reuters.com/business/sustainable-business/eu-proposes-adding-shipping-its-carbon-trading-market-2021-07-14/ |publisher=Reuters |date=14 July 2020 |access-date=10 December 2021 |archive-date=10 December 2021 |archive-url=https://web.archive.org/web/20211210163851/https://www.reuters.com/business/sustainable-business/eu-proposes-adding-shipping-its-carbon-trading-market-2021-07-14/ |url-status=live }}</ref>

===State allocation plans===
The annual Member State {{CO2}} yearly allowances in million tonnes are shown in the table:

{| class="wikitable" style="text-align: center"
|-
|+ Million tonnes of CO<sub>2</sub> yearly allowances<ref>{{cite press release |url= http://europa.eu/rapid/pressReleasesAction.do?reference=IP/07/1614&format=HTML&language=EN |title= IP/07/1614: Emissions trading: EU-wide cap for 2008–2012 set at 2.08 billion allowances after assessment of national plans for Bulgaria |work= EU |date= 26 October 2007 |access-date= 28 December 2021 |archive-date= 28 December 2021 |archive-url= https://web.archive.org/web/20211228024639/https://ec.europa.eu/commission/presscorner/detail/en/IP_07_1614 |url-status= live }} Access to the previous press releases (Nov 2006 – October 2007) in the linked page. Additional installations and emissions included in the second trading period are not included in this table but are given in the sources.</ref>
|-
! rowspan=2| Member State
! rowspan=2| 1st period<br />cap
! rowspan=2| 2005 verified<br />emissions
! colspan=2| 2008–2012 cap
|-
! State request
! Cap allowed
|-
| style="text-align:left;"| {{AUT}}
| 33.0
| 33.4
| 32.8
| 30.7
|-
| style="text-align:left;"| {{BEL}}
| 62.1
| 55.58{{efn|Including installations opted out in 2005}}
| 63.33
| 58.5
|- style="text-align:center;"
| style="text-align:left;"| {{BUL}}
| 42.3
| 40.6
| 67.6
| 42.3
|- style="text-align:center;"
| style="text-align:left;"| {{CYP}}{{efn|name=CYP+MLT}}
| 5.7
| 5.1
| 7.12
| 5.48
|- style="text-align:center;"
| style="text-align:left;"| {{CZE}}
| 97.6
| 82.5
| 101.9
| 86.8
|- style="text-align:center;"
| style="text-align:left;"| {{DEN}}
| 33.5
| 26.5
| 24.5
| 24.5
|- style="text-align:center;"
| style="text-align:left;"| {{EST}}
| 19
| 12.62
| 24.38
| 12.72
|-
| style="text-align:left;"| {{FIN}}
| 45.5
| 33.1
| 39.6
| 37.6
|-
| style="text-align:left;"| {{flagu|France}}
| 156.5
| 131.3
| 132.8
| 132.8
|-
| style="text-align:left;"| {{HUN}}
| 31.3
| 26.0
| 30.7
| 26.9
|- style="text-align:center;"
| style="text-align:left;"| {{flagu|Germany}}
| 499
| 474
| 482
| 453.1
|-
| style="text-align:left;"| {{GRC}}
| 74.4
| 71.3
| 75.5
| 69.1
|-
| style="text-align:left;"| {{IRL}}
| 22.3
| 22.4
| 22.6
| 21.15
|-
| style="text-align:left;"| {{flagu|Italy}}
| 223.1
| 222.5
| 209
| 195.8
|-
| style="text-align:left;"| {{LAT}}
| 4.6
| 2.9
| 7.7
| 3.3
|- style="text-align:center;"
| style="text-align:left;"| {{LTU}}
| 12.3
| 6.6
| 16.6
| 8.8
|- style="text-align:center;"
| style="text-align:left;"| {{LUX}}
| 3.4
| 2.6
| 3.95
| 2.7
|- style="text-align:center;"
| style="text-align:left;"| {{MLT}}{{efn|name=CYP+MLT|Cyprus and Malta, as new EU accession states, but not Annex I countries, will have their own NAPs and participate in trading during Phase II.}}
| 2.9
| 1.98
| 2.96
| 2.1
|- style="text-align:center;"
| style="text-align:left;"| {{NLD}}
| 95.3
| 80.35{{efn|Verified emissions for 2005 do not include installations opted out in 2005 which will be covered in 2008 and 2012 and are estimated to amount to some 6 Mt.}}
| 90.4
| 85.8
|-
| style="text-align:left;"| {{POL}}
| 239.1
| 203.1
| 284.6
| 208.5
|-
| style="text-align:left;"| {{POR}}
| 38.9
| 36.4
| 35.9
| 34.8
|- style="text-align:center;"
| style="text-align:left;"| {{ROM}}
| 74.8
| 70.8
| 95.7
| 75.9
|- style="text-align:center;"
| style="text-align:left;"| {{SVK}}
| 30.5
| 25.2
| 41.3
| 30.9
|- style="text-align:center;"
| style="text-align:left;"| {{SLO}}
| 8.8
| 8.7
| 8.3
| 8.3
|-
| style="text-align:left;"| {{flagu|Spain}}
| 174.4
| 182.9
| 152.7
| 152.3
|-
| style="text-align:left;"| {{SWE}}
| 22.9
| 19.3
| 25.2
| 22.8
|- style="text-align:center;"
| style="text-align:left;"| {{Flagu|United Kingdom}}
| 245.3
| 242.4{{efn|UK's verified emissions for 2005 do not include installations opted out in 2005 which will be covered in 2008 and 2012 and are estimated to amount to some 30 Mt.}}
| 246.2
| 246.2
|-
! style="text-align:left;"| Totals
! 2298.5
! 2122.16
! 2325.34
! 2080.93
|}
{{notelist}}

===Carbon price===
The carbon price<ref>{{Cite book|title=Carbon Trading & Pricing|first=Joost|last=Kanen|date=31 December 2006|id={{ASIN|0955372011|country=uk}}}}</ref> within Phase&nbsp;II increased to over €20/t{{CO2}} in the first half of 2008 (CCC, 2008, p.&nbsp;149). The average price was €22/t{{CO2}} in the second half of 2008, and €13/t{{CO2}} in the first half of 2009. CCC (2009, p.&nbsp;67) gave two reasons for this fall in prices:<ref name=ccc2009>{{Cite book
|date=12 October 2009
|author=CCC
|title=Meeting Carbon Budgets – the need for a step change
|series=Progress report to Parliament Committee on Climate Change. Presented to Parliament pursuant to section 36(1) of the Climate Change Act 2008
|url=http://www.official-documents.gov.uk/document/other/9789999100076/9789999100076.pdf
|publisher=The Stationery Office (TSO)
|access-date=1 May 2010
|archive-date=2 March 2011
|archive-url=https://web.archive.org/web/20110302205333/http://www.official-documents.gov.uk/document/other/9789999100076/9789999100076.pdf
|url-status=live
}}</ref>
*Reduced output in energy-intensive sectors as a result of the recession. This means that less abatement will be required to meet the cap, lowering the carbon price.
*The market perception of future fossil fuel prices may have been revised downwards.

Projections made in 2009 indicate that like Phase&nbsp;I, Phase&nbsp;II would see a surplus in allowances and that 2009 carbon prices were being sustained by the need to "bank" allowances to surrender them in the tougher third phase.<ref name=grubb/> In December 2009, carbon prices dropped to a six-month low after the Copenhagen climate summit outcome disappointed traders. Prices for EU allowances for December 2010 delivery dropped 8.7% to 12.40 euros a tonne.<ref>{{cite news
|url= http://news.bbc.co.uk/2/hi/business/8425293.stm
|title= Copenhagen deal causes EU carbon price fall
|work= BBC News
|date= 21 December 2009
|access-date= 27 January 2013
|archive-date= 27 January 2013
|archive-url= https://web.archive.org/web/20130127104834/http://news.bbc.co.uk/2/hi/business/8425293.stm
|url-status= live
}}</ref>

In March 2012, according to the periodical ''Economist'', the EUA permit price under the EU ETS had "tanked" and was too low to provide incentives for firms to reduce emissions. The permit price had been persistently under €10 per tonne compared to nearly €30 per tonne in 2008. The market had been oversupplied with permits.<ref>{{cite news
 |url          = http://www.economist.com/node/21548962
 |title        = Breathing difficulties – A market in need of a miracle
 |date         = 3 March 2012
 |author       = Longyearbyen
 |newspaper    = The Economist
 |access-date  = 3 April 2012
 |archive-date = 1 April 2012
 |archive-url  = https://web.archive.org/web/20120401203227/http://www.economist.com/node/21548962
 |url-status   = live
}}</ref>
In June 2012, EU allowances for delivery in December 2012 traded at 6.76 euros each on the [[Company:Intercontinental Exchange|Intercontinental Exchange]] Futures Europe exchange, a 61 percent decline compared with a year previously.<ref>{{cite news
 |url          = https://www.bloomberg.com/news/2012-06-11/eu-risks-12-years-of-oversupply-in-co2-market-report.html
 |title        = EU Risks 12 Years of Oversupply in CO2 Market: Report
 |first        = Ewa
 |last         = Krukowska
 |work         = Bloomberg
 |date         = 11 June 2012
 |access-date  = 6 January 2013
 |archive-date = 20 May 2013
 |archive-url  = https://web.archive.org/web/20130520023212/http://www.bloomberg.com/news/2012-06-11/eu-risks-12-years-of-oversupply-in-co2-market-report.html
 |url-status   = live
}}</ref>

In July 2012, Thomson Reuters Point Carbon stated that it considered that without intervention to reduce the supply of allowances, the price of allowances would fall to four Euros.<ref>{{cite web
|url=http://www.pointcarbon.com/news/1.1946676
|title=CO2 permits to fall to 4 euros if EU fails to fix ETS: report
|publisher=Point Carbon
|date=31 July 2012
|access-date=6 August 2012
|archive-date=3 August 2012
|archive-url=https://web.archive.org/web/20120803011837/http://www.pointcarbon.com/news/1.1946676
|url-status=live
}}</ref> The 2012 closing price for an EU allowance with a December 2013 contract ended the year at 6.67 euros a tonne.<ref>{{cite news
 |url          = http://www.theage.com.au/business/carbon-economy/european-carbon-permit-prices-cap-another-losing-year-20130101-2c3s9.html
 |title        = European carbon permit prices cap another losing year
 |author       = Bloomberg
 |work         = The Age
 |date         = 1 January 2013
 |access-date  = 14 January 2013
 |location     = Melbourne
 |archive-date = 5 January 2013
 |archive-url  = https://web.archive.org/web/20130105033903/http://www.theage.com.au/business/carbon-economy/european-carbon-permit-prices-cap-another-losing-year-20130101-2c3s9.html
 |url-status   = live
}}</ref> In late January 2013, the EU allowance price fell to a new record low of 2.81 euros after the energy and industry committee of the European parliament opposed a proposal to withhold 900 million future-dated allowances from the market.<ref>{{cite news
 |url          = https://www.theguardian.com/environment/2013/jan/24/eu-carbon-price-crash-record-low
 |title        = EU carbon price crashes to record low
 |first        = Damian
 |last         = Carrington
 |work         = The Guardian
 |date         = 24 January 2013
 |quote        = The European Union's flagship climate policy, its emissions trading scheme (ETS), saw the price of carbon crash to a record low on Thursday after a vote in Brussels against a proposal to support the struggling market.
 |access-date  = 27 January 2013
 |location     = London
 |archive-date = 9 December 2013
 |archive-url  = https://web.archive.org/web/20131209035153/http://www.theguardian.com/environment/2013/jan/24/eu-carbon-price-crash-record-low
 |url-status   = live
}}</ref>

==Phase III 2013–2020==
For Phase III (2013–2020), the European Commission implemented a number of changes, including (CCC, 2008, p.&nbsp;149):<ref name=ccc/>
*the setting of an overall EU cap, with allowances then allocated to EU members;
*tighter limits on the use of offsets;
*limiting banking of allowances between Phases II and III;
*a move from allowances to auctioning;
*and the inclusion of more sectors and gases.

Also, millions of allowances set aside in the New Entrants Reserve (NER) to fund the deployment of innovative renewable energy technologies and [[Physics:Carbon capture and storage|carbon capture and storage]] through the NER 300 programme, one of the world's largest funding programmes for innovative low-carbon energy demonstration projects.<ref>{{cite web|url=https://ec.europa.eu/clima/policies/ets/index_en.htm|title=EU Emissions Trading System (EU ETS) – Climate Action – European Commission|last=Anonymous|date=23 November 2016|website=Climate Action – European Commission|access-date=19 April 2018|archive-date=20 November 2016|archive-url=https://web.archive.org/web/20161120080622/http://ec.europa.eu/clima/policies/ets/index_en.htm|url-status=live}}</ref> The programme is conceived as a catalyst for the demonstration of environmentally safe carbon capture and storage (CCS) and innovative renewable energy (RES) technologies on a commercial scale within the European Union.<ref>{{cite web|url=https://ec.europa.eu/clima/policies/lowcarbon/ner300/index_en.htm|title=NER 300 programme – Climate Action – European Commission|last=Anonymous|date=23 November 2016|website=Climate Action – European Commission|access-date=19 April 2018|archive-date=16 November 2016|archive-url=https://web.archive.org/web/20161116222709/http://ec.europa.eu/clima/policies/lowcarbon/ner300/index_en.htm|url-status=live}}</ref>

Ahead of its accession to the EU, Croatia joined the ETS at the start of Phase III on 1 January 2013.<ref>{{cite web
 |url          = http://www.climate-policy-watcher.org/?q=node/243
 |title        = Croatia will join EU ETS in 2013
 |publisher    = Climate Policy Watcher
 |date         = 25 January 2012
 |access-date  = 18 February 2013
 |archive-date = 3 April 2015
 |archive-url  = https://web.archive.org/web/20150403221422/http://www.climate-policy-watcher.org/?q=node%2F243
 |url-status   = live
}}</ref><ref>{{Cite web |url=http://ec.europa.eu/clima/policies/ets/benchmarking/index_en.htm |title=Benchmarks for free allocation - Policies - Climate Action - European Commission |access-date=31 December 2012 |archive-date=5 November 2012 |archive-url=https://web.archive.org/web/20121105030041/http://ec.europa.eu/clima/policies/ets/benchmarking/index_en.htm |url-status=dead }}</ref> This took the number of countries in the EU ETS to 31.

On 4 January 2013, European Union allowances for 2013 traded on London's ICE Futures Europe exchange for between 6.22 euros and 6.40 euros.<ref>{{cite news
 |url          = https://www.bloomberg.com/news/2013-01-03/european-union-carbon-dioxide-permits-decline-to-one-month-low.html
 |title        = EU Carbon Permits Pare Early Losses, Tracking German 2014 Power
 |first        = Alessandro
 |last         = Vitelli
 |work         = Bloomberg
 |date         = 4 January 2013
 |access-date  = 6 January 2013
 |url-status   = live
}}</ref>

The number of excess allowances carried over ("banked") from Phase II to Phase III was 1.7 billion.<ref>{{Cite web |url=https://ec.europa.eu/clima/sites/clima/files/ets/reform/docs/c_2017_3228_en.pdf |title=Archived copy |access-date=15 July 2019 |archive-date=3 June 2019 |archive-url=https://web.archive.org/web/20190603044604/https://ec.europa.eu/clima/sites/clima/files/ets/reform/docs/c_2017_3228_en.pdf |url-status=dead }}</ref>

==Phase IV 2021–2030==
Phase IV commenced on 1 January 2021 and will finish on 31 December 2030.<ref>{{cite web|url=https://ec.europa.eu/clima/policies/ets_en|title=EU Emissions Trading System (EU ETS)|last=Anonymous|date=23 November 2016|website=Climate Action – European Commission|language=en|access-date=5 November 2019|archive-date=5 May 2021|archive-url=https://web.archive.org/web/20210505183114/https://ec.europa.eu/clima/policies/ets_en|url-status=live}}</ref> The European Commission plans a full review of the Directive by 2026. Since 2018, prices have continuously increased, reaching €57/t{{CO2}} ({{To USD|57|EUR|round=yes}} $) in July 2021.<ref>{{cite web|title=Carbon Price Viewer|url=https://ember-climate.org/data/carbon-price-viewer|publisher=EMBER|access-date=2021-03-20|archive-date=15 September 2021|archive-url=https://web.archive.org/web/20210915123457/https://ember-climate.org/data/carbon-price-viewer/|url-status=live}}</ref> This results in additional costs of about €0.04/kWh for coal and €0.02/kWh for gas combustion for electricity.

=== Reform of the EU-ETS and introduction of the Market Stability Reserve (MSR) ===
On 22 January 2014, the European Commission proposed two structural reform amendments to the ETS directive (2003/87/EC) of the 2008 Climate Package to be agreed on in the Council Conclusions<ref>{{cite web |url=http://www.european-council.europa.eu/council-meetings/conclusions?lang=en |title=European Council - Conclusions |access-date=24 January 2014 |archive-url=https://web.archive.org/web/20150107182753/http://www.european-council.europa.eu/council-meetings/conclusions?lang=en |archive-date=7 January 2015 |url-status=dead }}</ref> on 20–21 March 2014 by the Heads of EU Member States at the meeting of the European Council:<ref>{{Cite web |url=http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/140671.pdf |title=Archived copy |access-date=24 January 2014 |archive-date=5 March 2016 |archive-url=https://web.archive.org/web/20160305203527/http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/140671.pdf |url-status=live }}</ref>

* the linear reduction factor, at which the overall emissions cap is reduced, from 1.74% (2013–2020) to 2.2% each year from 2021 to 2030, thus reducing EU {{CO2}} emissions in the ETS sector by 43% compared to 2005<ref>{{Cite web |url=http://ec.europa.eu/clima/policies/2030/docs/com_2014_15_en.pdf |title=A policy framework for climate and energy in the period from 2020 to 2030, page 5 |access-date=24 January 2014 |archive-date=5 June 2014 |archive-url=https://web.archive.org/web/20140605095808/http://ec.europa.eu/clima/policies/2030/docs/com_2014_15_en.pdf |url-status=live }}</ref>
* the creation of a 12% "automatic set-aside" reserve mechanism of verified annual emissions (at least a 100 million {{CO2}} permit reserve) in the fourth ETS period from 2021 to 2030, thus creating a quasi [[Earth:Carbon tax|carbon tax]] or "carbon price floor" with a price range set each year by the European Commission's Directorate General for Climate Change<ref>{{cite web|url=http://ec.europa.eu/clima/policies/ets/reform/docs/com_2014_20_en.pdf|title=COM(2014) 20x/2 Proposal for a DECISION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL concerning the establishment and operation of a market stability reserve for the Union greenhouse gas emission trading scheme and amending Directive 2003/87/EC|access-date=24 January 2014|archive-date=4 March 2016|archive-url=https://web.archive.org/web/20160304213048/http://ec.europa.eu/clima/policies/ets/reform/docs/com_2014_20_en.pdf|url-status=live}}</ref>

Connie Hedegaard, the EU Commissioner for Climate Change, hoped "to link up the ETS with compatible systems around the world to form the backbone of a global carbon market" with Australia cited as an example.<ref name="ec.europa.eu"/> However, as the COP 19 Climate Conference again ended with no binding new international agreement in 2013, Australia has dismantled its ETS system.<ref>{{cite web| url=http://www.climatechange.gov.au/carbon-tax-abolished-1-july-2014| title=Department of the Environment and Energy| date=9 December 2020| access-date=20 January 2014| archive-date=2 December 2014| archive-url=https://web.archive.org/web/20141202045326/http://www.climatechange.gov.au/carbon-tax-abolished-1-july-2014| url-status=live}}</ref>

Before the European Council summit on 20 March 2014,<ref>{{Cite web |url=http://www.consilium.europa.eu/homepage/highlights/council-focuses-on-climate,-energy-and-gmos?lang=en |title=Consilium - Council focuses on climate, energy and GMOs |access-date=4 March 2014 |archive-date=6 October 2014 |archive-url=https://web.archive.org/web/20141006091024/http://www.consilium.europa.eu/homepage/highlights/council-focuses-on-climate,-energy-and-gmos?lang=en |url-status=dead }}</ref> the European Commission decided to propose a change in the functioning of the carbon market ({{CO2}} permits). The submitted legislation on the Market Stability Reserve system (MSR) would change the amount of annually auctioned {{CO2}} permits based on the amount of {{CO2}} permits in circulation.<ref>{{cite web | url=http://www.ipex.eu/IPEXL-WEB/dossier/document.do?code=COM&year=2014&number=20&extension=null | title=COM/2014/0020 – Document details page | access-date=4 March 2014 | archive-date=6 October 2014 | archive-url=https://web.archive.org/web/20141006095700/http://www.ipex.eu/IPEXL-WEB/dossier/document.do?code=COM&year=2014&number=20&extension=null | url-status=live }}</ref> On 24 October 2014, at the meeting of the European Council, the Heads of Governments of EU Member States provided legal certainty to the proposed Market Stability Reserve (MSR) by sanctioning the political project in the text of the Council Conclusions.<ref>{{Cite web |url=http://data.consilium.europa.eu/doc/document/ST-169-2014-INIT/en/pdf |title=Archived copy |access-date=22 January 2015 |archive-date=23 June 2016 |archive-url=https://web.archive.org/web/20160623205232/http://data.consilium.europa.eu/doc/document/ST-169-2014-INIT/en/pdf |url-status=live }}</ref> This would address imbalances in supply and demand in the European carbon market by adjusting volumes for auction. The reserve would operate on predefined rules with no discretion for the commission or Member States.

The European Parliament and the European council informally agreed on an adapted version of this proposal, which sets the starting date of the MSR to 2019 (so already in Phase III), puts the 900 million backloaded allowances in the reserve and reduces the reaction time of the MSR to one year. The adopted proposal was passed as Decision (EU) 2015/1814<ref name="auto"/> by the European parliament and the Council of ministers in 2015.<ref name="europarl.europa.eu"/>

=== Reform of the Market Stability Reserve (MSR) ===
In the years 2014–2017, the back-loading of auction volumes and the legislation on introducing the MSR had neither substantially decreased the surplus of allowances nor substantially increased allowance prices in the EU-ETS, with EUA prices remaining below €10/t{{CO2}}. In 2018, the MSR was reformed again with Directive (EU) 2018/410,<ref name="auto1"/> primarily to reduce the surplus of emissions allowances and create additional scarcity:<ref name=":2">{{Cite journal|last=European Parliament and Council of the European Union|date=2018-03-19|title=DIRECTIVE (EU) 2018/410 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL|url=http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32018L0410&from=EN|journal=Official Journal of the European Union|access-date=1 November 2021|archive-date=30 August 2021|archive-url=https://web.archive.org/web/20210830210759/https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32018L0410&from=EN|url-status=live}}</ref><ref>{{Cite journal|last1=Flachsland|first1=Christian|last2=Pahle|first2=Michael|last3=Burtraw|first3=Dallas|last4=Edenhofer|first4=Ottmar|last5=Elkerbout|first5=Milan|last6=Fischer|first6=Carolyn|last7=Tietjen|first7=Oliver|last8=Zetterberg|first8=Lars|date=2020-01-02|title=How to avoid history repeating itself: the case for an EU Emissions Trading System (EU ETS) price floor revisited|url=https://doi.org/10.1080/14693062.2019.1682494|journal=Climate Policy|volume=20|issue=1|pages=133–142|doi=10.1080/14693062.2019.1682494|hdl=1871.1/692a64e6-8337-45f1-81f1-f694af2b6c29|s2cid=211389793|issn=1469-3062|access-date=1 November 2021|archive-date=28 December 2021|archive-url=https://web.archive.org/web/20211228024541/https://www.tandfonline.com/doi/full/10.1080/14693062.2019.1682494|url-status=live}}</ref>

* For the period from 2019 to 2023, the share of allowances put into the MSR was increased from 12% to 24%
* From 2023 onwards, all allowances in the MSR above the total number of allowances auctioned during the previous year would become invalid
* Unilateral invalidation of allowances by member states that take additional policy measures leading to reduced demand for EUAs.

This reform lead to a strong increase of EUA prices in 2018, with prices staying mostly in a range of €18-30/t{{CO2}} from August 2018 to March 2020.

=== "Fit for 55" package ===
The tightening of the overall EU emissions target to –55% reduction versus 1990 in the [[Earth:European Green Deal|European Green Deal]] necessitates tightening of the current EU ETS reduction target for 2030 of –43% with respect to 2005. The EU commission proposes in its "Fit for 55" package to increase the EU ETS reduction target for 2030 to –61% compared to 2005.<ref name=":1" /> Such a tighter EU ETS target will increase scarcity of EUAs and thus EUA prices further, with modeling studies estimating carbon prices in the range of €90-€130/t{{CO2}} for 2030.<ref>{{cite web|last=Simon|first=Frédéric|date=2021-07-19|title=Analyst: EU carbon price on track to reach €90 by 2030|url=https://www.euractiv.com/section/emissions-trading-scheme/interview/analyst-eu-carbon-price-on-track-to-reach-e90-by-2030/|access-date=2021-11-01|website=www.euractiv.com|language=en-GB|archive-date=1 November 2021|archive-url=https://web.archive.org/web/20211101154225/https://www.euractiv.com/section/emissions-trading-scheme/interview/analyst-eu-carbon-price-on-track-to-reach-e90-by-2030/|url-status=live}}</ref><ref>{{Cite journal|last1=Pietzcker|first1=Robert C.|last2=Osorio|first2=Sebastian|last3=Rodrigues|first3=Renato|date=2021-07-01|title=Tightening EU ETS targets in line with the European Green Deal: Impacts on the decarbonization of the EU power sector|url=https://www.sciencedirect.com/science/article/pii/S0306261921003962|journal=Applied Energy|language=en|volume=293|page=116914|doi=10.1016/j.apenergy.2021.116914|s2cid=221902069|issn=0306-2619|access-date=1 November 2021|archive-date=1 November 2021|archive-url=https://web.archive.org/web/20211101154225/https://www.sciencedirect.com/science/article/pii/S0306261921003962|url-status=live}}</ref>

The EU commission also proposes to include emissions from maritime transport in the EU ETS.<ref name=":1" />

=== Russian invasion of Ukraine 2022 ===
The 24 February 2022 invasion sent carbon prices plunging from €97 in early February down to below €70.<ref>[https://www.theguardian.com/environment/2022/mar/02/eu-carbon-permit-prices-crash-after-russian-invasion-of-ukraine EU carbon permit prices crash after Russian invasion of Ukraine] The Guardian. 2020.</ref>

==Costs==
Emissions in the EU have been reduced at costs that are significantly lower than projected,<ref name=grubb/> though transaction costs are related to economies of scale and can be significant for smaller installations.<ref>Heindl, Peter: [http://www.zew.de/en/publikationen/publikation.php3?action=detail&nr=6532 Transaction Costs and Tradable Permits: Empirical Evidence from the EU Emissions Trading Scheme] {{Webarchive|url=https://web.archive.org/web/20131212224735/http://www.zew.de/en/publikationen/publikation.php3?action=detail&nr=6532 |date=12 December 2013 }}. Discussion Paper No. 12-021. Centre for European Economic Research, 2012</ref> Overall, the estimated cost was a fraction of 1% of [[Finance:GDP|GDP]]. It was suggested that if permits were auctioned, and the revenues used effectively, e.g., to reduce distortionary taxes and fund low-carbon technologies, costs could be eliminated, or even create a positive economic impact.

==Overall emission reductions==
According to the European Commission, in 2010 greenhouse gas emissions from big emitters covered by the EU ETS had decreased by an average of more than 17,000 tonnes per installation from 2005, a decrease of more than 8% since 2005.<ref>{{cite web
|url= http://ec.europa.eu/clima/publications/docs/factsheet_ets_emissions_en.pdf
|title= The EU ETS is delivering emission cuts
|year= 2011
|access-date= 8 August 2012
|publisher= European Commission
|archive-date= 17 May 2012
|archive-url= https://web.archive.org/web/20120517001725/http://ec.europa.eu/clima/publications/docs/factsheet_ets_emissions_en.pdf
|url-status= live
}}</ref>

==Inclusion of sinks==
Currently, the EU does not allow {{CO2}} credits under ETS to be obtained from sinks (e.g. reducing {{CO2}} by planting trees). However, some governments and industry representatives lobby for their inclusion. The inclusion is currently opposed by NGOs as well as the EU commission itself, arguing that sinks are surrounded by too many scientific uncertainties over their permanence and that they have inferior long-term contribution to climate change compared to reducing emissions from industrial sources.<ref>Kirsten Macey, [http://www.climnet.org/hotspot/Hotspot%2041.pdf No Sinks in the EU ETS] {{Webarchive|url=https://web.archive.org/web/20060617195216/http://climnet.org/hotspot/Hotspot%2041.pdf |date=17 June 2006 }}, Hotspot newsletter 41, Climate Action Network, March 2006, retrieved 4 October 2009.</ref>

==ETS related crime==

===Cybercrime===
On 19&nbsp;January 2011, the EU emissions spot market for pollution permits was closed after computer hackers stole 28 to 30&nbsp;million euros ($41.12&nbsp;million) worth of emissions allowances from the national registries of several European countries within a few days time period. The Czech Registry for Emissions Trading was especially hard hit with 7&nbsp;million euros worth of allowances stolen by hackers from Austria, the Czech Republic, Greece, Estonia, and Poland. A [[Phishing|phishing]] scam is suspected to have enabled hackers to log into unsuspecting companies' carbon credit accounts and transfer the allowances to themselves, allowing them to then be sold.<ref name="Carney">{{cite news | url=https://www.wsj.com/articles/SB10001424052748703956604576109272255053468 | work=The Wall Street Journal | first=Sean | last=Carney | title=EU Carbon Market Suffers Further Setback | date=28 January 2011 | access-date=3 August 2017 | archive-date=29 August 2017 | archive-url=https://web.archive.org/web/20170829091133/https://www.wsj.com/articles/SB10001424052748703956604576109272255053468 | url-status=live }}</ref><ref name="lehane">{{cite news
 |url          = http://praguepost.com/business/7290-hackers-steal-carbon-credits.html
 |title        = Hackers steal carbon credits
 |newspaper    = The Prague Post
 |last         = Lehane
 |first        = Bill
 |date         = 26 January 2011
 |access-date  = 16 April 2011
 |archive-date = 2 March 2011
 |archive-url  = https://web.archive.org/web/20110302010437/http://praguepost.com/business/7290-hackers-steal-carbon-credits.html
 |url-status   = live
}}</ref>

The European Commission said it would "proceed to determine together with national authorities what minimum security measures need to be put in place before the suspension of a registry can be lifted". Maria Kokkonen, EC spokeswoman for climate issues, said that national registries can be reopened once sufficient security measures have been enacted and member countries submit to the EC a report of their IT security protocol.

The Czech registry said there are still{{when|date=December 2019}} legal and administrative hurdles to be overcome and Jiri Stastny, chairman of OTE AS, the Czech registry operator, said that until there is recourse for victims of such theft, and a system is in place to return allowances to their rightful owners, the Czech registry will remain closed. Registry officials in Germany and Estonia have confirmed they have located 610,000 allowances stolen from the Czech registry, according to Mr. Stastny. Another 500,000 of the stolen Czech allowances are thought to be in accounts in the UK, according to the OTE.<ref name="Carney"/><ref name="lehane"/><ref>{{cite news| url=https://af.reuters.com/article/energyOilNews/idAFLDE70S0IY20110129 | archive-url=https://web.archive.org/web/20110131092537/http://af.reuters.com/article/energyOilNews/idAFLDE70S0IY20110129 | url-status=dead | archive-date=31 January 2011 | work=Reuters | title=Greek police trace EU carbon rights thieves | date=29 January 2011}}</ref>

Cyber fraudsters have also attacked the EU ETS with a "phishing" scam which cost one company €1.5&nbsp;million.<ref>[http://euobserver.com/885/29403 Cyber-scam artists disrupt emissions trading across EU] {{Webarchive|url=https://web.archive.org/web/20101122135520/http://euobserver.com/885/29403 |date=22 November 2010 }} EU Observer (2010)</ref> In response to this, the EU has revised the ETS rules to combat crime.<ref>[http://www.euractiv.com/en/climate-environment/eu-approves-revised-ets-rules-combat-cyber-crime-news-260461 EU approves revised ETS rules to combat cyber crime] {{Webarchive|url=https://web.archive.org/web/20110609125233/http://www.euractiv.com/en/climate-environment/eu-approves-revised-ets-rules-combat-cyber-crime-news-260461 |date=9 June 2011 }} Euractive (2010)</ref>

The security breaches raised fears among some traders that they might have unknowingly purchased stolen allowances which they might later have to forfeit. The ETS experienced a previous phishing scam in 2010 which caused 13&nbsp;European markets to shut down, and criminals cleared 5&nbsp;million euros in another cross-border fraud in 2008 and 2009.<ref name="lehane"/>

===VAT fraud===
In 2009 Europol informed that 90% market volume of emissions traded in some countries could be result of tax fraud, more specifically [[Finance:Missing trader fraud|missing trader fraud]], costing governments more than 5&nbsp;billion euros.<ref>{{cite web |url=http://euobserver.com/885/29132 |title=EU emissions trading an 'open door' for crime, Europol says |publisher=EUobserver |author=Leigh Phillips |date=10 December 2009 |access-date=28 October 2010 |archive-date=30 October 2010 |archive-url=https://web.archive.org/web/20101030071020/http://euobserver.com/885/29132 |url-status=live }}</ref>

German prosecutors confirmed in March 2011 that value-added-tax fraud in the trade of carbon-dioxide emissions has deprived the German state of about €850 million ($1.19&nbsp;billion). In December 2011 a German court sentenced six people to jail terms of between three years and seven years and 10 months in a trial involving evasion of taxes on carbon permits. A French court sentenced five people to one to five years in jail, and to pay massive fines for evading tax through carbon trading. In the UK a first trial over VAT fraud in the carbon market is put on track to start in February 2012.

==Views on the EU ETS==
{{criticism section|section|date=September 2014}}

Different people and organizations have responded differently to the EU ETS. Mr Anne Theo Seinen, of the EC's Directorate-General for the Environment, described Phase I as a "learning phase", where, for example, the infrastructure and institutions for the ETS were set up (UK Parliament, 2009).<ref>{{cite web
|date=12 May 2009
|author=UK Parliament
|title=Examination of Witnesses, Mr Anne Theo Seinen (Questions 242–269). In (section): Oral and Written Evidence, Tuesday, 12 May 2009. In (report): The role of carbon markets in preventing dangerous climate change. Produced by the UK Parliament House of Commons Environmental Audit Select Committee. The fourth report of the 2009–10 session
|publisher=UK Parliament website
|url=https://publications.parliament.uk/pa/cm200910/cmselect/cmenvaud/290/9051205.htm
|access-date=1 May 2010
|archive-date=24 April 2010
|archive-url=https://web.archive.org/web/20100424202404/http://www.publications.parliament.uk/pa/cm200910/cmselect/cmenvaud/290/9051205.htm
|url-status=live
}}</ref> In his view, the carbon price in Phase I had resulted in some abatement. Seinen also commented that the EU ETS needed to be supported by other policies for technology and renewable energy. According to CCC (2008, p.&nbsp;155), technology policy is necessary to overcome [[Finance:Market failure|market failure]]s associated with delivering low-carbon technologies, e.g., by supporting research and development.<ref name=ccc/>

In 2009 the World Wildlife Fund commented that there was no indication that the EU ETS had influenced longer-term investment decisions.<ref>{{cite web
|date=March 2009
|author=World Wildlife Fund
|title=Memorandum submitted by the World Wildlife Fund. In (section): Oral and Written Evidence, Tuesday 31 March 2009. In (report): The role of carbon markets in preventing dangerous climate change. Produced by the UK Parliament House of Commons Environmental Audit Select Committee. The fourth report of the 2009–10 session
|publisher=UK Parliament website
|url=https://publications.parliament.uk/pa/cm200910/cmselect/cmenvaud/290/9033103.htm
|access-date=1 May 2010
|archive-date=24 April 2010
|archive-url=https://web.archive.org/web/20100424202401/http://www.publications.parliament.uk/pa/cm200910/cmselect/cmenvaud/290/9033103.htm
|url-status=live
}}</ref> In their view, the Phase III scheme brought about significant improvements, but still suffered from major weaknesses. Jones ''et al''. (2008, p.&nbsp;24) suggested that the EU ETS needed further reform to achieve its potential.<ref>{{cite web
|date=April 2008
|author=Jones, B.
|title=Box 4.5. Recent Emission-Reduction Policy Initiatives. In: Chapter 4. Climate Change and the Global Economy (N. Tamirisa ''et al''.). In: World Economic and Financial Surveys: World Economic Outlook: Housing and the Business Cycle
|publisher=IMF website
|url=http://www.imf.org/external/pubs/ft/weo/2008/01/index.htm
|access-date=21 April 2010
|display-authors=0
|archive-date=31 August 2009
|archive-url=https://web.archive.org/web/20090831121049/http://www.imf.org/external/pubs/ft/weo/2008/01/index.htm
|url-status=live
}}</ref>

A 2016 survey of German companies participating in the EU{{nbsp}}ETS found that under current trading conditions, the EU{{nbsp}}ETS has generated weak incentives for participating firms to adopt carbon abatement measures.<ref name="kfw-2016">
{{cite web
 | title = KfW/ZEW CO<sub>2</sub> Barometer 2016 — Carbon Edition
 | date = 14 September 2016
| website = KfW Group
 | location = Frankfurt, Germany
 | url = https://www.kfw.de/KfW-Group/Newsroom/Aktuelles/News/News-Details_375232.html
 | access-date = 15 September 2016
}}
</ref><ref name="kfw-and-zew-2016">{{cite book
 | title = KfW/ZEW CO<sub>2</sub> Barometer 2016 — Carbon Edition — How the EU ETS can contribute to meeting the ambitious targets of the Paris Agreement
 | date = September 2016
 | publisher = KfW Bankengruppe and Centre for European Economic Research (ZEW)
 | location = Frankfurt am Main, Germany
 | issn = 2197-893X
 | url = https://www.kfw.de/PDF/Download-Center/Konzernthemen/Research/PDF-Dokumente-CO2-Barometer/CO2-Barometer-2016-Carbon-Edition.pdf
 | access-date = 15 September 2016
 | archive-date = 17 April 2020
 | archive-url = https://web.archive.org/web/20200417134744/https://www.kfw.de/PDF/Download-Center/Konzernthemen/Research/PDF-Dokumente-CO2-Barometer/CO2-Barometer-2016-Carbon-Edition.pdf
 | url-status = live
 }}</ref>

===Criticisms===
The EU ETS has been criticized<ref>[http://www.carbontradewatch.org/publications/carbon-trading-how-it-works-and-why-it-fails.html CARBON TRADING – HOW IT WORKS AND WHY IT FAILS] {{Webarchive|url=https://web.archive.org/web/20170825052419/http://www.carbontradewatch.org/publications/carbon-trading-how-it-works-and-why-it-fails.html |date=25 August 2017 }} Carbon Trade Watch Critical Currents no. 7, November 2009</ref> for several failings, including: over-allocation, windfall profits, price volatility, and in general for failing to meet its goals.<ref>[http://www.corporateeurope.org/climate-and-energy/content/2011/04/eu-ets-failing-third-attempt EU Emissions Trading System: Failing at the third attempt] {{Webarchive|url=https://web.archive.org/web/20110526020616/http://www.corporateeurope.org/climate-and-energy/content/2011/04/eu-ets-failing-third-attempt |date=26 May 2011 }}, Corporate Europe Observatory/Carbon Trade Watch, April 2011</ref> Proponents argue, however, that Phase I of the EU ETS (2005–2007) was a "learning phase" designed primarily to establish baselines and create the infrastructure for a carbon market, not to achieve significant reductions.<ref>[http://web.mit.edu/mitei/research/spotlights/europe-carbon.html Carbon emissions trading in Europe: Lessons to be learned] {{Webarchive|url=https://web.archive.org/web/20120511125435/http://web.mit.edu/mitei/research/spotlights/europe-carbon.html |date=11 May 2012 }} MIT Energy Initiative, 2008</ref><ref name="ncseonline.org">[http://ncseonline.org/NLE/CRSreports/08Mar/RL34150.pdf Climate Change and the EU Emissions Trading Scheme (ETS): Kyoto and Beyond] {{Webarchive|url=https://web.archive.org/web/20110807094953/http://ncseonline.org/NLE/CRSreports/08Mar/RL34150.pdf |date=7 August 2011 }} U.S. Congressional Research Service (2008)</ref><ref name="c2es.org">[http://www.c2es.org/eu-ets The European Union's Emissions Trading System in Perspective] {{Webarchive|url=https://web.archive.org/web/20120223233945/http://www.c2es.org/eu-ets |date=23 February 2012 }} MIT/Pew Center 2008</ref>

In addition, the EU ETS has been criticized as having caused a disruptive spike in energy prices.<ref>[https://www.washingtonpost.com/wp-dyn/content/article/2007/04/08/AR2007040800758_pf.html Europe’s Problems Color U.S. Plans to Curb Carbon Gases] {{Webarchive|url=https://web.archive.org/web/20170118131806/http://www.washingtonpost.com/wp-dyn/content/article/2007/04/08/AR2007040800758_pf.html |date=18 January 2017 }}, Steven Mufson, The Washington Post, 9 April 2007</ref> Defenders of the scheme say that this spike did not correlate with the price of permits, and in fact the largest price increase occurred at a time (Mar–Dec 2007) when the cost of permits was negligible.<ref name="c2es.org"/>

Researchers Preston Teeter and Jorgen Sandberg have argued that it is largely the uncertainty behind the EU's scheme that has resulted in such a tepid and informal response by regulated organizations. Their research has revealed a similar outcome in Australia, where organizations saw little incentive to innovate and even comply with cap and trade regulations.<ref name=":0">{{Cite journal|last1=Teeter|first1=Preston|last2=Sandberg|first2=Jorgen|date=2016|title=Constraining or Enabling Green Capability Development? How Policy Uncertainty Affects Organizational Responses to Flexible Environmental Regulations|journal=British Journal of Management|volume=28|issue=4|pages=649–665|doi=10.1111/1467-8551.12188|s2cid=157986703|url=http://wrap.warwick.ac.uk/93826/1/WRAP-constraining-enabling-green-policy-flexible-Sandberg-2017.pdf|access-date=9 March 2020|archive-date=6 May 2020|archive-url=https://web.archive.org/web/20200506055116/http://wrap.warwick.ac.uk/93826/1/WRAP-constraining-enabling-green-policy-flexible-Sandberg-2017.pdf|url-status=live}}</ref>

Some critics in EU blamed the EU ETS for contributing to the 2021 global energy crisis.<ref>{{cite news |title=European Energy Crisis Fuels Carbon Trading Expansion Concerns |url=https://www.bloomberg.com/news/articles/2021-10-06/european-energy-crisis-fuels-carbon-trading-expansion-concerns |work=Bloomberg |date=6 October 2021 |access-date=22 October 2021 |archive-date=22 October 2021 |archive-url=https://web.archive.org/web/20211022084826/https://www.bloomberg.com/news/articles/2021-10-06/european-energy-crisis-fuels-carbon-trading-expansion-concerns |url-status=live }}</ref><ref>{{cite news |title=The Green Brief: East-West EU split again over climate |url=https://www.euractiv.com/section/energy-environment/news/the-green-brief-east-west-eu-split-again-over-climate/ |work=Euractiv |date=20 October 2021 |access-date=22 October 2021 |archive-date=20 October 2021 |archive-url=https://web.archive.org/web/20211020225129/https://www.euractiv.com/section/energy-environment/news/the-green-brief-east-west-eu-split-again-over-climate/ |url-status=live }}</ref>

===Over-allocation===
There was an oversupply of emissions allowances for EU ETS Phase I. This drove the carbon price down to zero in 2007 (CCC, 2008, p.&nbsp;140).<ref name=ccc/> This oversupply reflects the difficulty in predicting future emissions which is necessary in setting a cap.<ref name=carbont/> Given poor data about emissions baselines, inherent uncertainty of emissions forecasts, and the very modest reduction goals of the Phase I cap (1–2% across the EU), it was entirely expected that{{According to whom|date=May 2010}} the cap might be set too high.<ref name="c2es.org"/>

This problem naturally diminishes as the cap tightens. The EU's Phase II cap is more than 6% below 2005 levels, much stronger than Phase I, and readily distinguishable from business-as-usual emissions levels.{{According to whom|date=May 2010}}<ref name="c2es.org"/>

Over-allocation does not imply that no abatement occurred. Even with over-allocation, there was theoretically a price on carbon (except for installations that received hundreds of thousands of free allowances). For some installations, the price had some effect on emitters' behavior. Verified emissions in 2005 were 3–4% below projected emissions,<ref name="ncseonline.org"/> and analysis suggests that at least part of that reduction was due to the EU ETS.<ref>[http://www.bepress.com/feem/paper90/ Over-Allocation or Abatement? A Preliminary Analysis of the EU ETS Based on the 2005 Emissions Data] {{Webarchive|url=https://web.archive.org/web/20130523072021/http://www.bepress.com/feem/paper90/ |date=23 May 2013 }} Fondazione Eni Enrico Mattei Working Papers (2007)</ref>

In September 2012, Thomson Reuters Point Carbon calculated that the first Kyoto Protocol commitment period had been oversupplied by about 13 billion tonnes (13.1 Gt) of {{CO2}} and that the second commitment period (2013–2020) was likely to start with a surplus of Assigned Amount Units (AAUs).<ref>{{cite press release |url= http://www.pointcarbon.com/aboutus/pressroom/pressreleases/1.1986577 |title= Kyoto's first commitment period oversupplied by 13 billion tonnes of CO2 Point Carbon |publisher= Thomson Reuters Point Carbon |date= 13 September 2012 |access-date= 28 November 2012 |archive-date= 29 June 2013 |archive-url= https://web.archive.org/web/20130629201608/http://www.pointcarbon.com/aboutus/pressroom/pressreleases/1.1986577 |url-status= live }}</ref>

===Windfall profits===
According to Newbery (2009), the price of EUAs was included in the final price of electricity.<ref name=newbery/> The free allocation of permits was cashed in at the EUA price by fossil generators, resulting in a "massive windfall gain". Newbery (2009) wrote that "[there] is no case for repeating such a wilful misuse of the value of a common property resource that should be owned by the country". In the view of 4CMR (2009), all permits in the EU ETS should be auctioned.<ref>{{Citation |date=3 March 2009 |author1=Annela Anger |author2=Terry Barker |author3=Athanasios Dagoumas |author4=Lynn Dicks |author5=Yongfu Huang |author6=Serban Scrieciu |author7=Stephen Stretton |title=Memorandum submitted by the Cambridge Centre for Climate Change Mitigation Research (4CMR) |work=The role of carbon markets in preventing dangerous climate change. |publisher=UK Parliament House of Commons Environmental Audit Select Committee. |series=The fourth report of the 2009–10 session |url=https://publications.parliament.uk/pa/cm200910/cmselect/cmenvaud/290/290we08.htm |access-date=1 May 2010 |archive-date=24 April 2010 |archive-url=https://web.archive.org/web/20100424202413/http://www.publications.parliament.uk/pa/cm200910/cmselect/cmenvaud/290/290we08.htm |url-status=live }}</ref>
This would avoid possible windfall profits in all sectors.

===Price volatility===
The price of emissions permits tripled in the first six months of Phase I, collapsed by half in a one-week period in 2006, and declined to zero over the next twelve months. Such movements and the implied volatility raised questions about the viability of the Phase I system to provide stable incentives to emitters.<ref name="c2es.org"/>

In future phases, measures such as banking of allowances, auctioning and price floors were considered to mitigate volatility.<ref>[http://www.econ.cam.ac.uk/eprg/TSEC/2/betz.pdf Emissions trading: lessons learnt from the 1st phase of the EU ETS and prospects for the 2nd phase] {{Webarchive|url=https://web.archive.org/web/20090806174234/http://www.econ.cam.ac.uk/eprg/TSEC/2/betz.pdf |date=6 August 2009 }} Climate Policy (2006)</ref> However, it's important to note that considerable volatility is expected of this type of market, and the volatility seen is quite in line with that of energy commodities generally. Nonetheless, producers and consumers in those markets respond rationally and effectively to price signals.<ref name="c2es.org"/>

Newbery (2009) commented that Phase I of the EU ETS was not delivering the stable carbon price necessary for long-term, low-carbon investment decisions.<ref name=newbery/> He suggested that efforts should be made to stabilize carbon price, e.g., by having a [[Finance:Price ceiling|price ceiling]] and a [[Finance:Price floor|price floor]]. This led to the reforms outlined above in Phase II and III.


==Offsetting==

===Project based offsetting===
The EU ETS is "linked" to the [[Earth:Joint Implementation|Joint Implementation]] and [[Earth:Clean Development Mechanism|Clean Development Mechanism]] projects as it allows the limited use of "offset credits" from them. Participating firms were allowed to use some [[Earth:Certified Emission Reduction|Certified Emission Reduction]] units (CERs) from 2005 and [[Earth:Emission Reduction Unit|Emission Reduction Unit]]s (ERUs) from 2008. Each Member State's National Allocation Plan must specify a percentage of the national allocation that will be the cap on the CERs and ERUs that may be used. CERs and ERUs from nuclear facilities and from [[Biology:Land use, land-use change, and forestry|Land Use, Land-Use Change and Forestry]] may not be used.<ref>{{cite web |title=Directive 2004/101/EC of the European Parliament
|url=http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32004L0101&qid=1427793827747&from=EN |date=27 October 2004
|access-date=16 February 2013| publisher=European Commission}}</ref>

The main theoretical advantage of allowing free trading of credits is that it allows mitigation to be done at least-cost (CCC, 2008, p.&nbsp;160).<ref name=ccc/> This is because the [[Finance:Margin (economics)|marginal]] costs (that is to say, the incremental costs of preventing the emission of one extra ton of [[Physics:Carbon dioxide equivalent|{{CO2}}e]] into the atmosphere) of abatement differs among countries. In terms of the UK's climate change policy, CCC (2008), noted three arguments against too great a reliance on credits:

*Rich countries need to demonstrate that a low-carbon economy is possible and compatible with economic prosperity. This is to convince developing countries to lower their emissions. Additionally, domestic action by rich countries drives investment towards a low-carbon economy.
*An ambitious long-term target to reduce emissions, e.g., an 80%&nbsp;cut in UK emissions by 2050, requires significant domestic progress by 2020 and 2030 to reduce emissions.
*CDM credits are inherently less robust than a cap and trade system, where reductions are required in total emissions.

Due to the economic downturn, states have pushed successfully for a more generous approach towards the use of CDM/JI credits post-2012.<ref>Pohlmann, "The European Union Emissions Trading Scheme" (p.362), in Legal Aspects of Carbon Trading, Ed. Freestone (2009)</ref>{{Attribution needed|date=May 2010}} The 2009 EU ETS Amending Directive states that credits can be used for up to 50% of the EU-wide reductions below the 2005 levels of existing sectors over the period 2008–2020.<ref>[http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:140:0063:0087:en:PDF EU ETS Amending Directive 2009] {{Webarchive|url=https://web.archive.org/web/20091026161354/http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:140:0063:0087:EN:PDF |date=26 October 2009 }} EUROPA, p.78 (2009)</ref> Moreover, it has been argued that the volume of CDM/JI credits, if carried over from phase II (2008–2012 to phase III 2013–2020) in the EU ETS will undermine its environmental effectiveness, despite the requirement of supplementarity in the Kyoto Protocol.<ref>[http://www.thaieurope.net/ftp/project09/ETS_final.pdf The EU ETS, CDM and the Carbon Market] {{Webarchive|url=https://web.archive.org/web/20160303173444/http://www.thaieurope.net/ftp/project09/ETS_final.pdf |date=3 March 2016 }} Mission of Thailand to the EC (2009)</ref>

In January 2011, the EU Climate Change Committee banned the use of [[Earth:Clean Development Mechanism|CDM]] [[Earth:Certified Emission Reduction|Certified Emission Reduction]] units from HFC-23 destruction in the European Union Emissions Trading Scheme from 1 May 2013. The ban includes nitrous oxide (N2O) from adipic acid production. The reasons given were the perverse incentives, the lack of additionality, the lack of environmental integrity, the under-mining of the Montreal Protocol, costs and ineffectiveness and the distorting effect of a few projects in advanced developing countries getting too many CERs.<ref>{{cite web |url= http://europa.eu/rapid/pressReleasesAction.do?reference=IP/11/56 |title= Emissions trading: Commission welcomes vote to ban certain industrial gas credits |first= Connie |last= Hedegaard |publisher= European Commission |date= 21 January 2011 |access-date= 18 September 2012 |archive-date= 11 August 2012 |archive-url= https://web.archive.org/web/20120811234814/http://europa.eu/rapid/pressReleasesAction.do?reference=IP%2F11%2F56 |url-status= live }}</ref>

===Buying and deleting emissions allowances===
As an alternative to CDM and JI projects, emissions can be offset directly by buying and deleting emissions allowances inside the ETS. This is a way to avoid several problems of CDM and JI such as additionality, measurement, leakage, permanence, and verification.<ref>{{Cite journal|url=https://www.oecd-ilibrary.org/environment/buying-and-cancelling-allowances-as-an-alternative-to-offsets-for-the-voluntary-market_5km975qmwp5c-en|title=Buying and Cancelling Allowances as an Alternative to Offsets for the Voluntary Market: A Preliminary Review of Issues and Options|first1=Anja|last1=Kollmuss|first2=Michael|last2=Lazarus|series=OECD Environment Working Papers|date=4 August 2010|via=www.oecd-ilibrary.org|doi=10.1787/5km975qmwp5c-en|journal=|access-date=13 July 2021|archive-date=13 July 2021|archive-url=https://web.archive.org/web/20210713130003/https://www.oecd-ilibrary.org/environment/buying-and-cancelling-allowances-as-an-alternative-to-offsets-for-the-voluntary-market_5km975qmwp5c-en|url-status=live}}</ref> Buying and cancelling allowances allows to include more emissions sources in the ETS (such as traffic). Furthermore, it reduces the available allowances in the cap-and-trade system, which means that it reduces the emissions that can be produced by covered sources.<ref>[http://www.epa.gov/airmarkt/trading/buying.html Buying Allowances] {{Webarchive|url=https://web.archive.org/web/20150219213218/http://www.epa.gov/airmarkt/trading/buying.html |date=19 February 2015 }} U.S. Environmental Protection Agency (2011)</ref>

==See also==
* [[Earth:Carbon emission trading|Carbon emission trading]]
* Carbon finance
*[[Earth:Carbon tax|Carbon tax]]
* Energy policy of the European Union
* [[Earth:European Climate Change Programme|European Climate Change Programme]]
* [[Earth:International Carbon Action Partnership|ICAP (International Carbon Action Partnership)]]
* Mitigation of global warming
* Single European Sky

==References==
{{Reflist|30em}}

==External links==
''Official pages''
* [https://ec.europa.eu/clima/eu-action/eu-emissions-trading-system-eu-ets_en European Commission, "Emissions Trading System (EU ETS)"]
* [https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32003L0087 "Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003", ''Official Journal of the European Union''] – EU Directive establishing EU ETS

''How ETS works''
* [https://web.archive.org/web/20061214141520/http://www.defra.gov.uk/environment/climatechange/trading/eu/ UK Defra General overview at the UK Department for Environment, Food and Rural Affairs]
* [https://web.archive.org/web/20120906153600/http://www.c2es.org/docUploads/EU-ETS%20White%20Paper.pdf Pew Center White Paper: overview of EU ETS]
* [http://www.inagendo.com/res/doc/inagendo_ets_fact_book.pdf Emission Trading Fact Book of Inagendo] (contains, among others, a glossary of ETS terms)
* [https://vimeo.com/8057561 Video from Climate and Pollution Agency (Norway): The Emission Trading Scheme]

''Key reports, and assessments''
* [https://www.europarl.europa.eu/RegData/bibliotheque/briefing/2012/120323/LDM_BRI(2012)120323_REV1_EN.pdf Prospects for the EU Emissions Trading System], Library of the European Parliament, June 2012
* [https://web.archive.org/web/20071025150600/http://www.climnet.org/EUenergy/ET/NAPsReport_Summary0306.pdf National Allocation Plans 2005–7: Do they deliver?] Executive summary of report by Climate Action Network.
* [http://www.carbontradewatch.org Carbon Trade Watch]
* [https://web.archive.org/web/20070312014835/http://www.panda.org/about_wwf/where_we_work/europe/what_we_do/epo/initiatives/climate/publications/index.cfm?uNewsID=50500 WWF website] "The environmental effectiveness and economic efficiency of the EU ETS: Structural aspects of the allocation". by WWF and Öko-Institut, 9 November 2005.
* [https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1088716 The European Emission Trading Scheme Put to the Test of State Aid Rules]
* [https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1088726 Scarcity and Allocation of Allowances in the EU Emissions Trading Scheme – A Legal Analysis].

''Case law''
*[http://www.bailii.org/ew/cases/EWCA/Civ/2015/331.html ''Swiss International Air Lines AG v UK SoS for Energy and Climate Change''] [2015] EWCA Civ 331


[[Category:Climate change policy]]

{{Sourceattribution|European Union Emissions Trading System|1}}