Compliance Factsheets

State and Trends of Carbon Pricing Dashboard

The State and Trends of Carbon Pricing Dashboard is an interactive online tool aimed at policymakers, businesses, and researchers. It provides the latest information on existing and emerging direct carbon pricing initiatives around the world.

Name of Instrument

EU ETS
Regional ETS
Implemented in 2005
EU
Free allocation (Intensity-based), Auctioning
Market stability reserve
CO2, N2O, PFCs
Point source
Not permitted

Covered Sectors

  • Covered
  • In principle
  • Electricity and heat
  • Industry
  • Mining and extractives
  • Aviation

Description

Operational since 2005, the European Union Emissions Trading System (EU ETS) is the oldest cap-and-trade system in force. It is a cornerstone instrument of the EU’s policy framework to combat climate change under the “European Green Deal” and reduce GHG emissions cost-effectively. The EU ETS is currently in its fourth trading phase (2021 to 2030). Every year, covered entities must surrender allowances for their emissions under the EU ETS. Auctioning is the main method of distributing allowances, with free allocation, based on benchmarks, used to address carbon leakage.

Recent Developments

The EU has adopted a number of reforms to the EU ETS as part of the “Fit for 55” package to align the system with the EU’s 2030 climate target of at least 55% net emissions reductions compared to 1990 levels and the European Green Deal objectives. The reforms increased the ambition and expanded the scope of the EU ETS to maritime transport, and introduced a new, separate emissions trading system for buildings, road transport and additional sectors (called EU ETS 2). The reforms also established a Carbon Border Adjustment Mechanism to address the risk of carbon leakage from specific sectors under the EU ETS (as an alternative to free allocation).

Coverage

The EU ETS applies to direct (scope 1) emissions from activities in the power sector, manufacturing, industry, and intra-EU aviation (including flights from the EEA to the United Kingdom). The EU ETS covers CO2 emissions, and emissions of other gases from certain activities. Each sector or activity has a specific threshold for participation. Recent reforms to the scheme expanded its scope to maritime transport, and introduced a new, separate emissions trading system for buildings, road transport and additional sectors (EU ETS 2) Emission-intensive and/or trade-intensive sectors have received a significant volume of free allowances to manage carbon leakage risks. Sectors-specific performance benchmarks are used to determine free allocations. The values are adjusted for technological progress on a yearly basis. An annual reduction rate is determined for each benchmark. For the steel sector, which faces high abatement costs and leakage risks, a fixed reduction rate applies. Free allocation for 2026 to 2030 will become conditional on the implementation of energy efficiency measures (based on audits or energy management systems) and of carbon neutrality plans for the worst performing installations, in order to incentivise decarbonisation. Free allocation to specific sectors will be gradually phased out from 2026 to 2034, in parallel to the phase-in of EU Carbon Border Adjustment Mechanism (CBAM) for third-country imports. Those sectors are - iron and steel, cement, aluminum, fertilizers and hydrogen. The CBAM will also apply to electricity imports.

Pricing and allocation approaches

From January 2019, the market stability reserve (MSR) started shaping the supply of allowances to provide greater price stability and predictability in the EU ETS. The MSR achieves this goal by removing allowances from the market if the number of total allowances in circulation is higher than 833 million allowances, and injecting allowances into the market if the number of allowances in circulation falls below 400 million. From 2019 until 2023, the yearly withholding rate of surplus allowances into the MSR is temporarily doubled to 24%. In addition, as of 2023 the number of allowances held in the MSR will be limited to the previous year's auction volume and any allowances beyond that number being invalidated. As of Phase 4, a Member State may also cancel allowances from their share of allowances to be auctioned if they take additional measures that result in closure of electricity generation capacity. The quantity of allowances invalidated shall not exceed the average verified emissions of the installation from five years preceding the closure. Emission allowances under the cap are distributed via a combination of free allocation and auctioning. Industry and aviation sectors receive free allocation based on EU-wide benchmarks and historical activity data. The free allocation to industry sectors also depends on their emission and/or trade intensity and is corrected to ensure the total free allowances does not exceed the available allowances for free allocation. The power sector does not receive any free allocation. The total number of free allowances available for free allocation declines annually. The total amount of emission allowances is determined top-down and decreases annually. From 2021 onwards, the cap decreases annually by 2.2% instead of 1.74%.

Compliance Approaches

Point source: Operators are liable for reporting the emissions covered under the EU ETS at a facility level and surrendering an equivalent amount of EU emission allowances. Operators need to meet their compliance obligations on an annual basis. Operators need to surrender allowances by April 30 for the covered GHGs emitted in the previous calendar year. The use of offsets is not allowed from Phase 4, which started in 2021.

Relation to other compliance CPIs

The EU ETS has been linked with the Switzerland ETS since 2020. Several countries that participate in the EU ETS also have domestic mechanisms.

Covered Emissions

Price range:
in 2023

Indicates instruments with multiple price levels. Only the main rate is shown for these instruments. Data last updated on 1 April 2023

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