The ETS, Emissions Trading System, is the world’s main market for climate-warming emissions. It uses a “cap and trade” approach to put a price on greenhouse gas emissions under the “polluter pays” principle. The European Union sets a maximum annual amount of greenhouse gases that the sectors covered by the system may emit; this cap is reduced over time.

The system covers large industrial installations, air transport and maritime shipping. Companies receive or buy emission allowances (one allowance equals one tonne of carbon dioxide). Those who emit less than their allowances can sell the surplus and earn revenue. Those who emit more must buy additional allowances on the market or face penalties.

Each year, a percentage reduction is applied to the overall cap, according to a European Parliament think tank. By enabling the trading of allowances, the ETS rewards emission reductions and encourages decarbonization.

The ETS has proven effective: in 2020 the entities covered reduced their greenhouse gas emissions by 43% compared with 2005. By 2024 they had halved their emissions. The system is on track to meet the target of reducing greenhouse gas emissions by at least 62% by 2030.

Since its launch in 2005 the system has grown more ambitious and now extends beyond EU borders: it also regulates emissions in the European Economic Area and in Northern Ireland. Since 2020 it has been linked to the Swiss ETS, and negotiations are underway to connect it to the UK system (an announcement on this is expected next week).

A new ETS2 will be introduced to cover greenhouse gas emissions from fuel suppliers in road transport, buildings and other sectors. ETS2 will directly affect private citizens as well as companies, and together the systems will cover roughly 75% of the EU’s greenhouse gas emissions. The Commission will present three proposals to revise the system the day after tomorrow.