EU ETS: building an international carbon market
The EU Emissions Trading System (EU ETS) is the cornerstone of the European Union’s drive to reduce its emissions of man-made greenhouse gases which are largely responsible for warming the planet and causing climate change.
- The system works by putting a limit on overall emissions from high-emitting industry sectors which is reduced each year. Within this limit, companies can buy and sell emission allowances as needed. This ‘cap-and-trade’ approach gives companies the flexibility they need to cut their emissions in the most cost-effective way.
- The EU ETS covers more than 11,000 power stations and manufacturing plants in the 27 EU member states as well as Croatia, Iceland, Liechtenstein and Norway. Flights within and between most of these countries are also covered. In total, around 45% of total EU emissions are limited by the EU ETS.
- As the main market for credits generated by emission-saving projects around the world, the EU ETS is a major source of investment in environmentally sustainable development in developing countries. The EU system is the world’s biggest emissions trading market, accounting for over three-quarters of international carbon trading.
- The EU ETS is inspiring the development of national or regional emissions trading systems in several parts of the world.
Building an international carbon market
The European Commission sees the EU ETS as an important building block for developing an international network of emission trading systems. The international carbon market is expected to develop through the bottom-up linking of compatible domestic cap-and-trade systems. National or sub-national systems are already operating in Japan, New Zealand, Switzerland and the United States, and are planned in Canada, China and South Korea.
Linking the EU ETS with other robust emissions trading systems provides several potential benefits, including reducing the cost of cutting emissions, increasing market liquidity, stabilising the carbon price, leveling the international playing field and supporting global cooperation on climate change.
Negotiations are also under way with Switzerland on linking the EU ETS with the Swiss ETS.