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7. The EU ETS phases

Basics 2

The EU ETS is organized in phases since its creation in 2005. It is not it its fourth phase.

7. The EU ETS phases

Phase I: 2005 - 2007

“Learning by doing pilot phase”. Experimental stage as preparation for phase II. Industries needed to understand what a cap and trade system is and how to manipulate carbon allowances. 

  • “Monopoly money” logic: almost all EUAs given away for free. 
  • The most CO2 intensive sectors: power generators and energy-intensive industries.
  • Low penalty for non-compliance at €40. 
  • Total supply was the sum of individual countries’ needs assessment. 

EUAs from Phase I were not bankable - it was not possible to use them for phase II compliance. 

Phase II: 2008 - 2013

Actual start of the pursuit of the EU climate targets. The EU ETS scope was extended. 

  • Less allowances given away for free (10% of EUAs were auctioned).
  • Scope extended to include flights within the EU countries.
  • Inclusion of Iceland, Norway and Liechtenstein. 
  • Inclusion of other gasses than just CO2.
  • Increased non-compliance penalty to €100 per tonne.

Credits from the voluntary market were eligible to comply with the EU ETS regulation. Moreover, EUAs started being bankable - it was now allowed to use allowances issued in Phase II for Phase III compliance purposes. 

Phase III: 2013 - 2020

In phases I and II, too many allowances were issued. This created a structural oversupply and was keeping prices low. The regulatory bodies were far from achieving their climate targets. The phase III amendments were aiming at fixing those fundamental challenges. 

  • The cap was no longer the sum of individual countries’ figures. A union-wide cap was established. 
  • Auctioning became the main source of EUA allocation in the primary market.
  • The Market Stability Reserve was introduced to control the historical oversupply. 
  • The cap started to decrease at a faster pace.
  • Since 2012, the penalty of €100 per tonne of CO2 has increased annually in line with the European consumer price index. This penalty is paid on top of the cost of the non-surrendered allowances themselves. 

Starting in 2020, credits from the voluntary markets were no longer eligible to comply with the EU ETS. 

Phase IV: 2021 - 2030

As the market has become more sophisticated, the EU ETS now has an extensive coverage. The most important element of this phase is the gradual removal of free allowances. 

  • Around 45% of emissions are covered
  • For most installations, free allowances will be phased out by 2030. They currently represent 47% of all allowances, the rest being auctionned. 
  • The Carbon Border Adjustment Mechanism was introduced in 2023 with the purpose of keeping European industrial competitiveness. 

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