The EU ETS is a cap and trade scheme in existence since 2005. It is the oldest and largest such system. It is built to incentivize European companies to reduce their carbon footprint by making them pay for the carbon that they emit. It does so while at the same time limiting the maximum amount of CO2 that can be produced until 2050. From this time on, the European economy should emit no more carbon dioxide.
Not all companies are obliged to surrender EUAs at the end of the year. The scheme targets the industries that contribute the most to CO2 emissions. Authorities identify the carbon-intensive activities and set eligibility criteria.
The energy sector, manufacturing industries and aircraft operators are judged to be the most harmful to the environment. They are the EU ETS’ current sectors. When we talk about the energy sector, it is mostly electricity and heat generating power plants. The manufacturing industries of focus are oil refineries, steel works, and metal production sites. Flights within the European Economic Area and departing to Switzerland and the United Kingdom are encompassed. Within a certain sector, only operators larger than a certain size are considered. Currently, 10 939 installations are part of the game. Those are the factories, manufacturing sites or any other units that are part of the cap-and-trade scheme.
The aim of the European Union is for all the carbon emissions to be removed by 2050. As of now, not all the Union’s emissions are covered by the EU ETS. Carbon Allowances should be surrendered to match “only” 40% of the total EU CO2 produced. The remaining 60% are from sectors outside of the cap-and-trade scheme.
In order to incentivize more actors to reduce their carbon emissions, the sectors within the EU ETS’ range are expanding. From 2024 on, the system will also cover the maritime transportation sector. Large ships entering EU ports, no matter their nationality, will have to comply with the EU ETS requirements. At the same time will be introduced the coverage of all international flights to and from the European Economic Area. Until then, only flights within the union had their carbon emissions matched by EUAs.
There will be further extensions starting from 2027. The building and road transportation fields will be included. A separate emissions trading system will be introduced to tackle those. More details on it are to be announced by regulators.
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9. The price drivers
Multiple factors such as the weather, energy prices, or industrial activity can affect EUA prices.
8. The Legislative Frameworks
The EU ETS is rooted in a legislative framework dating back to the early 1990s.