Emissions Trading Scheme (ETS)

The European Union is a signatory to the Paris Agreement of December 2015, and as such is committed to reducing greenhouse gas emissions by more than 80% by 2050, compared to levels in 1990. To achieve this, its energy sector must be decarbonised as much as possible, by electrifying heating and transport, and eliminating fossil fuels for electricity generation.

EU ETS: Emissions Trading Scheme

There are four types of tradable credits under the EU ETS:

1. EUAs: EU Allowances

2. EUAAs: EU Aviation Allowances

3. CERs: Certified Emission Reduction

4. ERUs: Emission Reduction Units

The European Union Allowance (EUA) is the most common tradable unit under the European Union Emissions Trading Scheme (EU ETS). One EUA grants the holder the right to emit one tonne of carbon dioxide (CO2), or the equivalent amount of two other greenhouse gases, nitrous oxide (N2O) and perfluorocarbons (PFCs).

CERs (Certified Emission Reduction) are obtained through the CDM (Clean Development Mechanism), and allow emission reduction to be achieved in a less developed country, and credited to a developed country. ERUs are generated through the Joint Implementation (JI) mechanism, which promotes technology transfer between countries listed in in the Kyoto Protocol Annex I.

The EU ETS carbon market works primarily through the trading in derivatives (futures, forwards, options), regulated by the rules of the EU financial market.

In 2014, the EU ETS total volume traded was 8.33 billion tonnes of CO2 either as spot allowances or derivatives of allowances (total value of EUR 47 billion), where only around 900 million allowances were traded on the spot market (value of about EUR 5.2 billion).

EU ETS covers more than 11 000 power stations and industrial plants in 31 countries, and around 2000 intermediaries, traders, organisations and individuals voluntarily participate in the EU ETS.