The European Union is the third largest producer of carbon dioxide emissions worldwide and is simultaneously pursuing an ambitious climate goal: it aims to significantly reduce its greenhouse gas emissions by 2030 and achieve net zero emissions by 2050. A key mecha-nism on the pathway towards greenhouse gas neutrality is the EU Emissions Trading System (EU ETS), established in 2005. It covers not only the 27 EU Member States but also Norway, Iceland and Liechtenstein, as well as electricity generators in Northern Ireland. The EU ETS has also been linked to the Swiss emissions trading system since 1 January 2020.
The EU ETS enshrines the “polluter pays” principle and currently requires operators of around 9000 European power plants and energy-intensive industrial installations, as well as intra-European aircraft operators (since 2012), to submit an emission allowance for each tonne of greenhouse gas that they emit. One allowance gives the right to emit one tonne of carbon dioxide equivalent.
The EU ETS reporting period is a calendar year. By the end of March each year, operators calculate the greenhouse gas emissions from their plants for the preceding year. These data are checked first by nationally accredited verifiers and are then forwarded to the national authority responsible for the implementation of the EU ETS; in Germany, this is the German Emissions Trading Authority (DEHSt, Deutsche Emissionshandelsstelle). The data are also entered into the Union registry for emissions trading. The operator must surrender sufficient allowances by the end of April to cover its reported emissions for the preceding year.
Companies may obtain emission allowances at primary market auctions run at the European Energy Exchange (EEX) in Leipzig. Emission allowances are auctioned here on a more or less daily basis by individual Member States and by the European Commission. Since the start of the third trading period (2013 to 2020), auctioning has been the basic principle for allocating allowances Europe-wide in the EU ETS. Emissions-intensive industries and heat producers continue to receive a free allocation of allowances for a transitional period, based on a “benchmarking” approach. Product benchmarks are based on the average greenhouse gas emissions of the best performing installations manufacturing that product. Free allocation is intended to reduce the risk of “carbon leakage”, i.e. the shifting of emissions to other countries. However, there are plans to phase out free allocation in the coming years.
Emission allowances can also be traded by market participants on the secondary market, e.g. on the exchange or through bilateral transactions. This has given rise to the term “emissions trading”, but strictly speaking, it is the allowances – i.e. the right to emit the corresponding quantity of greenhouse gases – rather than the emissions themselves which are traded. Trading is the price-forming mechanism for greenhouse gas emissions, and it is the price which is intended to motivate participating companies to reduce their emissions.
So that it becomes increasingly costly to emit greenhouse gases, the total number of available emission allowances decreases year on year. This reduction is determined at the political level. Germany has a share of around 22 per cent of this Europe-wide auction volume. In 2021, approximately 101 million emission allowances with an average price of 52.59 Euros were auctioned for Germany. The following year, 85 million allowances were auctioned; the average price was 80.32 Euros. In the first half of 2023, Germany auctioned around 45 million emission allowances at an average price of 87.11 Euros per allowance.
The financial pressure generated by the EU ETS is now having the desired effect; by 2021, emissions from installations covered by the EU ETS fell by 38 per cent compared to 2005.
9.10 > In Europe’s emissions trading system, the price of an emission allowance was far lower than expected for some considerable time. In recent years, however, the participating companies have had to pay much higher prices, creating more incentive to invest in emission reduction measures.