The EU emission trading scheme (ETS) is one of the key points brought up at the COP25, aimed at fighting against the emission of greenhouse gases.
It was established in the Kyoto Protocol, in 1997, and broadly consists of certain companies having a cap on greenhouse gas emissions.
Those that do not reach the maximum limit can keep their surplus emission rights for future needs or sell them to other companies that do not have enough because they have not been able to cut their emissions.
In the end, it is a question of limiting emissions, whatever agreement the participating companies reach.
Which companies participate in the EU ETS?
Since its creation in 2005, the companies which the EU Emissions Trading Scheme (EU ETS) has focused on have been power plants and other combustion facilities this include oil refineries, coke ovens, steel plants and cement, glass, lime, brick, ceramics, pulp, paper and cardboard factories.
From 2013 onwards, the scope of action was extended to the petrochemical industry, ammonia and aluminium, as well as N2O emissions from the production of nitric, adipic and glycolic acid and perfluorocarbons in the aluminium sector.
Participation in the EU ETS is mandatory for companies in these fields, with a few exceptions: in some sectors only factories above a certain size are included and some small installations are freed up if a government introduces fiscal or other measures that reduce their emissions by an equivalent amount. In addition, until 31 December 2023 the EU ETS will only apply to flights between airports within the European Economic Area.
As far as gases are concerned, emissions of carbon dioxide (CO2), nitrous oxide (N2O) and perfluorocarbons (PFCs) are considered. It covers around 45% of the EU's greenhouse gas emissions.
The EU ETS operates in the 28 member states of the European Union plus Norway, Iceland and Liechtenstein, which belong to the European Economic Area but not to the EU.
What exactly are emission rights?
Emission rights would work as a currency. An emission allowance is equal to one tonne of CO2 or the equivalent amount of another greenhouse gas.
As we mentioned earlier, companies have capped emission rights so as not to overdo it.
Those who pass the limits, have the option of buying emission rights from those who have not exhausted theirs and will not save them for the future.
These companies are taking steps to reduce emissions by investing in more efficient technology or using less carbon-intensive energy sources or a combination of both.
What stage are we in right now?
We are in phase 3 (2013-2020) where a single EU-wide emission limit applies.
Auctions are held to allocate allowances and those still distributed for free are subject to certain rules. More polluting sectors and gases are considered and the NER 300, a financing programme that brings together around €2 billion to finance innovative low-carbon technologies, renewable energy and carbon capture and storage, is underway.
What is expected from Phase 4?
The next phase will be phase 4, which will run from 2021 to 2030. It will work on consolidating the emissions trading system as an investment engine, on reducing emission rights to 2.2% from the first year and on strengthening the market stability reserve mechanism.
The market stability reserve was launched in January 2019 as a long-term solution to the surplus of emission rights that occurred, especially as a result of the economic crisis, which caused emissions to be reduced more than expected. As a result of the surplus of emission rights, the price of carbon has fallen, so there are fewer incentives to reduce emissions. Efforts will be aimed at correcting possible imbalances within this market as well as further reducing the maximum emissions that can be made per year.
At this stage, the free allocation of emission rights is to be maintained as a way of ensuring the international competitiveness of industrial sectors at risk of carbon leakage, i.e. companies that transfer their production to other countries with less stringent emission limits.
Finally, phase 4 envisages financially supporting industry and the energy sector in the transition to a low-carbon economy.
The most repeated limitation to the emission trading scheme is the one concerning double counting, i.e. the country that sells emission rights writes down the reduction for selling it and the country that buys it does this as well. In a press release last November, Greenpeace described this as a false hope that carbon trading will get us out of the climate crisis. "The climate faces a deep deficit in the ambition of political decision-makers. We cannot afford the luxury of carbon offsets or creative accounting or the recycling of illusory carbon credits. To have the least positive impact, the future carbon market will have to follow strict rules, a key test of the global community's commitment to Paris," it reads.