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ETS: Energy Trading System in EU

3 Min

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21 Feb 2024

Yuchen Luo

ETS is the abbreviation form of the term “Emissions Trading System” in European Union which aims to solve the global warming resulting from greenhouse gas effect efficiently. The European Union emissions trading system can be through back to the year 2005 where policy makers regulate the energy trading market. Surprisingly, it used to be the largest emission trading system in the world until the Chinese emissions trading system launched. The way the European Union energy trading system reduces and solves the greenhouse gas effect by providing EU Allowances (EUAs) for companies allow those companies to be able to emit a certain amount of carbon emission. When time passes away, EU will reduce the number of allowances this will possibly lead to their goals reduce of 55% of greenhouse gas emissions in 2030. Hopefully, the energy transition will be done by 2050 with net zero greenhouse gas emissions.

Figure 1: EU ETS and EU emissions (Source: EU ETS 101 A beginner’s guide to the EU’s Emissions Trading System. Page 6)

Principally, EU ETS proposed and operated the system called “cap and trade”. The term cap is defined as the limitation of total amount of greenhouse gas emission can be emitted by the infrastructure and aircraft. It has a concept similar to EU Allowances where the EU yearly reduces the amount of greenhouse gas emissions emitted. Subsequently, the result under this system is significantly. According to the European Commission’s report: Due to EU ETS, the emissions made by industry plants reduced 37% from the year 2005.

EU allowance is similar to the term carbon credit. As we mentioned above, companies with allowances are able to emit greenhouse gas. When the amount of allowance is reduced yearly, companies are able to purchase the allowance directly from EU or trade with other companies. For example, if some companies emit less greenhouse gas than the limitation under allowances. Those companies can store it up for future use or sell it to other companies who need allowances to emit more than the limited. The yearly reduction of cap within EU changes the firm’s behavior and incentive them. Either the firm changes the way of production and invests in new technology for clean energy or purchases more allowances. “From the year 2013, EU ETS generated over 152 billion euro as revenue.” Reported by EU commissions.

Furthermore, the EU also regulated the emission coverage for those ships or go beyond across the region. For the ship that pot in the harbor within European Union and European Economic Area (EEA), it’s emitted has to follow EU 100%. For ships that cross the area 50% of emissions are also under regulation of EU ETS. They are also requested to hold enough amount of European Union Allowances for the gas emissions for shipping and across the area.

Those revenue generated by EU allowances are considered as cyclical developments and energy transition. It flows into the national budget for public finance usage, all EU members are able to use this money as funds to develop renewable energy and improve in low carbon energy.

Figure2: foregone revenues due to free allocation, compared with auctioning revenues (2013-2019) (Source: EU ETS 101 A beginner’s guide to the EU’s Emissions Trading System. Page 28)