The EU Emissions Trading System

The EU emissions trading system (EU ETS) is a key tool for reducing EU’s industrial greenhouse gas emissions cost-effectively.


The first and the biggest international system for trading greenhouse gas emission allowances, the EU ETS covers more than 11,000 power stations and industrial plants in 31 countries and is currently covering around 45% of the EU’s greenhouse gas emissions.


The EU ETS works on the ‘cap and trade’ principle. A ‘cap’, or limit, is set on the total amount of certain greenhouse gases that can be emitted by the factories, power plants and other installations in the system. The cap is reduced over time so that total emissions fall. Within the cap, companies receive or buy emission allowances which they can trade with one another as needed. They can also buy limited amounts of international credits from emission-saving projects around the world. The limit on the total number of allowances available ensures that they have a value. After each year a company must surrender enough allowances to cover all its emissions, otherwise heavy fines are imposed. If a company reduces its emissions, it can keep the spare allowances to cover its future needs or else sell them to another company. The flexibility that trading brings ensures that emissions are cut where it costs least to do so.


According to the Commission, in 2020 emissions from sectors covered by the EU ETS will be 21% lower than in 2005 and by 2030, proposed to be 43% lower.


Greenhouse gases and sectors included

  • Carbon dioxide (CO2)
    • from power and heat generation
    • energy-intensive industry sectors including oil refineries, steel works and production of iron, aluminium, metals, cement, lime, glass, ceramics, pulp, paper, cardboard, acids and bulk organic chemicals
    • commercial aviation
  • Nitrous oxide (N2O) from production of nitric, adipic, glyoxal and glyoxlic acids
  • Perfluorocarbons (PFCs) from aluminium production


While emissions trading has the potential to cover many economic sectors and greenhouse gases, the focus of the EU ETS is on emissions which can be measured, reported and verified with a high level of accuracy.

Participation in the EU ETS is mandatory for companies operating in these sectors, but in some sectors only plants above a certain size are included. Governments can exclude certain small installations from the system if fiscal or other measures are in place that will cut their emissions by an equivalent amount.


Phases of ETS 

  • 2003: Adoption of the EU ETS Directive
  • 2005 – 2007: 1st trade period (pilot period)
  • 2008 – 2012: 2nd period of trade (Kyoto period)
    • Plan for National Allocation
    • Free allocation as default rule
  • 2013 – 2020: 3rd period trade
    • Auctions as a default rule
  • 2021 – 2027: 4th period trade


Phase 3
The EU ETS is now in its third phase, running from 2013 to 2020 with significant changes from phase 1 and 2 in order to strengthen the system. The main changes are:

  • A single, EU-wide cap on emissions applies in place of the previous system of national caps;
  • Auctioning, not free allocation, is now the default method for allocating allowances. In 2013 more than 40% of allowances have been auctioned, and this share will rise progressively each year;
  • For those allowances still given away for free, harmonized allocation rules apply which are based on ambitious EU-wide benchmarks of emissions performance;
  • Some more sectors and gases are included;
  • 300 million allowances set aside in the New Entrants Reserve to fund the deployment of innovative renewable energy technologies as well as carbon capture and storage through the NER 300 programme.

By putting a price on carbon and thereby giving a financial value to each tonne of emissions saved, the EU ETS has placed climate change on the company’s financial agenda. A sufficiently high carbon price also promotes investment in clean, low-carbon technologies.


Emission trading system in Serbia
In the framework of Serbia’s accession to the EU and to get support for the implementation of the Emission Trading Directive, Serbia has launched an EU Twinning project on the “Creation of a Monitoring, Reporting and Verifying System for the Successful Implementation of the EU Emissions Trading System”. The project aims to accelerate harmonization with and implementation of the establishment of the EU Emission Trading System (EU ETS) in Serbia.
As part of the project, an information website, called, was developed in order to involve civil society in the establishment of the EU ETS system in Serbia and to raise awareness on forthcoming obligations for the energy and industrial sectors in Serbia.
The project is implemented by the French Ministry of Ecology, Sustainable Development and Energy, German Federal Ministry for Environmental, Nature Conservation and Nuclear Safety and Austrian Environment Agency. More than 30 experts from these institutions and related agencies will be involved in the project. More information about the ongoing project in Serbia: