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Case Study
The European Union Emissions Trading System (EU ETS)

The European Union Emissions Trading System (EU ETS)

Market-based emissions trading to cost-effectively reduce greenhouse gas (GHG) emissions.
  • Enabling environment
  • Energy
  • Finance

EU, Europe and Eurasia

Year Published

2005 - present

Case Summary
The EU ETS was established in 2003 by a Directive of the European Parliament and the European Council, and came into operation in 2005. It is the cornerstone of EU policy towards combatting climate change by reducing GHG emissions cost-effectively. It is the first multinational cap-and-trade system at the level of installations and covers 45% of GHG emissions of the EU. It covers 31 countries which, in total, account for 20% of global gross domestic product (GDP) (EDF et al. 2015).

The main objective of the EU ETS is to help EU Member States meet their commitments under the Kyoto Protocol to limit or reduce GHG emissions in a cost-effective way. The system does this by capping the overall level of emissions across EU Member States and permitting the trade of emissions allowances. Each allowance gives the emitter the right to emit 1 tonne of CO 2 or an equivalent amount of any other GHGs. The ETS, in contrast to traditional ‘command and control’ regulation, allows the market to identify the most cost-effective emission reductions.
  • European Parliament
  • European Commission (EC)
  • European Council
  • EU Member State governments
  • EC Climate Change Committee
The market-based mechanism of the EU ETS means that there is a relatively small amount of upfront public investment needed, compared to command and control mechanisms. Only a small amount  of public spending, mainly borne by Member State governments, was needed to set up an emissions registry and allocate allowances.

Results supported byUNDPWorld Resources InstituteTransparency partnership