How does the EU ETS Work?
Emissions trading – the concept The rationale behind emission trading is that it enables emission reductions to take place where the cost of the reduction is lowest thus lowering the overall costs of combating climate change. More abatement will be undertaken by operators with lower abatement costs, therefore reducing the overall costs of meeting the emissions target (cap) set by any trading scheme.
Emissions trading provides certainty regarding the level of emissions reductions which will be achieved (i.e. the difference between projected emissions and the cap on emissions). What remains uncertain is where exactly emissions savings will be made (this depends upon who makes emissions reductions and on who trades with whom). However, the nature of greenhouse gas emissions means that emissions savings have the same environmental effect wherever they are made, so the location of the saving is immaterial.
The cost of emissions allowances is determined by the carbon market, and demand for/availability of allowances. Additional compliance options, such as the allowable use of offsets in the scheme such as JI/CDM project credits, provide greater price flexibility for installations.
Page last modified: 17 September 2007
Page published: 8 September 2003