EU Emissions Trading System

Global production volumes have reached extremely high levels. Production and consumption rates are also significantly higher compared to previous generations. Homes and offices continue to expand with each passing day. The opportunities provided by globalization make faster and more frequent travel possible. To carry out all these activities, fossil fuels are used, forest areas are shrinking, and construction activities are increasing. The very high amounts of greenhouse gas emissions produced are also an inevitable consequence of all these processes.

The EU Emissions Trading System, proposed by the EU to reduce greenhouse gas emissions, offers encouraging methods for reducing carbon footprint.

Objectives of the EU Emissions Trading System

The Emissions Trading System, which is an important part of the EU's combat against climate change, is implemented by the European Commission. Launched in 2005 after the adoption of the ETS Directive in 2003, the system is currently in its fourth phase, covering the years between 2021 and 2030. Based on the "cap and trade" principle, the system encourages trade by reducing emissions caused by industrial production.

Implemented by Iceland, Liechtenstein, Norway, and Switzerland as well as EU countries, the Emissions Trading System sets an emissions cap for companies. This cap, updated every year, aims to reduce the amount of human-induced emissions in the long run without harming trade.

The process in the EU Emissions Trading System begins with the determination of the upper emission cap. Companies are given an allocation based on this cap. Allocations can be obtained through auctioning or by purchasing from other companies. Monitoring and reporting emission releases ensure that the process proceeds transparently. Audits conducted in light of the reports determine the companies' compliance with the system.

Setting the Emission Cap

The EU sets an annual cap for emissions produced across a wide range of areas from power generation to industrial installations, aviation, and maritime transport. As part of the fight against climate change, the reduced cap is planned to be lowered by 4.3% each year between 2024 and 2027.

Distribution of Allocations

Allowing companies the determined cap is called emission allocation. Allocation permits companies to emit within the set amount. The 2024 EU Emissions Trading System cap has been set at 1,386,051,745.

Trading Allocations

Companies can sell their allocated shares to other companies. Allocation trading allows businesses that foresee exceeding their set limit to purchase allocation from other companies. This ensures that the emission rate set for the sector is not exceeded, while preserving the trading volume and production capacity of companies.

Reporting Emissions

Companies are responsible for continuously monitoring and reporting emission rates resulting from production or transport. The data in these reports help determine the status of companies within the EU Emissions Trading System.

Auditing the System

Companies must submit their data to both the European Commission and designated national authorities in their respective countries (mostly the Ministry of Trade and similar institutions). Penalties are applied in case the allocation is exceeded.

Legal Framework of the EU Emissions Trading System

Launched in 2005 under the ETS Directive, the EU Emissions Trading System is currently in its fourth phase. Several revisions made over the years have aligned the directive with the EU's overall climate objectives. The major updates made to date can be listed as follows:

• Fourth Trading Phase: The infrastructure of this phase, which became effective starting from 2021, was prepared in 2018. Aligned with the EU's 2030 Climate and Energy Framework, the Emissions Trading System was strengthened to support more ambitious climate goals.

• Fit For 55 Package: The Fit for 55 package, prepared by the European Commission, aims to reduce net greenhouse gas emissions by at least 55% by 2030 and is designed for all sectors contributing to the EU economy to reach this target. It was adopted in 2023 to structure the Emissions Trading System towards this goal. Under the Fit for 55 package, the carbon market is stabilized while increasing the effectiveness of the Emissions Trading System to reduce emissions, and a Carbon Border Adjustment Mechanism is established to ensure fair competition.

• European Green Deal: With the revision made to the ETS Directive in 2023, the European Green Deal targets were integrated into the Emissions Trading System. Thus, encouraging the transition to a more sustainable economy was added alongside the EU's net-zero emission targets planned for 2050.

How Does the EU Emissions Trading System Work?

Working on the "cap and trade" principle, the operation of the EU Emissions Trading System begins with the European Commission setting the emission cap. Aiming to achieve zero greenhouse gas emissions by 2050, the EU has successfully reduced emissions from electricity and industrial plants by 47% since 2005, thanks to the Emissions Trading System. The continuation of the process starting with setting the cap is as follows:

• Within the cap, allowances giving the right to emit the equivalent of one metric ton of carbon dioxide are put up for sale through auctioning. Allowances, which can be given to some companies free of charge, can in some cases be purchased from the open market.

• The price of the allowance is affected by market conditions as well as the audit rules in the system. Lowering the cap every year causes allowance prices to rise. Companies wishing to avoid this situation, which creates extra costs, can take quick action by setting emission reduction targets.

• Companies are obliged to acquire allowances that fully cover their annual emission amounts. If the limit is exceeded, firms are penalized by the ministry of trade of the relevant country. Companies are also obliged to report their annual emission amounts.

• When a company does not use up all of its annual emission allowances, it can sell the remaining amount or save it for use the following year.

Since 2013, over 175 billion euros in revenue has been generated from the sale of allowances. These revenues, which mainly go into national budgets, are mostly used to support renewable energy investments and energy efficiency projects.

What Are the Advantages of the EU Emissions Trading System?

The EU Emissions Trading System provides significant benefits in terms of emissions reduction, sustainable growth, encouraging innovative technologies, and creating new business models:

Reducing Emissions

In the first quarter of 2023, total greenhouse gas emissions from EU economies amounted to 931 million tons. This figure was measured at 894 million tons in the first quarter of 2024, representing a 4% decrease. Eurostat data dating from 1990 to the present can make the effects of the system easier to see. The amount of emissions, estimated at over 4,704 thousand tons in 1990, decreased to levels of 3,248 thousand in 2022.

Sustainable Growth

The figures show that reducing emissions is not a barrier to economic growth. While EU greenhouse gas emissions fell by nearly 3% in the first quarter of 2023 compared to the previous year, overall EU GDP grew by 0.1% and employment by 0.6%. An important part of the fight against climate change, the EU Emissions Trading System demonstrates that growth is possible while minimizing environmental harm.

Encouraging Innovative Technologies

The limitations imposed by the Emissions Trading System encourage companies to use renewable energy and innovative technologies in their production processes. This system, which enables environmentally friendly companies to gain prestige and makes them financially advantageous, ensures that the entire process proceeds transparently thanks to reporting and auditing.

Model Creation

Europe, being one of the world's leading regions in emissions, launching the Emissions Trading System and achieving positive results encourages non-EU countries to adopt similar practices. China, which generated 11.68 billion tons of emissions in 2020, accounting for approximately 32% of total global emissions, is at the forefront of countries adopting the Emissions Trading System as a model. China, which launched its own Emissions Trading System in 2021, has set targets to achieve carbon neutrality before 2060.

Calculation and Reporting Solution in the Alignment Process with the EU Emissions Trading System: QuickCarbon

Companies included in the EU Emissions Trading System gain advantages both in strengthening brand reputation and in financial benefits. If you want to transform your company into an environmentally friendly organization aligned with the EU Emissions Trading System, you can start by measuring your corporate carbon footprint. At QuickCarbon, we provide calculation and reporting services in accordance with the ISO 14064-1:2018 Standard and the GHG Protocol without requiring any consulting services.

With our user-friendly software, we visualize your data using multipurpose charts and help your business build sustainability plans. You can contact us to learn more about us and request a demo.