What is the function of the EU Emissions Trading System (EU ETS)?

The EU Emissions Trading System (EU ETS) is a cornerstone instrument of the European Union’s climate policy.

Below we show you the collaboration in video format in case you are interested:

The main functions of the Emissions Trading Scheme are:

1. Reduction of greenhouse gas emissions: The EU ETS sets a cap on the total emissions from certain economic sectors, which is progressively reduced to achieve the EU’s emission reduction targets.
2. Creation of economic incentives: By putting a price on carbon, it incentivizes companies to invest in clean technologies and reduce their emissions. Companies can sell their surplus allowances, while those exceeding their cap must purchase additional allowances.
3. Promotion of innovation: The system encourages investment in low-carbon technologies and energy efficiency.
4. Implementation of the “polluter pays” principle, as outlined in Article 191(2) of the TFEU: The Union’s environmental policy aims to achieve a high level of protection, considering the diverse situations in different regions of the Union. It is based on the principles of precaution and preventive action, the principle of rectifying environmental damage at the source, and the “polluter pays” principle.
5. Generation of revenue for climate policies: Revenue from the auctioning of emission allowances can be used to fund climate change mitigation and adaptation policies.
6. Prevention of carbon leakage: Through mechanisms such as the free allocation of allowances to at-risk sectors and the future Carbon Border Adjustment Mechanism (CBAM), it aims to prevent the relocation of industries to countries with less stringent climate policies.
7. Price signal for the entire economy: The carbon price established under the EU ETS serves as a reference for other sectors and policies, influencing investment decisions beyond the directly covered sectors.

If you liked this article, you may also find it interesting to read the following one:

What are Carbon Credit Buffers and How Do They Operate in Relation to Emission Risks?