The EU Emissions Trading Scheme (ETS) is the main policy being introduced EU-wide to tackle emissions of carbon dioxide and other greenhouse gases, and combat the threat of climate change. (See the Climate change section of the DECC website)
The basic premise of a trading scheme is that if a company keeps its emissions below a target level for a specific period, it is able to sell the surplus emission allowances to companies which find it more costly to limit their emissions In this sense, companies are encouraged to seek the most cost-effective methods of abatement.
In the case of climate change, this means the buying and selling of ‘permits’ to emit carbon dioxide. Permits are distributed to companies which commit to meeting an allocated emissions target. Those companies that can reduce emissions at low cost, going beyond their target, will be able to sell (or bank) the excess to companies that find it more difficult or expensive to reach their target. Those companies with high reduction costs can buy the extra permits to balance their emissions and target.
For example, take two companies both of which emit 100 units and both have target levels and allocations of 90. Company A invests in technology that reduces its emissions to 80 and can then sell 10 allowances to company B which cannot or has not reduced its emissions.
The EU ETS commenced on 1 January 2005. The first phase ran from 2005 to 2007 and the second phase will run from 2008 to 2012 to coincide with the first Kyoto Commitment Period. Further five-year periods are expected subsequently.
The Scheme will work on a ‘cap and trade’ basis. EU member state governments are required to set an emission cap for all installations covered by the Scheme.
Each installation will then be allocated allowances for the particular commitment period in question. The number of allowances allocated to each installation for any given period (the number of tradable allowances each installation will receive) will be set down in the National Allocation Plan.
Individuals and organisations not covered by the scheme will be able to open an account to buy and sell allowances at the emission registry website www.emissionregistry.gov.uk. Advice on opening a registry account is available on the Environment Agency website.