GE-1:EU emissions trading system (EU ETS)

Policy Description

The EU Emissions Trading System (EU ETS) is a cornerstone of the European Union's policy to mitigate climate change and its key tool for reducing industrial greenhouse gas emissions cost-effectively. The EU-ETS officially began on January 1, 2005 and consists of a “warm-up” phase (phase I) from 2005-2007 and then successive periods, with the second phase (phase II) from 2008-2012 set to coincide with the Kyoto compliance period and the third phase from 2013-2020. The EU ETS sets a cap on total direct GHG emissions for its participants (mostly energy generation and heavy industry in participating countries).



The EU Emissions Trading System (EU ETS) is a cornerstone of the European Union's policy to combat climate change and its key tool for reducing industrial greenhouse gas emissions cost-effectively [1]. The EU-ETS officially began on January 1, 2005 with a “warm-up” phase (phase I) from 2005-2007. The second phase (phase II) from 2008-2012 was set to coincide with the Kyoto compliance period [2] and phase III runs from 2013 to 2020.  The EU ETS sets a cap on total direct GHG emissions for its participants (mostly energy generation and heavy industry in participating countries (*1)(*2).

Phases I and II (2005-2012)

Individual participants in phase I and II get a number of emission allowances for free and can buy additional allowances if they need more, assuming other participants have spare allowances to sell. The price of the allowances is aimed at influencing participants' decision to invest in emission reduction measures or to buy allowances when they are faced with a shortage of allowances compared to their actual emissions. In phases I and II, each country determines the total amount of allowances available for its national participants, but allowances can be traded internationally (i.e. there is no national cap on emissions).

The EU ETS phase I and II covers CO2 emissions from some 11,000 installations (see Target Group). Nitrous oxide emissions from certain processes are also covered. Between them, the installations currently in the scheme account for almost half of the EU's CO2 emissions and around 40% of its total greenhouse gas emissions.

Phase III (2013-2020)

The system for allocating emission allowances in the current phase of the EU ETS (phase III) has changed significantly compared to the two previous two phases (2005-2012). Emission allowances will be distributed according to fully harmonised and EU-wide rules, meaning that the same rules will apply across all EU Member States. A centralised EU-wide cap on emissions was introduced to ensure a more consistent approach across the EU, rather than country specific caps. The EU-wide cap is set at 2.04 billion tonnes of CO2 in 2013 and  will reduce by 1.74% each year, delivering an overall reduction of 21% below 2005 levels by 2020 [10].

For the power sector, allowances are primarily auctioned meaning that the majority of allowances under the EU Emissions Trading System will not be allocated for free. Sectors that are considered to be at risk of carbon leakage will receive 100% of their allowances for free. Sectors that are not considered at rik of carbon leakage will receive 80% of their allocation for free in 2013, declining annually to 30% in 2020 and 0% (i.e. full auctioning) in 2027.

The scheme has been expanded in Phase III to include petrochemicals, ammonia, and aluminum sectors; nitrous oxide emissions from acid production; and PFC emissions from the aluminum sector. Aviation emissions were also included in 2012, both for flights within Europe and those flying in and out of Europe. However, due to strong opposition from other countries, inclusion of the latter emissions has been suspended. A decision is expected in late September 2013 [8]

A few of the final product benchmarks for post 2012 EU ETS are included in the list below. For the full list see [9]. Note that this is based on a carbon leakage status for these products for the year 2013 and 2014 and that the full definitions and included processes can be found in the full list [9].

·        Coke: 0,286 allowances / tonne

·        Hot metal: 1,328 allowances / tonne

·        Aluminium: 1,514 allowances / tonne

·        Grey cement clinker: 0,766 allowances / tonne

·        White cement clinker: 0,987 allowances / tonne

Policy Information Expand this section for information on the key features of the policy, such as its date of introduction, categorization, main objective(s) and linkages with other policies.

Policy Categorisation

Policy Instrument Type: Economic, Emissions Trading, Administrative

Position in the Pyramid

About Us

Participation: Mandatory


Start Date: 2012

Policy Linkages

Supported By Voluntary agreements with German industry Effort Defining
Supported By KfW Environmental and Energy Efficiency Programmes (formally ERP) Supporting Measure
Supported By CHP Law (Kraft Wärme Kopplungsgesetz) Supporting Measure
Supported By BMU environmental innovation programme Supporting Measure
Supported By 30 Pilot Network Project Supporting Measure

Agencies Responsible

German emissions trading authority (DEHSt)

Primary Objective: GHG Emissions


To reduce GHG emissions in Europe at lowest cost (through trading)

Target Group

Until 2013: Refining: iron & steel, ceramics, pulp & paper and combustion installations (power plants as well as in industry) above a threshold size. As of 2012 also aviation, as of 2013 also non-ferrous metals, chemicals, installations for carbon capture and storage (*6).

Driver of energy consumption or emissions affected by policy: Total GHG emissions.

Implementation Information Expand this section for information on targets, monitoring, verification and enforcement regimes, and implementation requirements and tools.


48%-50% of national GHG emissions over the period 2008-2011. In 2011 Germany had more than 1650 ETS participants registered.

Quantitative Target? yes

Target: Up to the year 2012 Germany must achieve emissions reductions of 17 million tonnes of CO2 to meet the Kyoto goal. Of these 17 million tonnes, 10 million tonnes of CO2 must be reduced by the energy sector and industry. [5]

Progress Monitored? yes

Verification Required? yes

Enforced? yes

Sanctions:  Penalty: €100/t CO2 not surrendered + make up shortfall  Possibly revoking of permit to emit

Requirements on the Target Group

  • Obtain an emission permit for GHG emissions (subject to approved monitoring protocol)
  • Annual monitoring and reporting of emissions according to harmonised rules
  • Surrender each year enough allowances to cover the emissions of the previous year

Support by Government

Government has set up various programs to achieve actual emission reductions, see policy linkages.

Implementation Toolbox

  • Virtual post office for secure and legally binding digital communication on EU-ETS matters between DEHSt and ETS participants
  • Electronic interface for the application data transfers’
  • Free software for the preparation of allocation applications (Form Management System, a server based application)
  • Helpdesk
  • Manual on emission monitoring (Umweltbundesamt), sample monitoring plan and Industry specific examples of monitoring plan.
  • List of accredited verifiers
  • Guidelines for the compilation of CO2 emission reports

Complexity of Implementation


In phase 1 and 2 National Allocation Plans (NAPs) had to be developed, BaU scenarios and improvement potential for a large variety of industry had to be judged on their accuracy, and competitiveness issues had to be taken into account in allocations Further arrangements for new entrants reserves and possible auctions had to be made, etc. In phase 3 (from 2013) National Implementation Measures (NIMs) must be developed in which the individual application for free allowances by industries must be checked (taking into account competitiveness issues, performance criteria etc.) and auctions need to be arranged (in case the choice is made to organise this nationally).

Target Group

Operators have to develop explicit scenarios of production and emissions, develop benchmarks, submit a monitoring protocol and -optionally- participate in auctions. In phase 3 in addition industries have to complete the tool that was developed for the NIMs with detailed sub-installation data in order to calculate free allowances.

Impacts, Costs & Benefits Expand this section to find information on policy effectiveness and efficiency.

Impact Quantitative Estimate Qualitative Estimate
Estimated effect on energy consumption or emissions ­- Total emissions of the approximately 1630 EU ETS installations in 2010 were 454 MT CO2, which was approximately 6% higher than in 2009. The 2010 emissions were still below 2008 levels, so that emissions in the second trading period in total have reduced. [3] - In 2009, the EU ETS participants have emitted 9.4 per cent fewer CO2 emissions compared to the previous year. The emissions trading sector affirms the overall trend announced by the Federal Environment Agency (UBA) in early March 2010, according to which the financial and economic crisis has led to the steepest decline in climate gas emissions in 60 years. The greatest share in reduction within the emissions trading industry can also be traced to declines in production resulting from the economic downturn in 2009. [4]
Estimated costs/benefits for industry Not available ­From 2013 energy-intensive industries continue to receive a free allocation on the basis of EU-wide benchmarks. The free allocation for industrial plants is reduced from year to year: from a maximum of 80% in 2013 to 30% in 2020 - always on the basis of results obtained by product-specific benchmarks. 2027 at the latest, industry should not receive any more free allocation. In the 3rd Trading period to 2020, exemptions are applied to sectors that are affected by carbon leakage, which will continue to receive 100% free allocation of allowances. [7]
Estimated cost for government The German Law to implement the EU ETS (TEHG) specifies that participating companies must pay cost-covering fees for services by the DEHSt, making the administration of the EU ETS cost neutral for the German government. [6]

References & Footnotes


[1] European Commission, Climate Action, European Union Emissions Trading System:


[3] DeHSt, Emissionshandel setzt Anreize für Klimaschutz, 018/2011,

[4] UBA, Press information 022/2010,

[5] BMU Press release No. 087/04, Berlin, 31.03.2004,

[6] DEHSt, Gesetz zur Umsetzung der Richtlinie 2003/87/EG über ein System für den Handel mit Treibhausgasemissionszertifikaten in der Gemeinschaft.

[7] Umweltbundesamt: Daten zur Umwelt:

[8] European Commission (2012). Press Release. “Stopping the clock of ETS and aviation emissions following last week's International Civil Aviation Organisation (ICAO) Council”. Available at

[9] European Commission (2011). Decision of 27.4.2011: determining transitional Union-wide rules for the harmonized free allocation of emission allowances pursuant to Article 10a of Directive 2003/87/EC.


(*1) Emissions from sources owned or operated by a reporting installation: combustion, process emissions and fugitive losses.

(*2) Currently 27 EU Member States + Norway, Iceland and Liechtenstein.

(*3) For industry and heating sectors, allowances will be allocated for free based on (greenhouse gas performance-based) benchmarks. Benchmarks reflect the average performance of the 10% most efficient installations in a sector or subsector in the EU in the years 2007-200. Installations that meet the benchmarks will in principle receive all allowances they need. Installations that do not meet the benchmark will have a shortage of allowances and the option to either lower their emissions (e.g. through engaging in abatement) or to purchase additional allowances to cover their excess emissions. For further information on benchmarks, see

(*4) This includes measures to further strengthen systems for monitoring, reporting, verification and accreditation in support of the EU Emissions Trading System.

(*5) Note on AGencies responsible: Overall responsibility is the Federal Environment Agency (UmweltBundesAmt - UBA).

(*6) See Annex I of the original Directive (2003) and Annex I of the revised Directive (2009).

(*7) Further information available on website of DEHSt.

Other Useful Resources

EU Transaction Log

The European Commission has an online database containing information about emissions, allocations and transfers for every installation in the EU. The database is updated regularly with information from each country’s national registry.

EU Emissions Trading Scheme Fact-sheet

A fact-sheet on the background of the EU Emissions Trading Scheme provided by the EU Commission.