DOSSIER: EU Emissions Trading System (EU ETS)

Published 20:01 on January 1, 2016  /  Last updated at 13:08 on April 5, 2018  /  Dossiers  /  No Comments

This dossier unpacks all the main issues in the world’s biggest carbon market, including a comprehensive Phase 4 reform tracker and details on earlier phases, the impact of Brexit, price polls, the two ETS funds, market oversight and key legal cases. It also features a summary of key elements by the International Carbon Action Partnership (ICAP).

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Summary (ICAP)

ICAPlogoSummary provided by the secretariat of the International Carbon Action Partnership (ICAP), a multilateral forum working on carbon markets. For more information, visit ICAP’s website. Copyright © ICAP and reproduced with permission.

General information: Starting in 2005, the European Union Emissions Trading System (EU ETS) is the world’s first and largest carbon market and represents the central pillar of the EU’s climate change policy. The system covers close to half of the EU’s emissions across the 28 member states as well as Iceland, Liechtenstein and Norway. The EU ETS will operate with a Market Stability Reserve (MSR) from 1 January 2019. The MSR aims to address the current surplus of over two billion allowances, and improve the systems resilience to future shocks. Provisions for Phase IV are currently the subject of parliamentary debate, which is expected to conclude late in 2017.

Background information: Compliance in the EU ETS is mandatory for entities of covered sectors which are captured by the inclusion threshold. There is an absolute cap of 1,939 MtCO2e (2017, excluding aviation), which is reduced annually by a constant linear reduction factor (currently 1.74%). Aviation Sector Cap 210 MtCO2e for 2013-20.

Emissions coverage:

1,939 MtCO2e (2017) (45%)

Liable entities:


Sector Coverage:

Downstream: power, industry, domestic aviation

Gas coverage:

CO2, N2O, PFCs


Free allocation (around 60%) & auctioning (around 40%)


Offsets and credits:


1The EU ETS has restricted the use of offsets in Phase III. The use of offsets in Phase IV is not envisaged.

Phases & Compliance periods:

Phase I: 2005-2007

Phase II. 2008-2012

Phase III. 2013-2020

Phase IV: 2021-2030

Compliance Period: from 1 January until 30 April the following year (16 months).

Temporal Flexibility

Banking is allowed since 2008.

Borrowing across compliance periods is not allowed.

Provisions for price management:

Article 29a of the EU ETS Directive provides for measures in the event of excessive price fluctuations.

Market Stability Reserve (MSR): As of 2019, the MSR will start operating in the EU ETS. It aims to reduce the allowance surplus and improve the system’s overall resilience to future shocks. The MSR compliments the short term backloading arrangement where 900 million allowances were withheld from the market over the years 2014, 2015 and 2016.


The European Commission has concluded negotiations with Switzerland on linking the EU ETS with the Swiss ETS. However, the link will only become operational once the agreement will have been signed and enter into force.

For further information, visit the ICAP ETS Map.



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