To address the issue of climate change and assist its member countries with achieving their commitments under the Kyoto Protocol, the European Union (EU) has developed a multi-country, multi-sector trading scheme that involves the exchange of greenhouse gas emission allowances. The implementation of the European Union Emission Trading Scheme (EU ETS) is rapidly approaching and many companies are already working toward meeting its requirements. Responding to interest and concern regarding this issue, we have included some of the more frequently asked questions on this topic and hyperlinks to First Environment’s responses below:
Established by a Directive of the European Council, the EU Emission Trading Scheme (EU ETS) creates the framework for an EU-wide cap and trade program for greenhouse gases. The EU ETS requires member countries to develop national allocation plans which result in GHG reduction at facilities with specific GHG emitting activities. These facilities are identified as “installations.”
Under the Scheme, an installation must obtain a permit and will be issued a certain amount of GHG emission allowances by its host country according to that country’s national allocation plan. At the end of each year, an installation must submit to its host country government emission allowances equal to its verified emissions. To obtain allowances equal to emissions, participants can buy allowances from other participants through emission trading transactions.
As signatories to the Kyoto Protocol, EU countries have commitments to reduce GHG emissions. Although the Kyoto Protocol identifies national GHG reduction targets and provides some general guidelines, it leaves development of a specific approach to meeting the target with each individual participating country. The EU ETS is the European Union’s plan and program to create emission reductions at the facility level to meet its Kyoto GHG reduction commitments.
The EU ETS is currently structured around two periods. The initial period is scheduled to begin on January 1, 2005 and continues until December 31, 2007. The second period runs from January 2008 through December of 2012. This second period coincides with the first commitment period of the Kyoto Protocol. After the second period, there are expectations of additional 5-year periods of the Scheme.
During the first period (see question above), the EU ETS will only address emissions of carbon dioxide. Other greenhouse gases may be incorporated into the Scheme in future periods.
EU ETS requirements apply to facilities whose operations include:
Other GHG producing activities may be incorporated into the Scheme in future periods.
Each EU country is responsible for issuing emission allowances to the installations within its borders according to its national allocation plan. Each national allocation plan uses a slightly different approach for doing this and so baseline methods are country specific. In general, countries consider the historical emissions of installations from 1998 through 2002 or some subset of this period.
At the end of each year, an installation must submit a report that identifies its CO2 emissions, which it has determined through direct measurement or it has calculated according to standardized and accepted methods. An accredited, independent third party must verify these emissions values before they are reported to the government. The verified emissions identify the number of allowances that an installation must submit to its host country government in order to be in compliance.
The EU ETS is a national program for reducing GHG emissions to meet commitments contained in the Kyoto Protocol. It is important to note that since it is part of EU legislation, the EU ETS will operate independently of the Kyoto Protocol’s entry into force.
The EU ETS may also connect to the Kyoto Protocol’s flexible mechanisms of Joint Implementation (JI) and the Clean Development Mechanism (CDM). Under the Kyoto Protocol, these mechanisms reward projects that reduce GHG emissions with credits that can be used toward meeting Kyoto reduction targets. Joint Implementation provides credits for reduction projects located in developed countries while the CDM rewards projects that occur in developing countries. Another EU Directive, known as the Linking Directive, allows JI or CDM credits to be converted by member countries into allowances usable for EU ETS compliance.
Companies that have operations in European countries that are classified as installations will be subject to the requirements of the EU ETS. These installations will need to obtain the requisite permits, report the verified emissions and submit allowances. Efficient facilities may be able to sell unneeded allowances in the emission markets, creating a new source of revenue for their operations.
Other entities that generate certified emission reductions (CERs) from CDM projects may use these credits to comply with EU ETS requirements or may sell these credits to other EU ETS participants.
The EU ETS may also result in requirements on the products and services of companies operating outside the EU but exporting these products and services into it, though whether and what requirements may result from this situation are still only speculation.
Further information on the EU ETS can be obtained from the following sources:
First Environment Inc.
770 L Street, Suite 950
Sacramento, CA 95814
A website for the EU Emission Trading Scheme is: