Legislation

International Basis

Emissions Trading in the European Union started on 01/01/2005. It is not a detached system but an approach within the international efforts regarding global climate protection.

The Kyoto Protocol was adopted in 1997 at the Member State Conference in Kyoto and is an additional protocol to the United Nations Climate Framework Convention on Climate Change (UNFCCC). The Kyoto Protocol entered into force on 16/02/2005 and is the basis of the European Emissions Trading System (EU ETS). A total of 190 countries participate in the Kyoto Protocol, the stipulated reduction commitments are binding under international law for each of the 37 industrialised countries. The first commitment period (2008-2012) was followed by the second commitment period on 01/01/2013. The size of the reduction targets for this second period is currently being internationally negotiated.

The commitments apply to the following seven greenhouse gases:

  • Carbon dioxide (CO2)
  • Methane (CH4)
  • Nitrous oxide/Laughing gas (N2O)
  • Hydrofluorocarbons (HFCs)
  • Perfluorocarbons (PFCs)
  • Sulphur hexafluoride (SF6)
  • Nitrogen trifluoride (NF3) (from 2013)

Various Instruments

The Kyoto Protocol describes several instruments for the reduction of these greenhouse gases in industrialised countries. Lowering the domestic emissions is a priority. Additionally, there are the so-called Flexible Mechanisms which can be used by countries as well as companies and individuals to comply with the country’s commitments.

These are:

  • Joint Implementation (JI)
  • Clean Development Mechanism (CDM)
  • International Emissions Trading between states

The international trade with emission allowances is an essential instrument for industrialised nations to meet their commitments as set out in the Climate Framework Convention and the Kyoto Protocol. Kyoto Emissions Trading takes place at the national level with the basic idea of creating a flexible “cap and trade” scheme, which works as follows: each industrialised country is assigned a specified amount of allowances (Assigned Amount Units, AAUs). The number of these allowances defines the quantity of greenhouse gas emissions – thus, they entitle the respective country to emit a specified and limited quantity of greenhouse gases. If the actual emissions exceed the limit (the cap), governments have a choice. They can either take action in their own country to reduce emissions (such as setting incentives for technological innovation), or they can buy additional allowances from other industrialised countries. Allowances (AAUs) become available if a country does not use up its emission budget and sells its surplus allowances. The result is an inter-state market for emission allowances. Further emission allowances can be earned by participating in the project-based, flexible mechanisms JI and CDM.

The European Emissions Trading System

The original proposition of emissions trading was to provide an additional instrument for industrial nations participating in the Kyoto Protocol to fulfil their national emission reduction commitments. In the Kyoto Protocol, the European Union committed itself to collectively lower emissions.

Burden Sharing

The then 15 European Member States made a commitment to reduce their emissions by 8 percent by 2012 based on the 1990 emissions (baseline emissions). In the so-called European Burden Sharing agreement, an individual reduction target was assigned to every Member State. Germany committed itself to reduce greenhouse gas emissions by 21 percent. The commitment within the Burden Sharing was based on the 2008-2012 emissions.

In 2009, the European Union specified further reduction targets for their Member States with Decision No. 406/2009/EC (so-called Effort Sharing Decision). Germany committed itself to a further reduction of 14 percent (based on the 2005-2020 emissions).

Company Level

To meet the agreed commitments, the European Union implemented the European Emissions Trading System (EU ETS) at company level. Participating companies now also receive a specified quantity of allowances once a year which they can sell or purchase i.e. trade them according to their emission status.

The Emissions Trading Directive (2003/87/EC) of 2003 constitutes the legal basis for this system. Furthermore, the so-called Linking Directive legally linked the Kyoto Protocol with the European Emissions Trading System. In this Directive, European Emissions Trading is linked with the Flexible Mechanisms of the Kyoto Protocol JI and CDM. Thus the companies in the European Member States can also use these instruments to acquire additional allowances abroad and with them partly fulfil their annual surrender obligation.

Since 01/01/2012, international air transport has also been part of the European Emissions Trading System. This was decided by the Directive 2008/101/EC, which amended the Emissions Trading Directive.

Registry System

The technical basis of the European Emissions Trading System (EU ETS) is a Europe-wide, electronic registry system, the so-called Union Registry. It is legally based on the EU Registry Regulation. This regulation contains essential requirements for the technical design of the Registry’s software as well as rules for reporting duties, account types, transaction types and security aspects. In the end, the Registry serves as a proof of compliance of the European and national reduction commitments according to the Kyoto Protocol.

Monitoring

One of the most important prerequisites for a working Emission Trading System is that all greenhouse gas emissions are reported and monitored according to the legal basis (in Europe the Emissions Trading Directive). There are several requirements in Europe for monitoring and reporting, which were defined by the so-called Monitoring and Reporting Guidelines in the first two trading periods and by the Monitoring and Accreditation and Verification Regulation in the third trading period.

Legal Implementation in Germany

The European Union’s legal requirements are implemented by the respective national laws and regulations of the European Member States.

The German Greenhouse Gas Emission Allowance Trading Act (TEHG) implements the Emissions Trading Directive in Germany. The TEHG is the national legal basis for the German participation in the European Emissions Trading Scheme together with other German statutory provisions of 2004.

The Linking Directive was implemented in Germany by the Project Mechanisms Act (ProMechG). On the basis of this law the companies subject to emissions trading in Germany can use the project-based mechanisms as instruments to reduce their reduction obligations and engage in JI and CDM projects. Furthermore, this law allows JI projects to be carried out in Germany

During the first two trading periods (2005-2007 and 2008-2012), the National Allocation Plan (NAP), the Allocation Act (ZuG) and the Allocation Regulation (ZuV) specified the quantity of emission allowances allocated to the companies subject to emissions trading in Germany as well as the respective rules of allocation.

The NAP as a macroeconomic plan, compiled by the individual Member States, defined the distribution of emission allowances at a national level, therefore, this plan was an essential basis for the actual allocation. The German Federal Government’s NAP was not an independent legislative provision but had to be approved by the European Commission. Afterwards, ZuG and ZuV implemented the approved plan legally.

The Third Trading Period 2013-2020

The third trading period started on 01/01/2013. It brought several changes in the structure of the European Emissions Trading System. The European Commission’s Directive 2009/29/EC amended the Emissions Trading Directive and constitutes the legal basis of the third trading period.

One of the most significant changes is the centralised allocation. This means that there are no longer any National Allocation Plans but a Cap determined by the European Commission and harmonised allocation rules for all Member States. The rules for allocation of free allowances are included in the European Commission’s decision of 27/04/2011. The Allocation Regulation 2020 (ZuV 2020) implements this decision in national law.

Please find a detailed overview of the different acts, regulations, decisions, directives and guidelines on the following pages.

Date: 18/02/2014

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