Who participates in emissions trading?
Emissions trading has been introduced in all EU Member States. In addition, Norway, Iceland and Liechtenstein have joined the European Emissions Trading Scheme (EU ETS).
Emission intensive facilities (stationary area)
How many emission allowances does an installation need?
In emissions trading allowances are traded. These emission allowances relate to the climate impact of one tonne of carbon dioxide (carbon dioxide equivalent CO2eq). The emission allowances are also called "certificates" and abbreviated to EUA (for EU Allowance).Each operator must surrender such allowances for the emissions of its installations subject to emissions trading. For this purpose, each operator has an emission allowance account in the EU Emissions Trading Registry, also called Union Registry.
It is billed in calendar years. By the end of March, operators will determine the greenhouse gas emissions of their installations during the previous year. These data are first checked by nationally accredited verifiers (e. g.) TÜV and other large testing organisations) and only then forwarded to the Union Registry. The operator must surrender appropriate emission allowances to the Union Registry by the end of April at the latest.
If insufficient emission allowances are surrendered, major sanctions are threatened: for every tonne of CO2eq that has no emission allowance surrendered, 100 euros must be paid (adjusted for inflation) (based on 2012). Operators therefore make sure that they have sufficient allowances by the 30/04 at the latest. If they do not have enough emission allowances, they can buy them or bid for them beforehand on the energy exchanges in Leipzig (EEX) or London (ICE).
How is the total amount of emission allowances determined and brought to market?
Provision of emission allowances
For each trading period an initial emission reduction target is specified in order to establish a specific quantity of emission allowances. Mostly the English term "cap" (upper limit) is used. This then determines how the emission allowances are provided.
For the current third trading period (2013-2020), a Europe-wide cap totalling 15.6 billion emission allowances was approved. These allowances were distributed over the eight years of the trading period, but not uniformly. In fact, the amount was reduced annually by around 38 million tonnes compared to the previous year. In the last trading year, an emission reduction of 21 percent compared to the 2005 emissions should be achieved.
Some of the allowances will be partly auctioned off and partly allocated free of charge. The auctions take place on the stock exchange. The free allocation of allowances is based on product emission values ("benchmarks"). These specify how much CO2eq the most efficient installations emit in producing one tonne of product (e. g. one tonne of aluminium). As a rule, the allocation amount is calculated using the production quantity of the installation.
The following rules apply:
- For power generation, 100 percent of allowances must be acquired on the market as there is no longer any free allocation. Exceptions apply to power generation in some European transition states.
- A part of industrial and heat production receives free allocations that are expected to decrease from 80 percent in 2013 to 30 percent in 2020 (each based on the product benchmarks described above, i. e. the amount of emissions from efficient production).
- If products are manufactured where a “carbon leakage risk” is assumed, there is a largely free allocation for the production plants. Carbon leakage refers to a shift in production processes and thus greenhouse gas emissions to non-European countries due to the costs of European emissions trading. The products subject to this risk are specified by the European Commission in the Carbon Leakage List.
- There is also a cross-sectoral correction factor which ensures that free allocation for the industry does not exceed a certain part of the cap (industrial cap). For the free heat allocation, the linear reduction factor applies.
As a result, the above regulations result in up to 50 percent of the Europe-wide cap of the third trading period being available for free allocations.
The remainder will be auctioned or held in the Market Stability Reserve (MSR), potentially available for future auctions. Due to the agreed cuts in auctions and the shifts into MSR, less than 50 percent of the emission allowances effectively issued in Europe will be auctioned in the third trading period. The basic principle "auctioning as a basic allocation rule", which was planned for the third trading period, will only be implemented for power generation. However, the free allocation to industry will not decline during the trading period as originally envisaged as nearly all sectors of industry are currently on the Carbon Leakage list.
The allowances for aviation are also provided via free allocations as well as via auctions.
How is trading in emission allowances carried out?
Emission allowances are traded primarily on the trading venues in London (ICE) and Leipzig (EEX). Smaller volumes are also traded on other stock exchanges. There is also a relevant off-exchange trading. The auctions, i.e. the auctioning of emission allowances, currently take place exclusively on the EEX and the ICE.
Auctions take place nearly every day. This regularity ensures that the auctions fit seamlessly into the market activities. Consequently, the prices obtained at the auctions correspond to the level of prices in the ongoing stock market trading.
All auction results will be published online within a few minutes. This provides the highest possible market transparency. The entire market for emission allowances is regularly described in auction reports by the German Emissions Trading Authority (DEHSt).
These reports deal not only with the auctions, but also with the much larger volume of continuous trading on the stock exchanges. In terms of the relevant overall market for emission allowances, about 13 percent of the traded volume was attributable to auctions in 2017 (2016: 11 percent).
The prices for emission allowances are based on supply and demand. While the unused emission allowances became invalid at the end of the first trading period, for the 2nd trading period surplus emission allowances can be transferred to the following trading periods. Therefore, many market considerations began at the start of the second trading period in 2008.
Due to generous caps and lower emissions due to a decline in production as a result of the economic crisis of 2008/2009 as well as high utilisation rates for international project credits, a surplus of emission allowances accumulated in the second and third trading periods. This has led to a corresponding decline in price.
To reduce the surpluses, a total of 900 million emission allowances were withheld from the auctions between 2014 and 2016 (backloading).
In order to permanently reduce surpluses and respond to peaks in demand, the Market Stability Reserve (MSR) will be introduced in 2019. The MSR reduces the volume of annual auctions if there are too many emission allowances in circulation. Alternatively, it increases them to a limited extent if there are too few emission allowances in the market. The emission allowances that were set aside as part of backloading are transferred directly to the Market Stability Reserve (MSR).
How can companies take advantage of emission reductions in other countries?
The Kyoto Protocol allows developed countries to meet some of their reduction commitments by implementing emission reduction projects abroad. The reductions thus achieved are then credited towards their own national reduction obligation.
There are two types of projects: Joint Implementation and Clean Development Mechanism. However, both will cease together with the Kyoto Protocol in 2020.
Companies can also undertake such projects and use the emission reduction certificates issued to cover their greenhouse gas emissions or sell them on the market. From 2021, new market mechanisms will be introduced in accordance with the Paris Agreement, but their specific form remains open.
Where are the emission allowances recorded?
All stakeholders participating in emissions trading – predominantly companies subject to emissions trading but also parties not subject to ETS compliance such as trading houses/banks – have an account with the EU Emissions Trading Registry, also called Union Registry.
All emission allowance transactions such as allocations, purchases, sales, and emission allowance surrenders are recorded on these accounts. The Union Registry is operated by the European Commission. The states involved in emissions trading have their own areas where they administer the accounts for which they are responsible.
For Germany, the German Emissions Trading Authority (DEHSt) administers around 2,750 accounts in the Union Registry. In this role, for example, it handles German applications for opening accounts and issues emission allowances.
Find out more about the Emissions Trading Registry by following the link on the right-hand side of the screen (in the Online Services menu).
State participants – how are tasks distributed in the course of emissions trading?
The day-to-day operation of the European Emissions Trading is ensured by the European Commission and the competent national authorities. In doing so, the Commission makes the EU Emissions Trading Registry available and examines and approves the free allocations in European countries. Emission allowances are issued by the competent national authorities.
As the competent national authority, the German Emissions Trading Authority (DEHSt) is responsible for the following: free allocation to German installation and aircraft operators, monitoring of emissions trading with all rules and obligations for installation and aircraft operators, control of German auctions and much more. Every year in the first quarter, DEHSt reviews the emissions reports of companies and administers the German accounts in the Union Registry. It is subject to the legal and technical supervision of the Federal Ministry of the Environment (BMU).