EU Emissions Trading System (EU ETS)

This card focuses on the method for calculating the overall emissions ceiling, or 'cap,' under the EU Emissions Trading System (EU ETS: Directive 2003/87/EC), and on the legal mechanism determining the Linear Reduction Factor (LRF) that sets the pace of the cap's annual decline. The EU ETS is a cap-and-trade system that sets an overall limit on greenhouse gas emissions from large industrial installations, power plants, and the aviation and maritime sectors within the EU, and allows emission allowances (EUAs) to be traded on a market basis. Under the directive amendments accompanying the EU's 'Fit for 55' climate legislative package, the LRF that reduces the cap each year has been dramatically raised from the previous 2.2% per year to 4.3% per year (2024–2027) and 4.4% per year (2028–2030), in order to cut emissions from ETS-covered sectors by 62% from 2005 levels by 2030. In addition, one-off cap adjustments directly reducing the overall EU-wide cap are carried out in 2024 and 2026.

This card focuses on the auctioning procedures for 'EUAs' (EU Allowances) under the EU Emissions Trading System, secondary market trading rules (through exchanges such as EEX and ICE, and OTC trading), and the requirements for extending the system's application to the maritime and aviation sectors. Under the EU ETS, EUAs are generally distributed through primary auctions conducted via the European Energy Exchange (EEX) and traded on secondary markets. From January 2024, large vessels of 5,000 gross tonnage (GT) or more calling at EU ports (the maritime sector) were formally brought within the scope of ETS obligations, with a phased requirement to purchase and surrender EUAs covering 100% of emissions from voyages within the EU and 50% of emissions from international voyages between the EU and non-EU ports. In the aviation sector as well, free allocation is being phased down in favor of full transition to auction purchasing, while aligning with CORSIA (the international aviation carbon offsetting scheme).

This card focuses on the allocation criteria for 'free allocation' to industrial sectors under the EU Emissions Trading System — based on product-specific carbon efficiency benchmarks — and on the schedule for the full phase-out of free allocation as the Carbon Border Adjustment Mechanism (CBAM) is introduced. To prevent carbon leakage (the relocation of manufacturing outside the EU), sectors at high risk of carbon leakage have traditionally received EUAs free of charge, in full or in part, based on 'benchmarks' set at the emission intensity of the top 10% most efficient installations producing each product. However, as CBAM begins operating as a level-playing-field mechanism that imposes a carbon cost on imported goods, free allocation for the six sectors covered by CBAM (such as steel, aluminum, and cement) will be reduced in annual stages from 2026 to 2034, ultimately reaching zero (full auctioning).