European Union Emission Trading Scheme
The European Union Emissions Trading System (EU ETS), also known as the European Union Emissions Trading Scheme, was the first large emissions trading scheme in the world. It was launched in 2005 to combat climate change and is a major pillar of EU climate policy. As of June 2012, the EU ETS covers more than 11,000 factories, power stations, and other installations with a net heat excess of 20 MW in 30 countries—all 27 EU member states plus Iceland, Norway, and Liechtenstein. The installations regulated by the EU ETS are collectively responsible for close to half of the EU's emissions of CO2 and 40% of its total greenhouse gas emissions.
Installations must monitor and report their CO2 emissions, because every year they must return leftover emission allowances to the government. In order to neutralize irregularities in CO2-emission levels due to extreme weather events (harsh winters or very hot summers), emission credits are doled out for a period of several years, called a "trading period". The first ETS trading period lasted three years, from January 2005 to December 2007. The second trading period began in January 2008 and spans a period of five years, until December 2012. The third trading period will run from January 2013 to December 2020.
Installations currently receive trading credits from their national allowance plans (NAPs), administered by the governments of participating countries. If carbon emissions exceeds what is permitted by its credits, a factory can purchase trading credits from other installations or countries. Conversely, if an installation has performed well at reducing its carbon emissions, it can sell its leftover credits for money. This allows the system to be more self-contained without necessitating too much government intervention.
In January 2008, the European Commission proposed a number of changes to the scheme, including centralized allocation by an EU authority (as opposed to national allocation plans), a turn to auctioning a greater share (more than 60%) of permits rather than allocating freely, and inclusion of other greenhouse gases, such as nitrous oxide and perfluorocarbons. These changes are still in a draft stage.
Compared to the 2005, when the EU ETS was first implemented, the proposed caps for 2020 (the final year of the third trading period) foresee a 21% reduction of greenhouse gases. The EU ETS has recently been extended to the airline industry as well. These changes took place starting January 2012.
Read more about European Union Emission Trading Scheme: Mechanisms, Phase I, Phase II, Phase III, Costs, Overall Emission Reductions, Inclusion of Sinks, 28 Million Euro Cyberfraud, Views On The EU ETS
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