he European Union Emissions Trading System (EU ETS), was the first multi-state greenhouse gas emissions trading scheme in the world and remains by far the biggest. It was launched in 2005 to combat climate change and is a major pillar of EU climate policy.

As of 2013, the EU ETS covers more than 11,000 factories, power stations, and other installations with a net heat excess of 20 MW in 31 countries—all 28 EU member states plus Iceland, Norway, and Liechtenstein. The installations regulated by the EU ETS were, in 2008, collectively responsible for close to half of the EU’s anthropogenic emissions of CO2 and 40% of its total greenhouse gas emissions. It is based on a cap and trade system, modelled on the US SO2 emissions trading programme, that facilitates the most cost-effective emission reductions by allowing those with the lowest abatement cost to help others via trade.

Installations must account for their verified emissions on a yearly basis by submitting enough EU allowances to cover every tonne of verified emissions. The majority of industrial installations receive some free allowances each year to reduce the impact of the EU ETS but the free allocation will decrease over time in line with Europe’s internationally agreed targets. The cap and trade system allows installations to buy any additional allowances they require and also sell any surplus allowances thereby financially incentivising, for the first time, companies to make decisions that benefit the climate.