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International Emissions Trading

International Emissions Trading is a system where parties that have exceeded their emission reduction commitments under the Kyoto Protocol may sell excess “assigned amount units” (AAUs). Other parties may meet their own emissions reductions by purchasing these AAUs or offset credits from developing countries. The mechanism has resulted in several national and regional trading schemes, including the European Union Emission Trading Scheme (EU ETS).

In January 2005 the European Union GHG Emission Trading Scheme (EU ETS) started operation as the largest multi-country, multi-sector GHG trading system worldwide. Until now, it is the world‘s most advanced emissions trading system.

The EU ETS is implemented as a cap-and-trade system. An aggregate limit (cap) on the amount of a pollutant that can be emitted is established. The cap is represented by emission allowances which can be transferred (traded) among installations required to hold a number of allowances equivalent to their emissions. Installations which emit less than their individual cap allows are able to sell their surplus emission allowances – and vice versa. Thus, the buyer is paying a charge for polluting, while the seller is being rewarded for having reduced emissions. Plus, emissions are reduced where it costs least. The cap is lowered over time, aiming towards the national emissions reduction target. The EU ETS is based on the Emission Trading Directive (Directive 2003/87/EC), which entered into force in October 2003, and is implemented at an installation level.

This means that some 11,500 large emitters of carbon dioxide within the EU must monitor and report their CO2 emissions annually and are obliged to surrender a number of emission allowances (EUAs) and CERs/ERUs equal to the total emissions from their installation during the preceding calendar year by 30 April at the latest. Installations currently covered by the ETS are collectively responsible for close to half of the EU's emissions of CO2 and 40% of its total greenhouse gas emissions.

Since January 2008, the EU ETS not only applies to the 27 EU Member States, but also to the other three members of the European Economic Area (EEA) – Iceland, Liechtenstein and Norway. In July 2008, the EU ETS Directive was amended to bring the aviation sector into the system from 2012 onwards (see Directive 2008/101/EC). In order to become clearer the position of EU-ETS in the global Carbon Market, an overall diagram is given below.