Politically defined limits contribute to determining the price of greenhouse gas emissions on the market. In this way, emissions trading provides a catalyst for investments that promote climate-friendly technologies.
Explanatory film about the European Emissions Trading System
Our explanatory film shows how emissions trading works and focuses with specific emphasis on its characteristics in the European Emissions Trading System 1 (EU ETS 1) (as of 2020).
Emissions Trading – Economics and Climate Protection
Production: joernbarkemeyer.de
Emissions Trading and Climate Protection
The European Emissions Trading System 1 (EU ETS 1) was introduced in Europe as a result of the Kyoto International Agreement on Climate Change. At Kyoto in 1997, the participating parties agreed for the first time on internationally binding stabilisation and reduction targets for greenhouse gas emissions in industrialised countries.
In December 2015, at the UN Climate Conference in Paris, the ‘Paris Climate Agreement’ was adopted, in which the participating countries agreed to take further measures to limit global warming to well below 2 degrees Celsius.
With regard to the scope of EU ETS 1, this translates to a reduction of 62 percent compared to emission levels in 2005. The changes in EU ETS 1 also include a faster reduction in the annual Emissions cap, increasing by 4.3 percent per year, and rising to 4.4 percent from 2028 onwards instead of the previous 2.2 percent, as well as changes to the Market Stability Reserve (MSR) to limit excesses. In addition, the European Carbon Border Adjustment Mechanism (CBAM) was introduced as part of the ‘Fit for 55’ package.
Other measures include
- the inclusion of maritime transport in EU ETS 1 from 2024,
- adapting the scope for aviation in EU ETS 1, and
- the inclusion of the buildings, transport and additional sectors in emissions trading (EU ETS 2)
Detailed information on the reform of European Emissions Trading System can be found here.
The EU ETS is also an important financial instrument for climate investment. 100 percent of the proceeds will be used in an active economic and social support for the transformation to climate neutrality. In Germany, the proceeds flow into the Climate Transformation Fund (KTF), which promotes climate protection projects, the expansion of renewable energies and the decarbonisation of industry.
How does emissions trading work?
For example:
Who participates in emissions trading?
European emissions trading (EU ETS 1 and, from 2027 on, EU ETS 2) will be implemented in all 27 EU Member States. Norway, Iceland and Liechtenstein have also joined EU ETS 1. With the exception of a few installations in Northern Ireland, the United Kingdom of Great Britain and Northern Ireland (hereinafter referred to as United Kingdom) has not participated in EU ETS 1 since the beginning of 2021 and has introduced its own emissions trading system. EU ETS 1 is linked to the emissions trading system in Switzerland.
Below you will find a brief overview of the sectors participating in EU ETS 1.
Emissions trading key figures in Germany and Europe
Europe | Germany |
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All installations covered by the EU ETS 1 emitted around 1.09 billion tonnes of CO2eq in 2023. | DGermany's 1,725 stationary installations emitted about 289 million tonnes of CO2eq in 2023. |
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Emissions from EU ETS 1 installations dropped by around 48 percent between 2005 and 2023. | Emissions from German installations in the EU ETS 1 dropped by around 44 percent between 2005 and 2023. |
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Emissions from intra-European air traffic increased by 8 percent to 52 million tonnes of CO2eq in 2023. | German-administered 71 aircraft operators emitted 7.6 million tonnes of CO2eq in 2023. |
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The EU ETS 1 covers around 40 percent of the EU’s total greenhouse gas emissions. | |
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EU ETS 1 covers 9,000 stationary installations such as power plants, refineries and steel mills. | |
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In 2023, Norway, Iceland and Liechtenstein participated in emissions trading in addition to the 27 Member States. |