Navigation and service

Understanding the European Emissions Trading System

Last update 22.02.2024

The EU Emissions Trading System (EU ETS 1) operates on a market economy basis to reduce emissions of climate-damaging gases in Europe.

Source: frentusha_istock

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

Text version

Emissions Trading and Climate Protection

To the topic

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:

Specifying the cap for emissions
Incentives to reduce emissions
Trade between companies
Emissions reduction by emissions trading

  • Emissions trading works according to the ’cap and trade’ principle. The government-set cap determines the maximum amount of CO2 equivalents in total that may be emitted by regulated companies. A cap that is ambitious in terms of climate policy ensures that CO2 becomes a scarce commodity and that a price for CO2 is formed on the market through trade, which gives companies an incentive to invest in more climate protection. After all, if it is more cost-efficient to avoid one tonne of CO2eq than to buy an allowance, it is worth taking technical measures to reduce emissions.

    Unlike rigid legal stipulations, which lead to varying levels of costs for the companies concerned, a market-based instrument such as emissions trading gives companies room to take their own decisions. They can decide for themselves whether they want to reduce emissions or buy additional allowances. This approach also yields economic advantages because the avoidance of emissions is mainly implemented by those companies that have the lowest avoidance costs.

    From a climate policy point of view, another advantage of emissions trading is that the establishment of a fixed maximum (cap) means the amount of emissions permissible at a certain point in time cannot exceed predetermined levels. To sum up, emissions trading is essentially characterised by the fact that it can achieve set environmental targets safely and at the most favourable economic costs. In addition, the revenues from emissions trading generate considerable financial leeway for active economic and socio-political support of the transformation to climate neutrality. However, other instruments such as regulatory law or funding policies have their own advantages. In practice, therefore, a mix of instruments is used.

  • In addition to the European Commission, the Federal Ministry of Economic Affairs and Climate Action (BMWK), the DEHSt and the states (Länder) are also involved in implementing European emissions trading in Germany. The European Commission operates the Union Registry and reviews and approves the amount of free allocations for companies in Member States. The DEHSt issues the allowances to the stakeholders' accounts.

    As the national competent authority, we are also responsible for monitoring emissions trading with all the rules and obligations for operators and aircraft operators, shipping companies, those responsible within the framework of EU ETS 2 and the management of German auctions in EU ETS 1 and much more. In the first quarter of every year we receive the companies' emissions reports, which we then review. We are subject to the legal and technical supervision of the Federal Ministry of Economic Affairs and Climate Action (BMWK).

    All transactions of allowances, which only exist virtually, take place through the Union Registry. In this centralised system, all participating stakeholders have an account in which they can hold their allowances and carry out transactions such as issuance, purchases, sales, cancellations and surrenders of allowances corresponding to the emissions generated. More information on the Union Registry can be found in the link below.

    The following applies to EU ETS 1: operators of stationary installations and aircraft as well as shipping companies determine their greenhouse gas emissions in the previous year by the end of March (those responsible within EU ETS 2 by 30 April). The data is first checked by nationally accredited Verifiers (e.g. TÜV and other large inspection organisations) and only then can they be forwarded to the Union Registry. Operators and shipping companies must surrender the relevant number of allowances to the Union Registry by the end of September at the latest (those responsible within EU ETS 2 by 31 May).

    If insufficient allowances are surrendered, companies risk severe sanctions: a penalty of 100 euros (plus the increase in the European Consumer Price Index for the reporting year compared to the reference year 2012) must be paid for each tonne of CO2eq for which an allowance has not been surrendered. For the 2022 reporting year, the amount of the penalty is already around 121 euros. Operators and shipping companies must therefore ensure that they have a sufficient number of allowances by the specified deadlines at the latest and surrender them. If they lack allowances, they can purchase more in advance, for example on the Energy Exchanges in Leipzig (EEX) or Amsterdam (ICE Endex).

    Further information can be found on our website under sanctioning or union registry

  • Emissions trading works according to the ’cap and trade’ principle. The government-set cap determines the maximum amount of CO2 equivalents in total that may be emitted by regulated companies. A cap that is ambitious in terms of climate policy ensures that CO2 becomes a scarce commodity and that a price for CO2 is formed on the market through trade, which gives companies an incentive to invest in more climate protection. After all, if it is more cost-efficient to avoid one tonne of CO2eq than to buy an allowance, it is worth taking technical measures to reduce emissions.

    Unlike rigid legal stipulations, which lead to varying levels of costs for the companies concerned, a market-based instrument such as emissions trading gives companies room to take their own decisions. They can decide for themselves whether they want to reduce emissions or buy additional allowances. This approach also yields economic advantages because the avoidance of emissions is mainly implemented by those companies that have the lowest avoidance costs.

    From a climate policy point of view, another advantage of emissions trading is that the establishment of a fixed maximum (cap) means the amount of emissions permissible at a certain point in time cannot exceed predetermined levels. To sum up, emissions trading is essentially characterised by the fact that it can achieve set environmental targets safely and at the most favourable economic costs. In addition, the revenues from emissions trading generate considerable financial leeway for active economic and socio-political support of the transformation to climate neutrality. However, other instruments such as regulatory law or funding policies have their own advantages. In practice, therefore, a mix of instruments is used.

  • Trading in European allowances (EU Allowances (EUa), EU Aviation Allowances (aEUA) or EUAA) takes place primarily at the trading centres in Amsterdam (ICE Endex) and Leipzig (EEX). In addition, relevant over-the-counter trading is also performed. Auctions, i.e. auctioning European allowances ((EU-Allowances (EUA)) or (EU Aviation Allowances (aEUA) or EUAA) currently take place exclusively on the EEX.

    Auctions are held almost daily. This regularity ensures that the auctions are seamlessly integrated into market activity. As a result, prices realised at the auctions align with the price level in continuous exchange trading on the secondary market.

    All auction results are published online within a few minutes. This serves to maximise market transparency. We regularly report on the entire market activity for the allowances in our monthly auction reports.

  • The auctioning reports published by DEHSt not only cover the auctions but also the much larger volume of continuous trading on the exchanges. In relation to the relevant overall allowances market, about six percent of the traded volume in 2023 could be attributed to auctions.

    The adoption of an amended Emissions Trading Directive in 2018, the introduction of the Market Stability Reserve in 2019 and the expectation of more ambitious caps in the future due to the implementation of the ‘European Green Deal’ led to an upward trend in EUA prices, which reached new highs at the beginning of 2023. However, there was a downward correction up to the beginning of 2024.

    Overview of price history and allowance surpluses:

    Overview of price history and surplus of emission allowances.

    Find further information on auctioning

  • A large part of the revenue from the auctions in EU ETS 1 will be used specifically to promote decarbonisation in industry and the energy sector

    • 100 per cent of the national auction proceeds must be used by the member states for climate protection. In Germany, 100 per cent of the revenue is even channelled into the Energy and Climate Fund (EKF), which finances a wide range of climate protection, energy efficiency and renewable energy measures.
    • Furthermore, two European funds have been set up to promote low-emission innovative technologies (Innovation Fund) and to modernise the energy sector (Modernisation Fund). While the Innovation Fund promotes innovative projects in the energy sector and industry in all member states, the Modernisation Fund is specifically intended to help poorer member states decarbonise their energy systems.

    The revenue from the auctions in the EU ETS 2 will be utilised via the EU Climate and Social Fund, among others.

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.

Übersicht: Stationary Energy and Industrial Plants

The following installations are covered by the European Emissions Trading Scheme:

  • large energy installations, in particular fossil-fuelled power plants, combined heat and power plants and heating plants (each with a Rated Thermal Input of 20 MW or more),
  • industrial installations with high energy consumption, for example blast furnaces in the steel industry, refineries, cement plants, aluminium plants, installations of the chemical industry.

In addition to CO2 emissions, some installations also emit other climate-damaging gases, for example nitrous oxide (N2O) is released from adipic and nitric acid production and perfluorinated hydrocarbons (PFCs) are emitted from primary aluminium production. N2O and PFC emissions are also subject to emissions trading. These gases are significantly more harmful to the climate than CO2: nitrous oxide by a factor of 300 and PFCs by a factor of more than 6000.

Share of emissions in European emissions trading by Member State.

A total of around 9,000 stationary installations are covered by EU ETS. Emissions from these installations account for almost 40 perc ent of all European greenhouse gas emissions.

Germany accounts for around 27 percent of emissions in the stationary sector.

In Germany, around two thirds of greenhouse gas emissions subject to trading come from energy installations, in particular from power plants (electricity) and combined heat and power plants (electricity and heat) and, to a lesser extent, from district heating boilers (heat) based on the distinction between industry and energy that applies in emissions trading.

This means, for example, that energy installations also include power plants that are operated by industrial companies to cover their own power consumption.

Share of emissions by sectors in Germany.

The remaining one third of greenhouse gas emissions subject to trading requirements are generated by industrial installations with high energy consumption. Plants producing and processing iron and steel (e.g. blast furnaces) account for the largest share of this. Emissions from refineries and cement clinker production facilities follow in second and third place.

Übersicht: Aviation

Aviation has also been included in the European Emissions Trading Scheme since the beginning of 2012. In principle, all flights that take off or land on the territory of the European Economic Area (EEA) are covered. Exceptions exist for certain aircraft (less than 5,700 kg maximum authorised take-off weight), certain types of flights (e.g. rescue and research flights) and for operators with low total annual emissions. From 2012 to 2023, the reporting and surrender obligation was essentially limited to flights that take off and land on the territory of the EEA. In this context, the term ‘reduced scope’ is also used.

In doing so, the European Union (EU) supported the efforts of the International Civil Aviation Organisation (ICAO) to establish a global market-based climate protection instrument to reduce international aviation emissions. In 2016, ICAO decided to introduce the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) in 2021. In the EU, CORSIA was implemented into European law as part of the ‘Fit for 55’ package by amending Directive 2003/87/EC. The rules of EU emissions trading and CORSIA apply depending on the route: As a rule, the EU ETS 1 implements CORSIA for intra-European flights, while the CORSIA rules apply to flights to and from third countries. The linking agreement between the EU and Switzerland has been in force since 01/01/2020. Under the agreement, flights from the EEA to Switzerland are subject to EU ETS 1, while flights from Switzerland to the EEA and within Switzerland are subject to the Swiss Emissions Trading Scheme (CH ETS).

As a result of Brexit the UK has no longer participated in the EU ETS 1 since 01/01/2021. However, flights from the EEA to the UK have continued to be covered by the EU ETS 1 due to the trade agreement between the EU and the UK. Flights from the UK to the EEA and within the UK are covered by the UK emissions trading scheme.

Further information to the topic on our website under Reform and Prospects and Aircraft Operators

Übersicht: Maritime Transport

Maritime transport has been fully integrated into the existing European Emissions Trading Scheme (EU ETS 1) since the beginning of 2024.

In the maritime transport sector, coverage of emissions generated depends on the ship's route and is covered in full or only in part by the EU ETS 1 surrender obligation. 100 percent of emissions from ship journeys within the European Economic Area (EEA) and from port calls are covered by emissions trading. Only 50 percent of emissions from journeys between a port in the EEA and a third country are subject to surrender regardless of the direction of transport. The maritime transport surrender obligation in the EU ETS 1 covers carbon dioxide (CO2) emissions for 2024 and additionally methane (CH4) and nitrous oxide (N2O) emissions from 2026. In the first two years, allowances only have to be surrendered for a portion of the verified emissions: 2024: 40 percent, 2025: 70 percent and from 2026 on: 100 percent.

Firstly, large commercially operated ships such as cargo and passenger ships with a gross tonnage (GT) of at least 5,000 are included. Warships, fishing vessels, naval auxiliaries, simple wooden ships, ships without engine propulsion and government ships for non-commercial purposes as well as inland waterway vessels are excluded.

Further information to the topic on our website under Maritime Transport

Emissions trading key figures in Germany and Europe

Europe

Germany

Emissions recorded by EU ETS
Emissions Germany
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.
European emissions reduction
Emissions reduction in Germany
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.
Emissions aviation
Emissions reduction in German aviation
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.
Greenhouse gas emissions
The EU ETS 1 covers around 40 percent of the EU’s total greenhouse gas emissions.
Amount of installations
EU ETS 1 covers 9,000 stationary installations such as power plants, refineries and steel mills.
Participants of EU ETS
In 2023, Norway, Iceland and Liechtenstein participated in emissions trading in addition to the 27 Member States.