The European Union Emissions Trading System (EU ETS) is a program that helps reduce greenhouse gas emissions in the European Union. It started in 2005 and uses a system called "cap and trade." This system sets a limit on how much pollution certain industries can produce. Companies that pollute must buy permits, called allowances, to cover their emissions. These permits are sold by the EU or other companies. The money from selling these permits is used for environmental and social projects. As of 2026, the EU ETS covers about 40% of the EU's greenhouse gas emissions. The limit on emissions will decrease over time and reach zero by 2039. After 2039, no more permits will be given, and no emissions will be allowed.

Beginning in 2027, a new system called EU ETS2 will include sectors not covered by the original EU ETS, such as road transport, buildings, and industrial installations. The old EU ETS and the new EU ETS2 will operate separately. A major difference is that EU ETS2 will require companies that supply fuel, rather than those that use fuel, to cover emissions with permits. Together, the two systems will cover 75% of the EU's greenhouse gas emissions.

Compared to 2005, when the EU ETS first began, the emission limits for 2020 required a 21% reduction in greenhouse gases. This goal was reached six years early, as emissions in the EU ETS dropped to 1.812 billion tonnes in 2014.

Between 2005 and 2025, greenhouse gas emissions in sectors covered by the EU ETS decreased by about 50%, while emissions in sectors not covered dropped by only 20%. A 2020 study found that from 2008 to 2016, the EU ETS reduced carbon dioxide emissions by 11.5% in covered sectors, even when carbon prices were low. A 2024 study estimated the emission reduction effect at 7%. A 2023 study showed that the EU ETS reduced emissions by 10% between 2005 and 2012 without harming profits or jobs for companies involved. A 2024 study also found that the EU ETS helped lower levels of air pollutants, such as sulfur dioxide, fine particulate matter, and nitrogen oxide, which improved local health and supported the system's goal of reducing climate change.

EU countries believe the emissions trading system is important for meeting climate goals. A strong carbon market helps investors and industries move away from using fossil fuels.

Setup

The EU Emission Trading System uses a cap and trade model. Each allowance allows the holder to release 1 ton of carbon dioxide (tCO2). This system sets a maximum limit (cap) on the total amount of greenhouse gases that can be released by all participating factories and power plants. EU Allowances are either sold through auctions or given for free, and can be bought or sold between companies. Factories must track and report their CO2 emissions and submit enough allowances to match their emissions. If a factory uses more than its allowance, it must buy extra allowances from others. If it uses less, it can sell its unused allowances. This system helps reduce emissions in the most cost-effective way without needing much government control.

This program initially covered energy and heat production industries. Around 11,186 plants took part in the first stage. These plants were responsible for 45% of all emissions in Europe at that time. Over 90% of allowances were given for free during this period to support future emission reductions. This free distribution caused the number and value of allowances to increase three times between 2006 and 2007. The price of allowances rose from €19 per ton of CO2 in 2005 to €30 per ton in 2007. However, too many allowances were given out, causing the price to drop to €1 per ton of CO2 in early 2007. This created instability in the market and made it harder for businesses to invest in low-carbon technologies.

The European Union Emission Trading Scheme (EU-ETS) is the largest international program for trading greenhouse gas emissions. It started in January 2005 after tests in the UK and Denmark. All 15 EU member states participated in the first phase. The program limits carbon dioxide emissions from large factories and power plants that produce more than 20 megawatts of heat. These facilities account for nearly half (46%) of the EU’s carbon dioxide emissions. During Phase I, participants could trade allowances among themselves and use credits from the Kyoto Protocol’s Clean Development Mechanism. Credits are earned by investing in clean technologies or emission-reducing projects worldwide, which can help cover a portion of a company’s emissions.

History

The EU Emissions Trading System (EU-ETS) was the first large program in the world to trade greenhouse gas emissions. It began in 2005 to help reduce global warming and is a key part of the European Union's energy policies. By 2013, the system covered over 11,000 factories, power plants, and other facilities in 31 countries, including all 27 EU member states, Iceland, Norway, Liechtenstein, and the United Kingdom. In 2008, these facilities were responsible for nearly half of the EU's human-caused carbon dioxide emissions and 40% of its total greenhouse gas emissions. The EU aimed to reduce greenhouse gas emissions by 20% compared to 1990 levels, cut energy use by 20% compared to a 2007 baseline, and increase renewable energy use to 20% of total energy consumption by 2020. These goals were met. A 2020 study found that the EU-ETS reduced carbon dioxide emissions by over 1 billion tons between 2008 and 2016, which was 3.8% of total EU emissions during that time.

The EU-ETS has changed over time. The first trading period was a time for learning how the system worked. During Phase III, more permits were sold through auctions instead of given freely (over 40% of permits were auctioned in 2013). Rules for remaining permits were made more consistent, and new greenhouse gases, such as nitrous oxide and perfluorocarbons, were included. In 2012, the system was expanded to cover the airline industry within the European Economic Area. However, carbon credit prices have been lower than expected due to a surplus of permits, partly because of the economic crisis. In 2012, the EU delayed some permit auctions. In 2015, the EU approved a Market Stability Reserve to adjust the number of permits based on how many were in use the previous year. In 2018, this reserve was updated so that some permits would be removed from circulation starting in 2023.

In January 2008, Norway, Iceland, and Liechtenstein joined the EU-ETS. Norway’s Ministry of the Environment released a draft plan that sets a limit of 15 million tonnes of carbon dioxide emissions, with 8 million tonnes to be sold through auctions. According to the OECD Economic Survey of Norway 2010, Norway aimed to reduce emissions by 10% below its Kyoto Protocol commitment between 2008 and 2012 and by 30% below 1990 levels by 2020. In 2012, EU-15 emissions were 15.1% below their base year levels. Between 2008 and 2012, EU-15 emissions averaged 11.8% below base-year levels, showing that the EU-15 met its first Kyoto target by a large margin.

Mechanisms

The first phase of the EU Emissions Trading System (EU ETS) was created to work separately from international climate agreements, such as the United Nations Framework Convention on Climate Change (UNFCCC, 1992) and the Kyoto Protocol (1997). When the Kyoto Protocol became active on 16 February 2005, Phase I of the EU ETS was already in use. Later, the EU agreed to allow certificates from the Kyoto Protocol’s flexible mechanisms to be used as tools to meet emission reduction goals. The "Linking Directive" permits operators to use some Kyoto certificates from flexible projects to cover their emissions.

The Kyoto flexible mechanisms include:

• Joint Implementation (JI): Defined in Article 6 of the Kyoto Protocol, this creates Emission Reduction Units (ERUs). One ERU equals one tonne of carbon dioxide equivalent (tCO₂e).
• Clean Development Mechanism (CDM): Defined in Article 12, this creates Certified Emission Reductions (CERs). One CER equals one tonne of carbon dioxide equivalent (tCO₂e).
• International Emissions Trading (IET): Defined in Article 17.

IET is important because CERs from CDM projects can help EU ETS operators meet their emission targets. These CERs are earned by reducing emissions in developing countries that have joined the Kyoto Protocol. Rules for Clean Development Projects are outlined in the Marrakech Accords, which followed the Kyoto Protocol. The EU ETS was designed independently but used lessons from the UK’s earlier voluntary emissions trading system and worked with others to ensure compatibility with UNFCCC rules.

Under the EU ETS, EU member countries set national emission limits, which must be approved by the EU Commission. These countries then give allowances to industries and track actual emissions. Allowances must be retired (used up) each year.

Operators in the ETS can transfer or trade allowances in several ways:

• Privately, within a company or across borders.
• Over the counter, with a broker matching buyers and sellers.
• On the spot market of European climate exchanges.

Trading works by matching buyers and sellers on an exchange, with allowances exchanged for money. Like a stock market, companies and individuals can use brokers listed on the exchange, even if they are not regulated operators.

Whenever ownership of an allowance changes, the National Emissions Trading Registry and the European Commission are informed to verify the transaction. During Phase II of the EU ETS, the UNFCCC also checks the validity of allowances and any changes in national allocation plans.

Like the Kyoto system, the EU ETS allows operators to use carbon credits in the form of ERUs to meet their obligations. CERs and ERUs certified by the UNFCCC or other Kyoto mechanisms are accepted as equal by the EU.

Each EU Allowance Unit (EUA), representing one tonne of CO₂, is designed to be interchangeable with Kyoto’s "assigned amount units" (AAU). Because the EU accepts Kyoto CERs as equal to EU EUAs, they can be traded one-to-one in the same system. However, the EU faced technical issues connecting to UN systems until 2008–2009.

During Phase II, operators in each EU country must surrender their allowances for inspection by the EU before the UNFCCC can retire them.

The total number of permits issued (either through auctions or free allocation) determines the supply of allowances. Prices are set by the market. Too many allowances lead to low carbon prices and less effort to reduce emissions. Too few allowances cause high carbon prices.

For each EU ETS phase, the total permits each country can issue are outlined in the National Allocation Plan (NAP), similar to the UNFCCC’s carbon account. The European Commission reviews NAPs to ensure they meet 12 criteria in the Emission Trading Directive. The most important rule is that the total permits must align with a country’s Kyoto target.

Member states can also consider emissions from sectors not covered by the EU ETS, such as transport (21% of EU emissions), households and small businesses (17%), and agriculture (10%), in their domestic policies.

During Phase I, most allowances were given freely (grandfathering), a method criticized for creating unexpected profits, being inefficient, and not encouraging clean energy innovation. However, free allocation may be needed for sectors facing international competition, like aluminum and steel.

To address these issues, the European Commission proposed changes in 2008, including ending NAPs by 2013 and auctioning most permits (about 60% in 2013, increasing later).

Starting in Phase III (2013), permits will be centrally allocated, not through NAPs, with more permits auctioned.

Unlike earlier phases, Phase II permits are not freely allocated. Instead, all permits are sold through EU auctions.

Allocation can help address concerns about losing competitiveness or emissions moving to countries with weaker rules (carbon leakage). Sectors like cement, steel, and aluminum are at risk of leakage, estimated at less than 1% of total EU emissions. Allocating permits temporarily supports these industries but does not solve the underlying issue. Border adjustments, where imports are taxed based on their carbon content, are a more efficient solution. However, border adjustments might be misused for trade protectionism and may not fully prevent leakage.

During a trading period, operators can "bank" (save) or "borrow" allowances. For example, a 2006 EUA can be used in 2007 (banking) or 2005 (borrowing). Borrowing across periods is not allowed. Member states could choose whether to carry over Phase I allowances to Phase I.

Phase I 2005–2007

During the first phase (2005–2007), the EU Emissions Trading System (ETS) included about 12,000 facilities, which accounted for roughly 40% of the European Union’s carbon dioxide (CO₂) emissions. These facilities included energy-related operations such as large power plants, oil refineries, and coke ovens; production of iron and steel; industries like cement, glass, and ceramics; and activities related to paper and board manufacturing.

All 15 EU member countries at the time participated in the ETS, which officially began on 1 January 2005. However, national registries could not process transactions for the first few months. The UK’s existing Emissions Trading Scheme had already created a market for trading carbon credits, making it easier for participants to begin. In the first year, 362 million tonnes of CO₂ were traded, totaling €7.2 billion, with many financial contracts involving future and option trades.

Carbon credit prices rose steadily until April 2006, reaching about €30 per tonne of CO₂. Later that month, several EU countries (the Netherlands, the Czech Republic, Belgium, France, and Spain) reported that their actual emissions were lower than the number of carbon credits allocated. This caused the price of carbon credits to drop by 54%, from €29.20 to €13.35, in the final week of April 2006. In May 2006, the European Commission confirmed that verified emissions were 4% lower than the number of credits given out in 2005, totaling about 80 million tonnes less. Prices then fell below €10 per tonne. Throughout 2006, the system had an oversupply of credits, leading to prices as low as €1.20 per tonne in March 2007 and €0.10 per tonne in September 2007. In 2007, carbon prices for the first phase dropped close to zero for most of the year. However, prices for the second phase (2008–2012) remained higher, as credits from the first phase were set to expire by 31 December 2007.

Verified emissions increased slightly during the first phase. For countries with available data, emissions rose by 1.9% between 2005 and 2007 (all 27 EU member states except Romania, Bulgaria, and Malta).

Because of this, some experts criticized national governments for allowing industries to influence the system, leading to calls for stricter limits in the second phase. This criticism resulted in tighter rules during the second phase of the ETS.

Phase II 2008–12

The second phase (2008–12) made the scheme much larger. In 2007, three countries not in the EU—Norway, Iceland, and Liechtenstein—joined the program. The EU’s "Linking Directive" allowed the use of CDM and JI credits. Although this was possible in phase I, too many permits were given out, and permits could not be saved for use in phase II, so this option was not used.

During phases I and II, most emissions permits were given to companies for free, which led to unexpected profits. Ellerman and Buchner (2008) said the EU-ETS changed an expected rise in emissions of 1–2% each year into a small drop in total emissions. Grubb et al. (2009) estimated that emissions were reduced by 50 to 100 million tons of CO2 each year, or 2.5 to 5%, during the first two years of the program.

On 27 April 2012, the European Commission announced the full use of the EU ETS single registry. This process moved over 30,000 EU ETS accounts from national systems to the single registry. The Commission also said the single registry would not have all the tools needed for phase III of the EU ETS.

Phase II had some stricter rules, but companies could still use JI and CDM credits to meet emissions limits. This meant the EU did not need to reduce its own emissions to meet the phase II cap. The cap for phase II is expected to reduce emissions in 2010 by about 2.4% compared to what would have happened without the cap.

Aviation emissions were added to the program starting in 2012. The EU said including aviation was important because it would increase the need for emissions permits by about 10 to 12 million tons of CO2 each year in phase II. DEFRA said using more JI credits from projects in Russia and Ukraine would balance the cost of permits and not change average CO2 prices.

The airline industry and countries like China, India, Russia, and the United States opposed including aviation. These countries said the EU did not have the right to regulate flights outside Europe. China threatened to stop buying planes from Airbus, which led France to ask the EU to pause the program. The United States passed a law in 2011 that stopped U.S. airlines from joining the EU ETS.

The EU said the rules should apply to all airlines equally and did not break international laws. Without a global agreement on airline emissions, the EU said it had to continue its program. However, only flights within the European Economic Area (EEA) are covered, not international flights.

The EU planned for the third trading period to include all greenhouse gases and sectors, such as aviation, shipping, and forestry. For transport, the many individual users make it complex, but it might use a cap-and-trade system for fuel suppliers or a baseline-and-credit system for car makers.

National Allocation Plans for phase II, first announced in November 2006, aimed for an average reduction of nearly 7% below 2005 emissions. However, using offsets like Emission Reduction Units from JI and Certified Emission Reductions from CDM projects allowed the EU to meet the phase II cap by buying units instead of reducing emissions.

According to EU data from 2008, the ETS reduced emissions by 3%, or 50 million tons. At least 80 million tons of "carbon offsets" were used to meet the program’s requirements.

In late 2006, the European Commission started legal actions against Austria, the Czech Republic, Denmark, Hungary, Italy, and Spain for not submitting their National Allocation Plans on time.

In July 2020, the European Parliament voted to include maritime emissions in the EU ETS, starting in January 2024. Ships over 5,000 gross tons would need to pay for their emissions.

The EU has set goals to reduce emissions starting in 2024. The revised Renewable Energy Directive (RED III) aims to cut greenhouse gas emissions in transport by 14.5% or increase renewable energy use to 29% by 2030. It also sets targets for advanced biofuels.

The ReFuelEU Aviation initiative requires airlines to blend sustainable fuels into their operations, starting at 6% by 2030 and increasing to 70% by 2050. For shipping, the FuelEU Maritime regulation requires companies to reduce emissions by 6% by 2030 and 80% by 2050.

The number of CO2 allowances given to each EU country each year is shown in the table.

Carbon prices during phase II rose above €20 per ton of CO2 in early 2008. Prices averaged €22 per ton in the second half of 2008 and dropped to €13 per ton in early 2009. Two reasons for this drop were:

• Lower production in energy-heavy industries due to a recession, which reduced the need for emissions cuts.
• Lower expected prices for fossil fuels in the future.

Projections in 2009 said phase II would have a surplus of permits, and 2009 prices were supported by the need to save permits for the stricter third phase. In December 2009, carbon prices fell to a six-month low after the Copenhagen climate summit results disappointed traders. Prices for EU allowances for December 2010 delivery dropped 8.7% to €12.40 per ton.

In March 2012, the Periodical Economist said EU ETS permit prices had fallen too low to encourage companies to reduce emissions. Prices had dropped from nearly €30 per ton in 2008 to under €10 per ton. In June 2012, EU allowances for December 2012 delivery traded at €6.76 per ton, a 61% drop from the previous year.

In July 2012, Thomson Reuters Point Carbon said prices could fall to €4 per ton without changes to the number of permits. The 2012 closing price for an EU allowance with a December 2013 contract was €6.67 per ton. In late January 2013, the EU allowance price fell to a record low of €2.81 after the European Parliament’s energy and industry committee opposed a proposal to remove 900 million future permits from the market.

Phase III 2013–2020

During Phase III (2013–2020), the European Commission made several changes, including:

• Setting a total limit on emissions for the EU, with allowances given to each EU country;
• Reducing the use of offsetting methods to lower emissions;
• Limiting the use of extra allowances carried over from Phase II to Phase III;
• Changing from giving allowances for free to selling them through auctions;
• Adding more industries and types of gases to the program.

Also, millions of allowances saved in the New Entrants Reserve (NER) were used to support the development of new renewable energy and carbon capture technologies through the NER 300 program. This program aimed to help test and use environmentally safe carbon capture and storage (CCS) and renewable energy (RES) technologies on a large scale in the European Union.

Before joining the EU, Croatia became part of the Emissions Trading System (ETS) at the start of Phase III on January 1, 2013. This increased the number of countries in the EU ETS to 31.

On January 4, 2013, European Union allowances for 2013 were bought and sold on London’s ICE Futures Europe exchange for between 6.22 euros and 6.40 euros.

A total of 1.7 billion extra allowances from Phase II were carried over to Phase III.

Phase IV 2021–2030

Phase IV began on January 1, 2021, and will end on December 31, 2030. The European Commission plans to review the Directive fully by 2026. Since 2018, prices have risen continuously, reaching €57 per ton of CO2 (67 dollars) in July 2021. This increase added about €0.04 per kilowatt-hour for coal and €0.02 per kilowatt-hour for gas used in electricity production.

On January 22, 2014, the European Commission proposed two changes to the ETS directive (2003/87/EC) from the 2008 Climate Package. These changes were to be discussed by EU Member States at a meeting of the European Council on March 20–21, 2014:

• The rate at which the overall emissions cap is reduced increased from 1.74% (2013–2020) to 2.2% annually from 2021 to 2030. This would reduce EU CO2 emissions in the ETS sector by 43% compared to 2005.
• A 12% "automatic set-aside" reserve mechanism was created for verified annual emissions, ensuring at least 100 million CO2 permits were held in reserve during the fourth ETS period (2021–2030).

Connie Hedegaard, the EU Commissioner for Climate Change, aimed to connect the ETS with global systems, such as Australia’s, to create a worldwide carbon market. However, after the COP 19 Climate Conference in 2013 failed to produce a binding agreement and Australia’s new government ended its ETS system, this goal was not achieved.

Before the European Council summit on March 20, 2014, the European Commission proposed changes to the carbon market’s operation. The Market Stability Reserve (MSR) system was introduced to adjust the number of CO2 permits auctioned each year based on the number of permits already in circulation. On October 24, 2014, EU Member States approved the MSR in the Council Conclusions, ensuring it would balance supply and demand in the carbon market by following set rules without requiring additional decisions.

The European Parliament and Council agreed on an updated version of the MSR proposal. This version set the MSR’s start date to 2019 (during Phase III), placed 900 million previously delayed permits into the reserve, and reduced the time for the MSR to respond to market changes to one year. The final proposal was passed as Decision (EU) 2015/1814 in 2015.

In 2023, carbon prices dropped to about €70 per ton, down from over €100, which affected funding for the EU Innovation Fund. This highlighted the MSR’s role in stabilizing the market.

Between 2014 and 2017, the back-loading of permits and the introduction of the MSR did not significantly reduce the surplus of permits or raise prices, as prices remained below €10 per ton of CO2. In 2018, the MSR was reformed with Directive (EU) 2018/410 to reduce the surplus of permits and increase scarcity:

• From 2019 to 2023, the share of permits placed into the MSR increased from 12% to 24%.
• Starting in 2023, any permits in the MSR exceeding the number auctioned the previous year would become invalid.
• Member States could unilaterally invalidate permits if they took actions that reduced demand for EUAs.

This reform caused EUA prices to rise sharply in 2018, with prices mostly between €18–30 per ton of CO2 from August 2018 to March 2020. A study found that the price increase was not only due to the ETS/MSR changes but also because policymakers made the EU ETS more credible for long-term use, leading companies to plan for future scarcity.

The EU’s updated climate goal of reducing emissions by 55% compared to 1990 levels by 2050 required tightening the EU ETS target for 2030 to –61% compared to 2005 levels. The EU Commission proposed this in its "Fit for 55" package, which could increase the scarcity of permits and raise prices to €90–€130 per ton of CO2 by 2030.

The EU Commission also proposed including emissions from maritime transport in the ETS.

The February 24, 2022, invasion caused carbon prices to drop from €97 in early February to below €70.

As part of the 2023 ETS Directive revisions, a new emissions trading system called ETS2 was created. It will cover emissions from buildings, road transport, and other sectors not included in the current ETS. These sectors have not reduced emissions enough to achieve climate neutrality by 2050.

ETS2 will focus on emissions from fuel suppliers, not end users, who will report, pay for, and reduce emissions. The cap will be set to reduce emissions by 42% by 2030 compared to 2005 levels. Revenues will fund climate action and social measures, including the Social Climate Fund, which supports vulnerable groups. The European Commission has published a study on how to decarbonize sectors covered by ETS2 in a fair way.

ETS2 is designed to start smoothly. Emissions monitoring and reporting will begin in 2025, and the system will operate fully in 2027. During 2027, 30% more permits will be available. ETS2 will use a market stability reserve to manage supply and demand. If permit prices exceed €45 for three years, more permits may be released. If oil or gas prices are very high in 2026, ETS2’s start could be delayed to 2028.

Once ETS2 is introduced, 75% of the EU’s emissions will be covered by a cap-and-trade system.

In 2025, ETS2’s activation was delayed to 2028 due to political concerns about inflation and energy costs, which hurt the EU’s environmental and social goals. This decision shows the growing conflict between political feasibility and the urgency of climate action.

Reaching net zero

After 2039, no more allowances will be given out. Once all unused allowances are gone, no emissions will be allowed.

Costs

Emissions in the EU have decreased, and the costs were much lower than expected. However, transaction costs depend on the size of the installation. Smaller installations may face higher costs. In total, the cost was less than one-tenth of 1% of the EU's GDP. Experts say that if permits were sold through auctions and the money was used wisely, such as by lowering certain taxes and supporting clean energy projects, costs could be reduced or even lead to economic benefits.

Carbon Border Adjustment Mechanism (CBAM)

Starting in 2026, the European Union will begin using a carbon border tax called the Carbon Border Adjustment Mechanism (CBAM). This tax aims to address carbon leakage, which occurs when European companies face higher costs from the European emission trading system, making them less competitive compared to companies in other countries that do not take similar steps to reduce emissions. Because of this, European consumers may choose to buy imported goods with high emissions instead of European products, causing emissions to shift to other countries and harming European industries. The tax will require companies in other countries to pay similar costs for carbon emissions. This will allow the European Union to stop giving free emission allowances to industries that are difficult to decarbonize, a practice previously used to prevent carbon leakage.

If countries outside the European Union have or plan to create their own carbon pricing policies, they may avoid the EU’s carbon border tax and use the revenue for their own efforts to reduce emissions. A similar carbon border tax will be introduced in the United Kingdom by 2027. Some experts believe this mechanism could help reduce emissions by encouraging companies to cut emissions and by motivating countries, such as the United States (which does not have a federal carbon pricing system), to develop similar policies. Some writers suggest that the CBAM marks the start of a "climate club," an idea proposed by Nobel Memorial Prize winner William Nordhaus. Countries like Japan, China, and South Korea will pay high fees under the CBAM and have already begun improving their emissions trading systems.

China has expanded its emissions trading system to new sectors and will set an absolute limit on total emissions instead of using intensity-based targets, partly due to the CBAM. The carbon markets in India and Turkey aim to keep revenue for their national budgets. Other countries, including Brazil, Indonesia, Taiwan, Vietnam, Malaysia, and Serbia, are establishing their own carbon pricing systems in response to the CBAM. Partly because of the CBAM, the Open Coalition on Compliance Carbon Markets was formed during the 2025 United Nations Climate Change Conference. This group seeks to create a global carbon market.

Overall emission reductions

According to the European Commission, greenhouse gas emissions from large companies covered by the EU Emissions Trading System (EU ETS) decreased by an average of more than 17,000 tonnes per facility between 2005 and 2010, which is an 8% reduction.

A 2020 study showed that the EU ETS helped reduce carbon dioxide emissions even when carbon prices were low. A review of 13 studies on the EU ETS estimated that the system reduced emissions by about 7%.

A 2023 study found that carbon emissions decreased by about 10% between 2005 and 2012. The study compared companies that followed the EU ETS rules with those that did not. It concluded that the EU ETS did not greatly affect profits or employment and that regulated companies saw increases in revenues and fixed assets.

According to the European Parliament, emissions from power plants and factories covered by the EU ETS dropped by 47% between 2005 and 2023.

Inclusion of sinks

Right now, the European Union does not let companies earn credits for reducing carbon dioxide by using natural methods, such as planting trees. Some government officials and business leaders want to change this rule. However, groups that protect the environment and the European Union's leaders disagree. They say there are questions about how reliable these natural methods are over time and that reducing emissions directly from industries is more effective for fighting climate change.

ETS related crime

On January 19, 2011, the EU emissions spot market for pollution permits was closed. This happened after computer hackers stole 28 to 30 million euros ($41.12 million) worth of emissions allowances from the national registries of several European countries within a few days. The Czech Registry for Emissions Trading was especially affected, with 7 million euros worth of allowances stolen by hackers from Austria, the Czech Republic, Greece, Estonia, and Poland. A phishing scam is suspected to have allowed hackers to access companies' carbon credit accounts and transfer the allowances to themselves, which they later sold.

The European Commission stated it would work with national authorities to determine the minimum security measures needed before reopening the registries. Maria Kokkonen, an EC spokeswoman for climate issues, said national registries can be reopened once sufficient security measures are in place and member countries submit reports about their IT security protocols.

The Czech registry noted there are still legal and administrative challenges to resolve. Jiri Stastny, chairman of OTE AS, the Czech registry operator, said the registry will remain closed until victims of theft have recourse and a system is established to return stolen allowances to their rightful owners. Registry officials in Germany and Estonia confirmed they located 610,000 allowances stolen from the Czech registry, according to Mr. Stastny. Another 500,000 stolen Czech allowances are believed to be in accounts in the UK, according to the OTE.

Cyber fraudsters attacked the EU Emissions Trading System (ETS) using a "phishing" scam that cost one company €1.5 million. In response, the EU revised ETS rules to address such crimes.

The security breaches caused concerns among traders that they might have unknowingly purchased stolen allowances, which they might later have to return. The ETS faced a similar phishing scam in 2010, which led to the shutdown of 13 European markets. Earlier, criminals stole 5 million euros through cross-border fraud in 2008 and 2009.

In 2009, Europol reported that 90% of emissions trading volume in some countries might result from tax fraud, specifically "missing trader fraud," costing governments over 5 billion euros.

German prosecutors confirmed in March 2011 that value-added-tax fraud in carbon dioxide emissions trading cost the German government about €850 million ($1.19 billion). In December 2011, a German court sentenced six people to jail terms ranging from three to seven years and 10 months for evading taxes on carbon permits. A French court sentenced five people to one to five years in prison and ordered them to pay large fines for tax evasion through carbon trading. In the UK, a trial related to VAT fraud in the carbon market was scheduled to begin in February 2012.

Views on the EU ETS

People and groups reacted differently to the EU ETS. Mr. Anne Theo Seinen, from the EC's Directorate-General for the Environment, called Phase I a "learning phase." During this time, the systems and rules for the ETS were created (UK Parliament, 2009). He said the carbon price in Phase I helped reduce some emissions. Seinen also said the EU ETS needed other policies to support new technologies and renewable energy. CCC (2008, p. 155) stated that technology policies are needed to fix problems that prevent the use of low-carbon technologies, such as by helping research and development.

In 2009, the World Wildlife Fund said there was no sign that the EU ETS influenced long-term investment choices. They believed Phase III improved the system but still had major issues. Jones et al. (2008, p. 24) said the EU ETS needed more changes to reach its goals.

A 2016 survey of German companies in the EU ETS found that current trading rules gave weak reasons for companies to reduce carbon emissions.

The EU ETS has been criticized for problems like giving out too many allowances, unexpected profits, price changes, and failing to meet its goals. Supporters said Phase I (2005–2007) was a "learning phase" meant to set up the system and prepare for a carbon market, not to reduce emissions quickly.

Some design issues limited the system’s success. In 2005–2007, emission limits were not strict enough to cut emissions. The total number of allowances given out was more than actual emissions, causing the carbon price to drop to zero in 2007. This happened because the EU used emissions data from the European Environmental Agency in Copenhagen, which measured emissions differently than the EU-ETS system in Brussels. This mistake caused an oversupply of 200 million tonnes (10% of the market) in Phase I and very low prices.

The EU ETS has also been criticized for causing a sudden rise in energy prices. Supporters said the price rise did not match the cost of permits, and the biggest increase happened when permit prices were very low.

Researchers Preston Teeter and Jorgen Sandberg said uncertainty about the EU ETS led to weak responses from companies. Similar results were seen in Australia, where companies had little reason to follow cap and trade rules.

Some critics in the EU said the EU ETS contributed to the 2021 global energy crisis.

There was an oversupply of emissions allowances in EU ETS Phase I, which caused the carbon price to drop to zero in 2007 (CCC, 2008, p. 140). This oversupply shows the difficulty of predicting future emissions, which is needed to set limits. Poor data about emissions, the uncertainty of forecasts, and small reduction goals in Phase I (1–2% across the EU) made it likely that the limit was set too high.

This problem gets better as the limit becomes stricter. The EU’s Phase II limit is more than 6% below 2005 levels, much stronger than Phase I, and clearly different from usual emissions levels.

Too many allowances do not mean no emissions reductions happened. Even with oversupply, there was a carbon price (except for some companies that got many free allowances). For some companies, the price influenced their actions. Verified emissions in 2005 were 3–4% below expected levels, and analysis suggests some of that reduction was due to the EU ETS.

In September 2012, Thomson Reuters Point Carbon said the first Kyoto Protocol period had an oversupply of about 13 billion tonnes (13.1 Gt) of CO₂, and the second period (2013–2020) was likely to start with a surplus of Assigned Amount Units (AAUs).

Newbery (2009) said the cost of EU emissions permits was part of the final price of electricity. Free permits gave unexpected profits to fossil fuel companies. Newbery wrote that it was wrong to misuse the value of a shared resource. 4CMR (2009) said all permits in the EU ETS should be sold through auctions to avoid unexpected profits.

The price of emissions permits tripled in the first six months of Phase I, then dropped by half in one week in 2006 and fell to zero over the next year. These changes and the high price swings raised questions about whether Phase I could provide stable incentives for companies.

In future phases, measures like saving allowances for later, selling permits through auctions, and setting price limits were considered to reduce price swings. However, it is normal for this type of market to have some volatility, similar to energy prices. People in these markets usually respond well to price changes.

Newbery (2009) said Phase I of the EU ETS did not provide a stable carbon price needed for long-term investments in low-carbon energy. He suggested setting both a maximum and minimum price to stabilize carbon prices. This led to the changes made in Phases II and III.

Offsetting

The EU ETS connects with Joint Implementation and Clean Development Mechanism projects because it allows the limited use of "offset credits" from them. Companies in the program could use some Certified Emission Reduction units (CERs) from 2005 and Emission Reduction Units (ERUs) from 2008. Each country in the EU must decide, in its National Allocation Plan, what percentage of its total emissions allowance can be used for CERs and ERUs. CERs and ERUs from nuclear power and Land Use, Land-Use Change, and Forestry projects cannot be used.

A key benefit of allowing credits to be traded freely is that it helps reduce emissions in the most cost-effective way. This happens because the cost of reducing emissions varies between countries. In the UK, the Climate Change Committee (CCC, 2008) pointed out three reasons why relying too much on credits is not ideal:

• Wealthy countries must show that a low-carbon economy is possible and can support economic growth. This helps encourage developing countries to reduce their emissions. Domestic efforts by rich countries also help invest in low-carbon technologies.
• A strong long-term goal, like cutting UK emissions by 80% by 2050, needs major progress by 2020 and 2030.
• Credits from the Clean Development Mechanism (CDM) are less reliable than a cap-and-trade system, which requires total emissions to be reduced.

Because of the economic downturn, countries successfully pushed for more use of CDM/JI credits after 2012. The 2009 EU ETS Amending Directive said credits could be used for up to 50% of the EU’s emissions reductions below 2005 levels in certain sectors between 2008 and 2020. However, using too many CDM/JI credits from earlier years might weaken the environmental goals of the EU ETS, even though the Kyoto Protocol requires that credits supplement, not replace, domestic efforts.

In January 2011, the EU Climate Change Committee banned the use of CDM Certified Emission Reduction units from HFC-23 destruction in the EU Emissions Trading Scheme starting May 2013. This also included nitrous oxide (N2O) from adipic acid production. The reasons included unfair incentives, lack of real emission reductions, poor environmental protection, harm to the Montreal Protocol, high costs, and the unfair advantage given to some projects in developing countries.

An alternative to CDM and JI projects is to directly reduce emissions by buying and removing emissions allowances within the ETS. This avoids problems like ensuring projects are truly helping the environment, accurate measurements, emissions shifting to other areas, long-term results, and verification. Purchasing and removing allowances also allows more sources, like traffic, to be included in the ETS. This reduces the total number of allowances available, which limits the emissions that covered sources can produce.

Criticism

In March 2026, ten European Union member states asked the European Commission to extend the distribution of free carbon permits to industrial sectors beyond 2034. The countries involved were Austria, Bulgaria, Croatia, the Czech Republic, Greece, Hungary, Italy, Poland, Romania, and Slovakia. They requested this action to help reduce rising energy costs and challenges for industries caused by the continuing U.S.-Israeli war on Iran. Leaders from these countries, including Polish Prime Minister Donald Tusk and Italian Prime Minister Giorgia Meloni, signed a letter asking for a careful examination of the EU Emissions Trading Scheme (ETS). The letter aimed to reduce the effect of carbon pricing on electricity prices. The signatories also argued that ending free allowances, which is currently planned to begin in 2028, should be done gradually to avoid placing too much pressure on industries during the energy crisis.