Emissions trading is the trade in emission permits, European Emissions Allowances (EUA). In the European Union (EU) the trade in emission permits takes place through the Emissions Trading Scheme (ETS). This system is aimed at reducing the emission of certain greenhouse gasses, of which CO2 (carbon dioxide) is the most important one. That's why they are sometimes called CO2 permits or carbon credits. The trade in emission permits starts off with determining a limit or ‘cap’ for emissions: a limit on the total number of emissions that will be auctioned.
The European businesses who produce the largest number of CO2 emissions are obligated to take part in the emissions trade. Each of these businesses must annually hand over the equivalent in emission permits of the number of tonnes of CO2 it produced. Each tonne of CO2 costs 1 carbon credit. Businesses who have less emission permits than the number of tonnes of CO2 they emitted must buy additional permits, whereas businesses who produced less CO2 than they had permits to can sell their remaining permits.
Theoretically this cap and trade meant to give businesses an incentive to produce less pollution, reducing emissions while stimulating technological innovation and economic growth. In the meantime, the EU distributes a little less emission permits every year. The 'emission limit' thus gradually decreases, which should result in the permits becoming ever scarcer and therefore more expensive.
At this moment the Emissions Trading System regulates the emissions of about eleven thousand installations at some 6000 businesses. In the Netherlands some 450 businesses are participating in the Emissions Trading System. These are mainly large, energy-intensive businesses from the energy sector, refineries, chemical industry, the metal industry etc.
However, the EU ETS has not been working properly for many years. Read this FAQ to find out why.