The EU Emissions Trading System (EU ETS) is a market-based mechanism established to reduce greenhouse gas emissions by placing a cost on carbon. It operates under a cap-and-trade framework, where a cap is set on the total emissions allowed from covered sectors (such as power generation, industry, and aviation). Within this cap, companies receive or purchase emission allowances (EUAs)—each representing the right to emit one tonne of CO₂ or its equivalent.

How It Works:

• A cap is set on the total CO2 emissions for the covered sectors.
• Within that cap, companies that emit less than their allocated allowances can sell their surplus on the carbon market.
• Companies that exceed their allowances must buy additional EUAs to cover their emissions.
• This creates a carbon market, where the price of allowances is driven by supply and demand, encouraging companies to reduce emissions where it is most cost-effective.

Introduced in 2005, the EU ETS is the first and most influential compliance carbon market in the world.