What exactly does ETS mean?

Reducing greenhouse gas emissions, protecting the climate - the European Emissions Trading System (ETS) helps to achieve these targets. But when a tonne of CO2 costs the same as a pizza, it is time to act. The EU has made a start on this to counteract this trend.

Illustration: Erneuerbare Energien, Stromnetz und Verbraucher unter einer Lupe© BMWi

This is what it's all about: reducing CO2 emissions

40 per cent less CO2 by 2020 compared with 1990: this is a key target for Germany's energy transition. The 28 Member States of the European Union (EU) have also set a clear climate protection goal: greenhouse gas emissions are to be cut throughout Europe by at least 20 per cent by 2020 and by 40 per cent by 2030 compared with 1990. We have already achieved more than 20 per cent.

In order to make progress in the field of climate protection, the EU introduced the Emissions Trading System (ETS) in 2005, the first international and so far the world's largest greenhouse gas emissions trading system. Apart from the 28 EU Member States, Norway, Iceland and Liechtenstein are also participating in the ETS.

Polluters pay more

In order to understand the principle, let us compare the system with a waste container in your backyard. Several tenants share one container with a limited volume. Therefore, everybody should try to produce as little waste as possible to make sure the container does not spill over.

In the case of the ETS, policymakers stipulate the volume of the CO2 waste container and the number of waste bags that fit in it. One bag corresponds to one tonne of CO2. The right to emit one tonne of CO2 is called an allowance; it costs money and must be bought by the companies in their respective countries.

Each year the volume of CO2 that may be emitted becomes smaller and the number of allowances is reduced. As a consequence, CO2 emissions become more expensive, and this is an incentive for enterprises to cut emissions. Some companies are even able to sell spare allowances to other firms which need them more urgently. This is where trade comes in: the price of allowances is determined by supply and demand. This is also called "Cap and Trade".

The emissions trading system with its strict caps guarantees that the climate targets will be reached because the volume of CO2 and other greenhouse gases that may be emitted is directly linked with the number of allowances available.

Cheap allowances - no strong incentive to save energy

In the last few years, however, the price of the allowances has in fact fallen sharply. In 2015, for instance, an allowance cost eight euros, i.e. the same as a pizza in an Italian restaurant. There are many reasons for this, including the weak economies in southern Europe. As a consequence, emissions trading has been sluggish because there is currently a surplus of about two billion allowances on the market. The low price of allowances offers no strong incentive to invest in low-carbon technologies and thus to save money in reaching the climate targets in the long term.

CO2 emissions to become more expensive

Therefore it is important to revise the ETS and reintroduce strong incentives for companies to invest in low-carbon technologies. Since 2014, the federal government has successfully called for this revision at EU level. As from 2019, a new mechanism - the 'market stability reserve' - is to reduce the surplus of allowances and stop the fall in prices. An important point of Germany's 10-point Energy Agenda has thus been implemented, although the federal government would have preferred to introduce this mechanism as early as 2017.

The plants that are subject to the ETS, mainly power stations and industrial production facilities, account for slightly less than half of Europe's total CO2 emissions. In other sectors including buildings, agriculture and transport, the EU Member States are responsible for reaching the climate targets. Emissions can be further reduced in all sectors.