In January 2005 the European Union Greenhouse Gas Emission Trading System (EU ETS) commenced operation as the largest multi-country, multi-sector Greenhouse Gas Emission Trading System world-wide. The EU ETS runs in phases: 2005-2007 (Phase I), 2008-2012 (Phase II), 2013-2020 (Phase III).


The scheme is based on Directive 2003/87/EC, which entered into force on 25 October 2003. The amount of EUAs allocated to each emitter in the scheme are set out in National Allocation Plans prepared by the Member States and approved by the European Commission.


Under the EU ETS Registry Regulation 2216/2004/EC, each Member State establishes a national registry that links to the others and to the Community Independent Transaction Log (CITL). Each national registry connects to the backbone which in turn ensures a secure, compatible and smooth integration of all systems under one European umbrella. The sum of all registries together with the CITL operates as the Registries System.  Allowances are issued to registry accounts established for each affected facility.


In January 2008, The European Commission published its draft proposals for the review of the EU ETS. The aim of the review was to develop the EU ETS after 2012 and learn from the experiences so far. Following agreement among Member states and the European Parliament, the EU ETS Directive was significantly revised, as part of the EU 2020 Climate & Energy Package in December 2008. The changes will take place from Phase III (running from 1 January 2013 to 31 December 2020). 


From 2013, the revised EU ETS Directive provides for:

 · A centralized, EU-wide cap on emissions with an annually declining trajectory of 1.74%. The cap will deliver an overall reduction of 21 percent below 2005 verified emissions by 2020. The Commission will publish the absolute Community-wide cap for 2013 by 30 June 2010.

· There will be an increase in auctioning levels – at least 50% of allowances will be auctioned from 2013, compared to around 3% in Phase II. This will improve the environmental effectiveness and economic efficiency of the EU ETS. In the UK, there will be 100 percent auctioning to the power sector. This will also be the case across most of the EU.

· Access to project credits under the Kyoto Protocol from outside the EU will be limited to no more than 50 percent of the reductions required in the EU ETS. This is a reduction from 226% in Phase II, and means many more emissions reductions will happen in the EU.

·12 % of the total allowances auctioned will be re-distributed to Member States with lower GDP in the interests of solidarity. These are mostly the newer eastern Member States.

·There is a non-legally binding commitment from EU member states to spend at least half of the revenues from auctioning to tackle climate change both in the EU and in developing countries.

·Industrial sectors will be allocated allowances for free on the basis of product benchmarks. The benchmarks will be set on the basis of the average of the top 10% most greenhouse gas efficient installations in the EU.

·Sectors deemed at significant risk of relocating production outside of the EU due to the carbon price (i.e. carbon leakage) will receive 100% of the benchmarked allocation for free.

·Sectors not deemed at significant risk of carbon leakage will receive 80% of their benchmarked allocation for free in 2013, declining to 30% in 2020 and 0% in 2027.

·Up to 300 million allowances from the new entrants’ reserve of the EU ETS will be used to support the demonstration of carbon capture and storage (CCS) and innovative renewable technologies.

·There is the potential for Member States to opt out small emitters and hospitals so as to reduce regulatory burden.


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