How does the EU ETS work?The EU ETS works on a cap-and-trade principle, whereby the EU sets a limit on the amount of CO₂ participants covered by the system can emit each year. A fixed number of European Union Allowances (EUAs) are put on the market, which companies need to have for every metric ton of CO₂ (tCO₂) they emit within one calendar year. Companies purchase or receive allowances but can also trade them with other emitters if needed. Over time the emissions cap reduces, and fewer EUAs are issued so that total emissions fall. The number of free allocations also decreases each year.
The EU ETS covers CO₂ emissions from activities such as from power stations, heavy industry (e.g. steelworks), and domestic aviation. Companies within these sectors must hold EUAs that cover their annual emissions, with heavy fines imposed on those that emit more emissions than they have in permits. Each year the operators of installations must surrender EUAs corresponding to their emissions from the previous year. EU ETS carbon permit prices rose to more than 100 euros/tCO₂ for the first time in February 2023, showing the increased costs installations must pay when they pollute. Since 2005, installations covered by the ETS have reduced emissions by about 33 percent.