The multi-sector European Union Greenhouse Gas Emission Trading System (EU ETS) commenced operation on 1 January 2005. The Greenhouse Gas Emission Trading system is based on the principle of reducing greenhouse gas emissions where it is cheapest to do so. If it is cheaper for industrial companies to obtain emission allowances in the EU-wide carbon market than to reduce their own emissions, it is therefore more economical for them to obtain the emission allowances than implement emission reduction measures. In reverse, emission reduction measures that are cheaper than obtaining emission allowances are worth carrying out.
The emissions trading scheme covers the carbon dioxide emissions of large industrial installations and energy production plants. The aim of the Emissions Trading Directive is to include the emissions of industrial sectors in the emissions trading scheme within the total specified in the national allocation plans and, as of 2013, within the emissions ceiling set for the EU’s emissions trading sector. Operators belonging to the emissions trading scheme shall surrender a number of allowances equal to the emissions from their installations during the preceding calendar year each year to the competent authority. One emissions allowance is equivalent to one tonne of carbon dioxide.
Emission allowances will be allocated to operators for free, or by auction. Operators can sell and purchase emission allowances freely throughout the EU-wide market. There are several stock exchanges trading in emissions. Emission allowances are also traded outside the stock exchanges. The price of an emission allowance is formulated similarly to the price of other commodities.
Besides industrial corporations, Member States can also trade in emission units, as per the Kyoto Protocol, and they are allowed to acquire emission units from emission reduction projects that have been implemented in other countries in order to achieve their own emission reduction targets. Finland also has its own emission units purchase programme.