SITUATION ANALYSIS:

The EU ETS was created by a European Parliament and the European Council Mandate in
2003, and came into effect in 2005. It is the key component of EU policy towards fighting
climate change by reducing GHG emissions cost-effectively.  It is the first global cap-and-
trade which protects 45% of EU GHG emissions. It covers 31 countries representing 20% of
global gross domestic product (GDP). The primary focus of the EU ETS is to enable EU
Member States fulfil their commitments under the Kyoto Protocol to minimize or eliminate
GHG emissions in a cost-effective manner. The scheme achieves so by measuring the total
amount of pollution across EU Member States and enabling carbon allowances to be
exchanged. Increasing allocation, grants the emitter the right to emit 1 tonne of CO 2 or an
equal quantity of some other GHGs. In comparison to the conventional ‘command and
control’ policy, the ETS helps the industry to find the most cost-effective pollution cuts.
The EU emissions trading scheme (ETS) focused on the understanding having a carbon price
is the most cost-effective way to fulfil Kyoto obligations. The system will enable EU to reach
its Kyoto goal at an expense of between € 2.9 and € 3.7 billion annually. It is less than 0.1%
of GDP of EU. The scheme is based on six fundamental principles:
1) ‘Cap and Trade System’
2) Primary focus on CO2 from large industrial emitters
3) Implementation taking place in four phases and with periodic reviews and growth
potential.
4) Emission allowance allocation plans decided periodically.
5) Incorporates a strong framework for compliance.
6) The industry seems to be EU-wide but taps the opportunity to reduce emissions in the
rest of the world through the use of CDM and JI, which links to appropriate systems
in third countries.
During its initial phase, the scope of the ETS is intentionally limited. It just includes CO2
pollution from large emitters in the electricity and the heat generating sector. The scheme will
be reviewd allowed mid-2006 to allow for fine-tuning in the light of results gained. The scope
could be extended to other sectors, such as chemicals, aluminium and transport, as well as to
more greenhouse gases. The ETS covers around 45% of the EU's total CO2 emission or about
30% of its overall greenhouse gas emissions. It has a limited scope, covering more than
11,000 installations in the EU.