Emissions Trading System (ETS)
A cap-and-trade market in which a regulator caps total emissions, issues tradable allowances, and requires covered installations to surrender one allowance per tonne emitted.
An emissions trading system sets a declining cap on emissions from covered sectors and distributes allowances by auction or free allocation. Firms that cut emissions cheaply can sell surplus allowances; those facing high abatement costs buy them, so reductions occur where they are cheapest.
The EU ETS, launched in 2005, covers power, heavy industry, intra-EEA aviation and, since 2024, maritime transport, about 40% of EU emissions. Under the 2023 reform the cap falls 4.3% per year to 2027 and 4.4% thereafter, targeting a 62% cut by 2030 versus 2005. The Market Stability Reserve withdraws surplus allowances. A separate ETS2 for buildings and road fuels is scheduled to start in 2027 (with a possible delay to 2028). Allowance prices ranged mainly EUR 60–100/t over 2022–2025.
Other major systems include China's national ETS (power sector since 2021, the largest by covered emissions at roughly 5 Gt CO2), the UK ETS, California-Quebec cap-and-trade, RGGI in the north-eastern US, and the Korean and New Zealand schemes.
Free allocation for industries at risk of carbon leakage is being phased out in the EU alongside the introduction of CBAM.
Related terms
All terms →- Carbon price
A cost applied per tonne of CO2e emitted, through a carbon tax or an emissions trading system, so that the climate damage of emissions enters market prices.
- CBAM (Carbon Border Adjustment Mechanism)
An EU levy on the embedded emissions of imported carbon-intensive goods, aligning their carbon cost with that paid by EU producers under the EU ETS.
- Scope 1 emissions
Direct greenhouse gas emissions from sources owned or controlled by a reporting organisation, such as boilers, furnaces, vehicles and process emissions.
- Carbon offset
A tradable credit representing one tonne of CO2e reduced, avoided or removed by a project outside the buyer’s own operations, used to compensate for the buyer’s emissions.
- Net zero
A state in which anthropogenic greenhouse gas emissions are balanced by anthropogenic removals over a specified period, so net additions to the atmosphere are zero.