Emission Trading System

January 02, 2023

An Emissions Trading System (ETS) is a policy tool used by governments to reduce greenhouse gas emissions, contributing to climate change. It works by setting a cap on the total amount of emissions that can be produced within a given period and then allocating or auctioning off a certain number of emissions allowances to participating companies.

These allowances represent the right to emit a specific amount of greenhouse gases and can be bought, sold, or traded on the open market.

EU ETS

The European Union Emissions Trading System (EU ETS) is a cap-and-trade system that covers more than 11,000 power stations and industrial facilities in 31 countries.

The market's interaction of supply and demand determines the price of allowances within the EU ETS. Allowances are typically sold through auctions, and the winning bids determine the price. However, the price of allowances can also be influenced by a variety of factors, including the overall level of demand for allowances, the overall level of emissions in the EU ETS, and the cost of implementing emission reduction measures.

Several data sources exist on the price of allowances within the EU ETS. One source is the European Union Allowances (EUA) futures contract, traded on the ICE Futures Europe exchange. The EUA futures contract is a financial instrument that allows market participants to hedge their exposure to the price of EU ETS allowances.

This is the price of the EUA rolling nearer future contract:

The problem is, as it stands, this price is too low to make a big difference.

Some interesting videos on the topic:

References

• Kyoto Protocol
• Carbon Pricing Dashboard
• A beginner’s guide to the EU’s Emissions Trading System
• EEX Environmentals