The establishment of a market in the European Union to trade in CO2 emissions licences – EU ETS (European Union Emission Trading Scheme) – on 1 January 2005, established a market instrument that allows companies to comply with their Kyoto targets more effectively.
The European Union emission licence trading scheme aims to limit or reduce greenhouse gas emissions. The fact that participating companies can purchase or sell emission licences allows them to reduce their emissions at a lower cost.
The scheme establishes the overall level of emissions permitted but, within that limit, it allows participants in the system to purchase and sell emission licences according to their needs. These emission licences are the common exchange currency on which the system is based. An emission licence gives its holder the right to emit one tonne of CO2. Scarcity in the market is created by limiting the total number of emission licences.
The first period of licence trading ran over three years from 2005 to the end of 2007 as a practical trial phase to prepare for the second period, which commenced on 1 January 2008. This will last for five years, finishing at the end of 2012.
The Council of the European Union decided in March 2007 to strengthen, expand and improve the way the emission licence trading scheme works in the period after 2012, with a view to meeting the EU target of reducing greenhouse gas emissions by at least 20% against 1990 levels by 2020.