Governance & Policy
EU Emissions Trading System (EU ETS)
Definition
The EU Emissions Trading System, established by Directive 2003/87/EC, is a cap-and-trade scheme covering power generation, energy-intensive industry and aviation within Europe, with a separate second system (ETS2) for buildings and road transport. It caps total emissions, allocates or auctions allowances, and lets covered installations trade them, creating a carbon price that declines as the cap tightens.
References
Legal text of the scheme
Policy context and ETS2
Overview
What it means
Around forty percent of EU emissions carry a market price, making carbon a line-item cost for covered sectors and a revenue source for climate funds.
How it is used
Compliance teams manage allowance positions; analysts quote the EU carbon price as an investment signal; policymakers link it to CBAM.
Why it matters
It is the world's largest carbon market and the reference point for carbon pricing debates everywhere.
Review questions
What source or framework gives the term authority? What boundary or role is being described? What evidence would a reviewer need before relying on the term?