The EU Emissions Trading Directive sets the legal framework for the Emissions Trading Scheme (ETS) and contains mandatory rules for calculation of emission caps, allocation principles etc.
The first trading period ran from 2005 to 2007, the 2nd from 2008 to 2012, corresponding to the Kyoto compliance period. The current 3rd trading period runs since 2013 and will end in 2020.
The trading scheme comprises 10 to 12 thousand companies from industries responsible for about 40% of EU emissions, such as energy production, steel, glass, and cement production.
Major sources of CO2 emissions that are not within the scope of the ETS are: land and marine traffic (however, aviation is included since 2012), buildings, agriculture, and power plants up to 20MW capacity.
Each company taking part in the emissions trading receives a certain number of EU allowances (EUA, emission right for 1 tonne of CO2) . This is how individual emissions caps for each company are defined.
Companies which do not have sufficient EU allowances to cover their emissions have to buy EUAs from companies that are not using all of their emission rights. The EU commission estimates that more than 3 billion EUAs were traded in 2008. According to the German Emissions Trading Authority 3,83 billion EUAs were traded in 2013.
If a company needs more emissions allowances than it received and does not buy new ones on the market, it is penalised with a fine of 100 Euros per tonne.
In the 2nd trading period, National Allocation Plans (NAPS) for each country distributed at least 90% of certificates free of charge to companies, the remaining certificates were sold at auctions.
In the 3rd trading period, a greater share of EUAs will be auctioned (20% in 2013, 70% in 2020), and the annual amount of EUAs will be reduced to 1.72 billion by 2021.
The EU Linking Directive allows for transfer of certificates from the project based Kyoto mechanisms JI (Joint Implementation) and CDM (Clean Development Mechanism) into the ETS.
The Kyoto principle of supplementarity stipulates that the use of CDM and JI within the ETS must be limited. Each participating country sets these limits, e.g. 22% of allocated certificates per site in Germany.