In 2005, the EU established a scheme designed to reduce the emissions caused by heavy industry and power generation sectors by pricing their greenhouse gas pollution.

The EU Emissions Trading System applies the ‘polluter pays’ principle and sets an annual ‘cap’ on the total emissions that the covered sectors can collectively emit. This upper ceiling gradually lowers, meaning fewer emissions are allowed over time, which in turn drives decarbonisation by making the fossil fuel used to power such industries less cost-effective.

The cap is expressed in tonnes of CO2 emissions, and annually an equivalent amount of  pollution permits known as EU Allowances (EUA) are allocated to market participants (freely or by auctions) Within the set cap, companies can buy and sell allowances on the open market and trade them with each other.

The aviation sector was added to the EU ETS in 2012, while the maritime sector joined in 2024.

The EU’s flagship carbon pricing policy has been a qualified success – between 2005 and 2024 emissions from electricity and energy-intensive sectors decreased by 51.2%. However, most of these reductions occurred in the power sector, while emissions from heavy industry have stagnated.

The EU ETS can be improved in many ways and at Carbon Market Watch we campaign to eliminate the free pollution permits that are allocated at no cost to polluting industries, to invest auctioning revenue in further climate action, strengthen social protections under the EU ETS, and to extend coverage of aviation and maritime sectors so that polluters fully pay their fair share towards climate action.