The European Union Emissions Trading Scheme (EU ETS) remains the largest carbon trading system in the world, covering more than 11,000 power stations and industrial plants in 31 countries. But the program has struggled in recent years amid an oversupply of allowances that has put significant pressure on the price of carbon credits. Launched in 2005, the EU ETS is now in its third phase, running from 2013 to 2020. The program covers about 45% of the EU’s GHG emissions.

Meanwhile, Turkey and Ukraine are engaged in evaluations for possible emissions trading systems (ETS), with financial and technical support from the World Bank’s Partnership for Market Readiness (PMR), which is assisting a number of countries interested in and exploring building emissions markets.



The EU ETS became effective January 1, 2005, creating the world’s largest market in greenhouse gas (GHG) emissions to date. The program establishes a mandatory carbon dioxide (CO2) cap-and-trade system, in which sources are allocated a certain number of emission allowances based on historic performance and other parameters.

The ETS was established primarily to help EU member states achieve their Kyoto Protocol targets, as well as provide companies and governments with experience in developing, operating and participating in carbon markets. The first phase of the EU ETS operated from 2005 to 2007, and the second phase ran from 2008 to 2012.

Participants reducing emissions below their cap can sell the resulting excess allowances. Those companies that find reducing emissions internally to be prohibitively expensive, or those needing to increase production, can buy allowances on the open market.

The cap is reduced over time so that total emissions fall, with the 2013 cap for emissions from power stations and other fixed installations in the 27 EU Member States – before Croatia’s accession on 1 July 2013 – has been provisionally set at just north of two billion allowances, according to the European Commission. For each year after 2013, this cap will decrease by 1.74% of the average total quantity of allowances issued annually in 2008-2012. In 2020, emissions from sectors covered by the EU ETS will be 21% lower than in 2005.

A business regulated under the EU ETS is penalized if it does not surrender enough allowances to cover its emissions. It has to buy allowances to make up the shortfall, is ‘named and shamed’ by having its name published, and must pay a dissuasive fine for each excess tonne of GHG emitted, according to the European Commission. The fine in 2013 is €100 per tonne (tCO2e). The penalty rises each year in line with the annual rate of inflation in the Eurozone (the group of EU countries using the euro as their currency).

A major revision approved in 2009 to strengthen the system means the third phase is significantly different from phases one and two, namely in that a single, EU-wide cap on emissions applies in place of the previous system of national caps and auctioning rather than free allocation is now the default method for allocating allowances. In 2013, more than 40% of allowances will be auctioned, a number that will rise each year, with the rest of allowances allocated free of charge on the basis of harmonized rules underpinned by benchmarks of emissions performance. Industrial sectors and sub-sectors deemed to be exposed to a significant risk of ‘carbon leakage’ receive a higher share of free allowances than those that are not.

In January 2012, the aviation sector was brought into the EU ETS through legislation adopted in 2008, with a cap on aviation allowances that was 3% lower than aviation emissions in the 2004-2006 reference period. Direct emissions from aviation account for about 3% of the EU’s total GHG emissions, a substantial majority of which come from international flights. But the decision sparked fierce opposition from countries such as China and the United States. In December 2011, the European Court of Justice ruled against certain US airlines and their trade association that pursued legal relief against the inclusion of aviation in the EU ETS, with the court finding that the EU’s legislation on aviation emissions is compatible with international law. But in November 2012, the EU decided to institute a one-year delay against penalizing the aviation sector for non-compliance while the International Civil Aviation Organization (ICAO) developed an alternate solution to regulate global airline emissions. In September 2013, the EU agreed to limit the application of its ETS to non-EU flights only to cover emissions occurring in EU airspace rather than the entire flight until 2020 if agreement is reached on an ICAO proposal for a global market-based mechanism covering the sector. However, countries such as China and the United States balked at the compromise, demanding that the EU exempt all emissions from non-EU originating flights into its airspace, a demand that European officials have since shown an inclination to accommodate.

The EU ETS faces a challenge due to a growing surplus of allowances, largely because of the economic crisis that has depressed emissions more than anticipated. At the start of the third phase, the surplus stood at almost two billion allowances, double its level in early 2012. This surplus risks undermining the market’s effectiveness and could threaten the ability of the EU ETS to meet more demanding emission reduction targets in a cost-effective manner. European officials gave the final stamp of approval to a plan to shore up the EU ETS by withholding 900 million permits from 2014-2016, a temporary solution known as backloading that some experts believe increases the potential for market volatility and does not address the impact of reintroducing the credits in 2020.

The United Kingdom has set a carbon price floor of £16/tCO2e, rising to £30/tCO2e by 2020, to supplement low EU ETS prices and stimulate long-term investment in low-carbon infrastructure, according to the World Bank’s Mapping Carbon Pricing Initiatives report. The UK’s long-term target is to reduce GHG emissions by 80% by 2050.

In 2005, the EU ETS’s first year of operation, about 321 million allowances, with a value of $7.9 billion, were traded. Trading volume rose to 1.1 billion allowances in 2006 and 2.1 billion (worth $49.1 billion) in 2007, according to the World Bank’s annual State and Trends of the Carbon Market reports.

Trading volume in EU allowances jumped from 3.1 billion in 2008 to 6.3 billion in 2009 and 6.8 billion in 2010 (when EU allowances accounted for 84% of the value of the total carbon market). In 2011, 7.9 billion allowances were traded, with a value of $147.9 billion.

Daily trading volumes exceeded 40 million allowances in early 2009, touched 60 million in early 2011 and exceeded 70 million in mid-2011, data compiled by Bloomberg New Energy Finance and London Energy Brokers Association show.


Turkey has a National Climate Change Action Plan in place, which highlights the implementation of a comprehensive installation-level Monitoring, Reporting and Verification (MRV) scheme, according to the World Bank report. The country adopted a detailed GHG MRV regulation and passed national legislation requiring energy and industry sector installations to report GHG emissions in 2012. Turkey is a member of the World Bank’s Partnership for Market Readiness (PMR), which is providing funding to help the country design key aspects of an installation-level MRV system for these sectors and explore other sectors to which the system can be expanded. The PMR funding will also support the design of a GHG data management and registry system to monitor GHG inventories and lay out a possible road map for the implementation of a domestic ETS between now and 2015.


Ukraine aims to reduce emissions by 20% by 2020 and by 50% by 2050. The country passed a draft law in November 2010 that provides the foundation for implementing a domestic ETS by January 2013, but the legislation was withdrawn from consideration by Parliament in July 2012, the World Bank report noted. Currently, a new law for the domestic ETS is being drafted led by the State Environmental Investment Agency, and a presentation to the Parliament is planned at the end of 2013. Ukraine also plans to develop a design for an installation-level energy sector MRV and develop a roadmap toward implementation of an ETS, with the support of the PMR. Other activities could include the development of long-term GHG emissions projections and a detailed ETS framework, according to the report.

European Commission 




United Kingdom 

The World Bank’s Mapping Carbon Pricing Initiatives report



European offset demand grew 34%, from 33 million tonnes MtCO2e in 2011 to 43.4 MtCO2e in 2012, according to Forest Trends’ Ecosystem Marketplace’s State of the Voluntary Carbon Markets 2013 report. A full half of these offsets were sourced from projects in Asia (almost all renewable energy) with another 9% (4 MtCO2e) from Africa-based projects. Just over half (52%) of all offsets transacted to EU-based buyers in 2012 were sold to carbon offset retailers – who either resold the offsets under new contracts or procured offset volumes to fill existing client needs.

The UK’s Woodland Carbon Code – administered by the UK Forestry Commission to incentivize woodland creation – supports the creation of a per tonne unit that UK-based companies can purchase as an environmental credit. The UK Department for Environment, Food and Rural Affairs (DECC) allows UK companies to claim any support for Woodland Carbon Code projects against their annual emissions reporting – the lone case of a national government allowing voluntary offsetting claims against mandatory emissions reporting. The Woodland Carbon Code had a quiet year in 2012, with only 0.1 MtCO2e transacted, but moving into 2013 piloted its first grouped validation scheme in support of reduced validation costs for small-scale forest carbon project developers, according to the Ecosystem Marketplace report. The standard has 19 projects validated through 2012.

Starting in 2014, potential buyers of carbon offsets generated by forestry projects under the Woodland Carbon Code can see future offsets available for sale, allowing them to make long-term offsetting plans. Companies can now buy Pending Issuance Units (PIUs) that represent promises to deliver Woodland Carbon Units (WCUs) in the future once the trees have grown and the carbon sequestration has been verified, which allows the PIUs to be converted into WCUs.

Italy’s Carbomark was launched as a pilot action aimed at creating a local voluntary carbon market. The market service started in September 2010, when local small and medium-sized enterprises had the opportunity to buy local carbon credits to offset their emissions. The market focuses on local mitigation activities in two regions in northeast Italy, does not include activities taking place in other countries and favors the trading of credits of agroforestry activities.

Turning to non-EU member offset supply locations in Europe, Turkey was the region’s primary source of offset supply – and the 7th largest source of offsets globally, according to the Ecosystem Marketplace report. Transaction volumes from Turkey-based projects nonetheless fell by 31% in 2012, as a function of competing lower-priced renewables from Asia-based projects, as well as buyers’ shift in attention to new locations and sources of supply for Gold Standard offsets.

Forest Trends’ Ecosystem Marketplace’s Maneuvering the Mosaic: State of the Voluntary Carbon Markets 2013 report 

UK’s Woodland Carbon Code Hangs “For Sale” Sign For Future Offsets