Emissions trading is a mandatory scheme used to reduce the cost of pollution by providing economic incentives for achieving emissions reductions. In such a plan, a central authority sets limits or "caps" on each country and each pollutant. Countries or pollutants that intend to exceed their limits may buy emissions credits from entities that are able to stay below their designated limits. This transfer is referred to as a trade.
The European Emissions Trading Scheme (EU ETS) is a mandatory compliance programme for large emitters in the 25 European Union Member States. About two billion European Allowances (EUAs) are issued each year to included companies, which establishes a cap on total aggregate emissions from these companies. To comply with their obligations, capped companies may either reduce their emissions and sell the surplus EUAs or buy EUAs (or CERs or ERUs) in the marketplace.
By ratification of the Kyoto Protocol, each Annex I country (mainly developed countries) has agreed to limit emissions to the levels described in the protocol. Countries, that have lower emission production than their limit, may offer the extra amount to buyers who can purchase the emissions credits in order to meet their targets. This rewards countries that meet their targets, and provides financial incentives to others to do so as soon as possible.
EU ETS