Anita Boros, Gyula Koi (eds): Sustainability and Law
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5. Legislation on Sustainability in the European Union law (László Vértesy)
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5.3. Secondary law
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5.3.3. Climate Protection

5.3.3. Climate Protection

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The EU Emissions Trading System (abbr. EU ETS) is detailed in Directive 2003/87/EC and is a key component of the EU’s climate change policy.1 This directive is the cornerstone of the EU’s policy to tackle climate change by reducing greenhouse gas (abbr. GHG) emissions in a cost-effective and economically efficient way. The EU ETS uses a cap-and-trade principle where the EU sets the cap on the total amount of potential greenhouse gases emitted by installations in the system. Companies are provided with or buy emission allowances which they can trade between themselves. The cap decreases over time, providing assurance that total emissions will decrease over time.
 

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Cap-and-trade principle. The EU ETS works on the basis of this principle. A cap, or limit, is set on the total amount of certain GHGs that can be emitted by the factories, power plants and other installations in the system. The cap is reduced over time so that total GHGs emissions fall. The system allows emission allowances to be traded so that the total emissions of the installations and aircraft operators stas within the cap, and the most cost-effective measures can be taken to reduce emissions.
Carbon leakage. Carbon leakage refers to the situation that may occur if, for reasons of costs relating to climate policies, businesses were to transfer production to other countries with laxer emission constraints. This could lead to an increase in their total emissions. The risk of carbon leakage may be higher in certain energy-intensive industries.
‘Polluter-pays’ principle. This principle requires polluters to bear the cost of the pollution they cause.
 

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Figure 39. ETS Phases in the EU. Source: Compiled by the author
Phase
Years
Key Features
Sectors Covered
Allocation Method
Reforms & Notes
Phase I
2005–2007
Pilot/trial phase
Power and heat generation, select industry sectors
Mostly free allocation based on historical emissions (grandfathering)
Over-allocation led to price collapse; no banking of allowances to Phase II
Phase II
2008–2012
First Kyoto Protocol compliance phase
Expanded industrial sectors; aviation from 2012
Mostly free allocation; some auctioning introduced
National Allocation Plans (NAPs1); banking allowed into Phase III; inclusion of CDM/JI credits (limited)
Phase III
2013–2020
Centralised EU-wide cap
Power, industry, and aviation sectors across EU
Increased auctioning, especially for power sector; benchmarking for industry
Cap reduced annually by Linear Reduction Factor (LRF); Market Stability Reserve (MSR) proposed (effective 2019); harmonised rules
Phase IV
2021–2030
Strengthened system aligned with 2030 climate targets
As before; maritime sector to be added
Further reduced free allocation; more auctioning; benchmark updates
Stronger MSR; LRF increased from 1.74% to 2.2%; Innovation and Modernisation Funds expanded; Carbon Border Adjustment Mechanism (CBAM) planned
Phase V (Proposed)
2031 onward
In planning with Fit-for-55 Package
Extension to buildings, road transport (ETS 2)
Separate ETS for new sectors; full auctioning for ETS 2
To support 55% GHG reduction target by 2030; Social Climate Fund introduced
 

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The current (fourth) phase of the ETS runs from 2021 to 2030. For this period, the EU has set a new, increased target to decrease GHG emissions by 62%, compared to 2005 levels. The EU also provides assistance to Member States for the impacts of climate change through a range of strategies and funding mechanisms. There is no single directive focused on climate change adaptation, but the EU’s framework includes: (i) incorporating adaptation into their existing policies and funding format, (ii) raising the profile of resilience, and (iii) encouraging the creation of national adaptation strategies.
1 Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC https://eur-lex.europa.eu/eli/dir/2003/87/oj/eng
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