2.2. European Union Allowances (EUA)

Worldwide ETS and Carbon Implementation

In 2005, European Union set up an international Emission Trading System (EU ETS), which operates in all EU countries, plus Iceland, Liechtenstein and Norway (EEA-EFTA states). Every year companies that are subject to this system, get a certain amount of carbon allowances allocated to them.

The EU ETS works on the 'cap and trade' principle, meaning, that every year a certain number of allowances is allocated to the companies subject to the system. Companies, whose CO2 equivalent emissions exceed their allocation, must purchase allowances from other companies that are 'under-emitted'. Additionally, the total amount of allowances distributed to the market participants is reduced every year, incentivizing companies to choose more climate-friendly and less polluting ways of production. As a result, this is a big driver in the EUA market price (approximate prices of €7/t in 2017; €20/t in 2019; €50/t in 2021).

EU ETS system covers carbon dioxide (CO2) from electricity and heat generation, energy-intensive industry sectors (oil, steel, iron, aluminium, metals, cement, lime, glass, ceramics, pulp, paper, cardboard, acids, bulk organic materials), commercial aviation within the European Economic Area (EEA); nitrous oxide (N2O) from the production of nitric, adipic and glyoxylic acids and glyoxal; perfluorocarbons (PCFs) from the production of aluminium.

In 2020, over 8 billion CO2 allowances changed hands in the EU ETS. With the current price of €52.17 (2021/06/09), that would account for almost €420 billion of traded volume in a year. Most companies do not have direct or easy access to buy or sell CO2 allowances. These companies need to reach out to intermediate trading houses in order to be able to buy/sell EUAs. This results in many additional costs such as brokerage fees for the intermediary, as well as administrative and legal fees. Relatively speaking, the smaller the company, the higher relative fees they incur, or sometimes they do not get serviced at all. The same goes for retail.