Carbon Trading - EU Emissions Trading System (EU ETS) 

What is the EU ETS? 

The so-called carbon trading system is aimed at carbon emission trading centers in the EU that exceed the scope of enterprises' own carbon emission permits and need to purchase the excess emission permits through a third-party trading platform. The EU ETS is one of the world's largest and most influential carbon trading markets, and it is a key policy tool implemented by the European Union (EU) to combat climate change and reduce greenhouse gas emissions. The core goal of the EU ETS is to encourage companies to reduce carbon emissions, encourage companies in EU countries and participating countries to reduce carbon dioxide and other greenhouse gas emissions, promote clean energy use mechanisms, and promote sustainable economic development through carbon trading and carbon pricing. The detailed background, principles of operation, goals, effectiveness, and impact on climate policy of the EU ETS are as follows. 

I. Background and History 

The history of the EU ETS EU emissions trading system can be traced back to its official launch in 2005 and is one of the early climate policies adopted by the European Union. The EU began to pay attention to climate change in the early 1990s and committed to reducing greenhouse gas emissions in the 1997 Kyoto Protocol. To achieve this. It was established on the basis of the European Greenhouse Gas Emissions Trading Directive (EU ETS Directive) in 2003, which establishes carbon emission limits for the industrial, energy, and transportation sectors within Europe. The implementation of this system aims to reduce carbon emissions, encourage companies to invest in cleaner and environmentally friendly technologies, and lay the foundation for Europe to achieve its greenhouse gas emission reduction targets by 2020 and 2030. 

II. Operational Basics 

The operating principle of EU ETS can be summarized as follows: 

1.  Carbon emission allowance allocation (cap-control): 

The European Union determines carbon emission limits and emission caps for each participating country and company. Redistribution is based on the EU's overall targets and participating countries, and these allowances are usually allocated based on historical emissions data and industry characteristics. Carbon emission limits are considered rights by countries and businesses designated by the European Union, and these rights are called carbon emission permits.

 2. Distribution of emission permits: 

Participating countries divide this emission cap into carbon emission permits (Emission Allowances), which are then distributed to participating domestic companies and institutions. Each permit represents an emission right for a certain amount of carbon dioxide or other greenhouse gases. 

3. Carbon trading market: 

Companies or institutions can freely buy and sell these emission permits, forming a carbon trading market. Assuming that a company's total emissions exceed the total amount of emission permits it holds, the company or institution must purchase additional carbon permits from third parties or from external parties or incur excess emission penalties. If a company's total emissions are below its emission permit limit, it can sell the excess license quota to the outside world. 

4. Open carbon pricing: 

The price of carbon emission permits is determined by the law of supply and demand in the free market. When the carbon emission limit is reduced, the price may rise due to the demand of the company or emitting agency in response to the demand, thereby encouraging the company to reduce carbon emissions and use the company's short, medium and long-term investment, business methods, production technology or equipment, and decision-making investment in clean technology as a decision-making indicator.

 5. Compensating for insufficient emission space: 

If companies cannot purchase sufficient carbon emission permits in the market, they may need to participate in some climate project programs, such as carbon offset projects, to compensate for their insufficient emission space. These projects include tree planting, climate-friendly energy projects, and more. 

6. Gradually reduce emission caps: 

During each trading period, the EU will gradually reduce the tightening of emission caps to encourage companies to achieve more carbon emission reductions. This mechanism of gradual reduction and strengthening of limits contributes to the achievement of long-term emission reduction targets. 

7. Strict supervision and audit: 

The EU ETS has very strict standards for total control and supervision, with dedicated agencies and procedures responsible for supervising and reviewing the carbon emissions, carbon reduction measures, and related data of participating companies to ensure the authenticity and accuracy of reports.   

III.EU ETS EU ETS Objectives 

The main objectives of the EU ETS include: 

1. Reducing Carbon Emissions: By setting carbon emission limits, the EU ETS encourages participating companies or institutions to reduce carbon emissions and promote the use of clean energy, thereby mitigating the rapid changes in extreme weather. 

2. Promoting innovation: The carbon trading market provides incentives for businesses to engage in economic activities, encouraging them and institutions to invest in clean and environmentally friendly technologies, fostering innovation.

3. Achieve economic benefits: The operation of the carbon market can bring economic benefits to participants and help improve the sustainability of the European economy.

 4. Support climate policy: The EU ETS is part of the European Union's climate policy and supports Europe's climate goals, including greenhouse gas emission reduction and renewable energy development. 

IV.operational performance and impact Since the establishment of the EU ETS EU Emissions Trading System, the EU carbon trading mechanism has achieved a series of significant results: 

1.  Carbon Emissions Reduction: 

The EU ETS contributes to the reduction of carbon emissions in Europe, successfully reducing carbon emissions within the EU. Over the years, based on historical data, relevant participating companies have reduced their total carbon emissions, which to a certain extent achieves the EU's ultimate goal of climate neutrality, and helps promote more efficient energy use and carbon reduction in Europe's industrial and energy sectors. 

2. Global Benchmark: 

The EU ETS has become a benchmark for the global carbon market, inspiring other countries and regions to establish similar carbon trading systems. It has also played an active role in international climate negotiations.

 3. Financial support: 

By auctioning carbon permits, the EU ETS generates a significant amount of funds, which can be used to support climate projects and carbon reduction measures. 

4. Carbon Market Development: 

The EU ETS's carbon market trading mechanism has become one of the world's largest carbon trading markets, attracting many participants and investors to participate in the trading volume of the carbon trading market. 

5. Promoting Clean Energy: 

The existence of carbon market prices encourages companies to make decisions about investing in clean energy and production models, driving the future and market growth of renewable energy. 

6. Economic benefits:

 The carbon trading market provides enterprises with indicator benefits and economic benefits for improving their business resources or long-term operating target projects, and also provides relevant tax revenues for governments and relevant departments and units to support global climate policies and related climate projects, thereby promoting the development of a green economy. 

V.Impact on climate policy

 The impact of the EU ETS on climate policy is positive, providing a strong economic incentive mechanism and encouraging increased demand for carbon reduction indicators and the use of clean and renewable energy. However, the system also faced some challenges and criticisms: 

1.    Price Fluctuations Affecting Investments: Carbon market trading prices have fluctuated significantly in the past, which may cause uncertainty about the effectiveness of companies' plans and investment policies. 

2. Fairness in the allocation of permits: The allocation of carbon emission permits has caused controversy, and some believe that the amount of carbon emission permits should be more fair to ensure that the economic benefits affected by participation in carbon reduction activities are balanced for all participants.

 3. Carbon leakage: Some companies may migrate the manufacturing supply side to third countries that do not impose carbon taxes or carbon fees for manufacturing due to increased operating costs due to regional carbon taxes or carbon fees imposed by regional government policies, so as to avoid the restrictions of EU ETS emission permits. 

VI.Future challenges or possible developments 

Despite some impact and achievements of the EU ETS, it also faces some challenges and possible room for improvement: 

1.    Price Fluctuations: The price of the carbon Chiayi market has fluctuated sharply in the past, which may lead to a lack of stable conditions in the carbon trading market, which indirectly affects the willingness to participate in investment. 

2. Allocation of emission rights or permits: The allocation of carbon emission allowances may not be fair, and it is susceptible to political forces and pressure from relevant stakeholders to influence their objective concerns. 

3. Expansion to other industries: The EU ETS is mainly focused on the energy sector and industrial sector, and future challenges should maximize the influence of the carbon trading market to other industries or industries, such as; transportation industry and agriculture and animal husbandry. 

4. Increase carbon prices: EU authorities should consider increasing the price of carbon emission taxes or fees to more effectively reflect the carbon emission risks and social costs of not implementing carbon self-management or investing in climate policies, and encourage more active carbon reduction actions. 

The EU ETS is an important tool for Europe to combat climate change, providing successful examples or indicators for the establishment and development of carbon markets. It also demonstrates the potential of carbon indicators and internal and external carbon price setting to achieve carbon reduction goals and promote the development of a green economy. Of course, this measure also needs to be continuously refined to meet the ever-changing extreme climate challenges. The EU should continue to play a leading role in both areas of carbon trading and climate action, and hopes to extend its success globally.