The European Union’s carbon market has shown remarkable success in encouraging industries to green their production processes. Known as the Emissions Trading Scheme (ETS), it has helped reduce the EU’s greenhouse gas (GHG) emissions by more than 40% in covered sectors.
The largest environmental-commodities market in history, it spans 31 countries (the 27 member states plus Iceland, Liechtenstein and Norway) and more than 10,000 power plants and industrial installations. These include oil refineries, steel works, and production of iron, aluminium, metals, cement, glass, ceramics, pulp and paper, among others. Based on the “cap and trade” principle, it sets an absolute limit on the total amount of certain greenhouse gases that can be released each year by the entities regulated by the system. Critically, that cap is tightened over time. Companies can buy or receive emission allowances, which they trade with one another as needed.
However, the policy has also had some undesirable side effects. Industries have looked to outsource their production to countries that do not adopt similar policies, which can lead to a rise in emissions outside Europe, potentially even exceeding the EU’s emission reductions.
