The European Union (EU) has shown leadership in combating climate change. In December 2019, the executive body, the European Commission, announced the European Green Deal, a growth strategy for a sustainable and competitive EU economy.

The strategy’s main goals are 1) zero net greenhouse gas emissions by 50 years, 2) decoupling of economic growth and resource use, and 3) a fair and inclusive transition. According to the European Commission, the EU reduced greenhouse gas emissions by 23% and increased its gross domestic product (GDP) by 61% between 1990 and 2019.

However, according to the policy in place at the time of the announcement of the European Green Deal, the EU’s greenhouse gas emissions were only expected to be 60% lower in 2050 than in 1990. Therefore, policies had to be strengthened in order to achieve the target.

The EU therefore enacted the European Climate Law in June 2021. It made it a legal obligation to reduce greenhouse gas emissions by at least 55% below 1990 levels by 30 years and to achieve net emissions of zero by 2050.

In July 2021, the EU published ‘Fit for 55’, a package of policies to achieve the 30-year target of the European Climate Act. Its content is wide-ranging, but the focus here is on the European Union Emissions Trading Scheme (EU-ETS), which is at the heart of the package.

The EU-ETS is a cap-and-trade emissions trading scheme, and since its introduction in 2005, it has become the world’s largest carbon market in terms of the amount of emissions allowances traded. It is currently in its fourth phase (21-30 years) and covers a total of approximately 10,000 installations in the electricity and heat supply sector and energy-intensive industrial sectors in the European Economic Area (EEA – 27 EU countries plus Iceland, Liechtenstein and Norway) and aviation operators operating in the EEA.

The regulation covers carbon dioxide (CO2), nitrous oxide and perfluorocarbons, covering approximately 40% of EU-wide greenhouse gas emissions. In principle, emission allowances are allocated to eligible installations in a paid auction. In the event of non-compliance with the target, a fine of EUR 100 per tonne of CO2 equivalent is levied, plus the need to procure the missing emission allowances.