Carbon prices are on the rise on Europe’s ETS but have yet to catch up with the UK floor. The increases are likely to favour renewables and give a boost to gas at the expense of coal.

What is The European Union Emission Trading Scheme?

Established in 2005, the European Union Emission Trading Scheme (ETS) is the world’s largest carbon market, involving more than 11,000 power stations and industrial plants across the EU.

Companies buy permits through auctions. Auctions that fail to clear due to a lack of bids have the volumes added to future auctions.

How Does it Work?

The ETS programme covers around 50% of total emissions within the EU and works as follows:

  • The ETS sets a cap on the amount of greenhouse gases (CO2) that organisations can emit each year with the emissions monitored and reported by each organisation.
  • A fixed number of allowances get issued, and each year companies need to hold enough allowances to cover their emissions.
  • If they don’t have enough, they need to buy more on the ETS market.

Over time the caps get reduced, and fewer allowances get issued which is now beginning to drive up ETS carbon prices.