The European Union Emissions Trading Scheme (EU ETS) has been set up to help member countries to achieve their Kyoto commitments. It is allocating GHG emission limitations on a number of installations within specific industry sectors in each country (approximately 11,000 installations throughout Europe), in the period from 2005 to 2012.

It creates a market for carbon trading, by allowing emission targets to be met through trading of EU emission allowances (EUAs), and CDM and JI projects under Kyoto. It is therefore linked to Kyoto.

National Allocation Plans (NAPs), developed by each member state, set the upper level of allowances to be issued (caps) on a national level. The Allocations have to be approved by the EU Comission.

In the first period of the scheme 2005-2007, a total of 6.3 billion allowances were issued, each allowances representing the right to emitt 1 tonne of CO2 equivalent. Hence the EU ETS covers 44 % of all greenhouse gas (GHG) emissions in the EU.

If installations do not meet their target for the sum of the years of the trading period, the penalty is €40/t CO2 on the shortfall in the 2005- 2007 period. In addition, the excess amount they emitted is deducted from their target for the subsequent trading period.