Emissions trading started in January 2005 and covers the 25 Member States of the enlarged European Union. The European Union Greenhouse Gas Emission Trading Scheme (EU ETS) is the first multi-national emissions trading scheme in the world and is considered a forerunner of the international emissions trading scheme under the Kyoto Protocol.

It is estimated that the companies currently participating in the scheme account for almost half of the EU's total CO2 emissions. The European Emission Trading Scheme covers more than 12.000 energy-producing and energy-intensive plants.

The aim is to help EU Member States achieve compliance with their commitments under the Kyoto Protocol. Emissions trading does not imply new environmental targets, but allows for less expensive compliance with existing targets under the Kyoto Protocol. Letting participating companies buy or sell emission allowances means that the targets can be achieved at least cost.

Under the EU emissions trading scheme, the EU Member States will set limits on CO2 emissions from energy-intensive companies by issuing allowances as to how much CO2 these companies are allowed to emit. Reductions below the limits will be tradable.

Companies that achieve reductions can sell them to companies that have problems staying within their limits or for which emissions reduction measures are too expensive compared to what the allowances will cost. These latter companies are also likely to be interested in credits from CDM and JI projects. Any company may also increase its emissions above the level of allowance it is issued by acquiring more allowances from the market. The certificates are tradable and serve as a kind of currency.

Emissions trading is an innovative system that takes advantage of market forces and provides an economic basis for lowering emissions. It will make sure that emissions are cut where it is most cost-efficient, thereby ensuring that reductions are made at the lowest possible cost to the economy and that innovation is fostered. This allows the Kyoto signatories to achieve their Kyoto targets at the least possible cost and ecologically effective action is implemented economically.