Emissions Trading Scheme (ETS)

Compliance Carbon Markets, also known as Emissions Trading Systems (ETS) aim to establish a carbon price through a mandatory regulatory or legal framework. They can be regional, national or international regimes for regulating and trading carbon allowances.
They typically operate through a cap and trade mechanism, where there are government-defined maximum emission limits known as allowances or credits. Carbon emitters that are under their emissions limit may sell their excess credits, whilst those who exceed the limit may buy credits to cover the shortfall.

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Frequently Asked Questions

  • How many ETSs are there?

    The number of ETSs is constantly growing. In 2018 the World Bank reported that there were 51 schemes either implemented or scheduled worldwide.

  • What is the main ETS?

    The European Union Emissions System (EU-ETS) was set up in 2005 and was the first scheme of its type – it is also one of the world’s largest. Its jurisdiction covers all member states and European Free Trade Association states.


    The UK Emissions Trading Scheme (UK-ETS) was set up in 2021 to replace the UK’s participation in the EU-ETS and provide continuity of emissions trading for UK businesses. The UK Emissions Trading Scheme works in a very similar way to the EU scheme, except that while the EU ETS applies to all countries in the European Economic Area, the UK ETS only applies to the UK.

    There is also the Chinese National Emission Trading System, implemented in 2021, which covers all of China, and the California Global Warming Solutions Act covering the state of California alone.


  • How do they work?

    Most ETSs operate on the ‘cap and trade’ principle. The volume of greenhouse gases that can be emitted by certain sectors is limited by a ‘cap’ which decreases every year, to ensure that overall emissions continue to decrease in line with the climate targets. The cap is measured in allowances, with each allowance permitting the holder to emit a certain amount (usually one tonne) of greenhouse gas.

    Each year, companies must obtain sufficient allowances to cover their greenhouse gas emissions. They may receive some allowances free of charge but may also trade allowances with other companies to meet their obligations.

  • Are they effective?

    CCMs can be extremely effective. They provide certainty that greenhouse gas reductions can continue to be achieved, through the implementation of a declining cap, whilst also giving individual emitters the flexibility to tailor their compliance solutions to their own specific circumstances.


    The philosophy behind any trading system is that emissions reductions should take place where it is most efficient and cost-effective to do so first – incentivising the most effective emissions reduction measures. They also place accountability on emitters to track, reduce and report emissions.

    We can assist your business in fulfilling these tracking and reporting obligations to ensure that you have a complete view of your emissions data, can meet compliance requirements, and make a positive contribution to carbon reduction.


  • Do they just cover carbon dioxide (CO2)?

    Each scheme is different, but allowances are often per tonne of carbon dioxide equivalent, which includes carbon dioxide itself or an equivalent amount of other significant greenhouse gases such as nitrous oxide or perfluorocarbons.

    We look at the range of emissions from each business, ensuring that all greenhouse gases are considered in your carbon-reduction measures.

  • What is the Carbon Border Adjustment Mechanism (CBAM)?

    To encourage cleaner production of goods that are imported, CBAMs impose a carbon-related charge on certain imported products. This ensures that companies do not relocate production to regions with little or no carbon regulation – a problem known as ‘carbon leakage’.


    The charges are typically set at a level that covers the difference between the carbon price applied in the country of production versus the carbon price that would have been incurred had the goods been produced locally.

    CBAM certificates are purchased by companies and then the number of certificates that corresponds to the emissions embedded in their imports must be surrendered each year.


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