Emissions trading, or “cap-and-trade”, is a market-based approach for the control of pollutants through the provision of economic incentives to limit or reduce emissions.
Emissions Trading
The underpinning rationale of emissions trading is that emission reductions are achieved where the cost of the reduction is lowest, thus lowering the overall cost of mitigation efforts against climate change.
Emissions trading principles became the basis for international emissions trading as established by Article 17 of the Kyoto Protocol to the United Nations Framework Convention on Climate Change UNFCCC) – trading of emission entitlements between Parties with quantified emission limitation or reduction targets.
An authority (for example an international or regional body in the case of a multinational scheme, or a government in the case of a national scheme) sets a cap on the total amount of pollutant that can be emitted under the system. Parties or companies participating in an emissions trading system are each allocated a quantity of tradable emission permits (also referred to as allowances), the sum of which would be equivalent to the overall cap. Each emission permit or allowance is equivalent to a specific amount of pollutant; in the case of greenhouse gas emissions trading systems, one permit or allowance is normally equivalent to 1 tonne of carbon dioxide equivalent. A system may also include a decrease in the cap over time.
Entities participating in such a system, and thus allocated emission permits, have the flexibility of determining how and where emission reductions will take place. An entity is allowed to emit in excess of the allocation of permits it has been issued by purchasing additional permits from an entity that emits less than its allocation and thus has surplus permits to sell. Thus, entities can either reduce emissions on site or else buy permits, depending on which approach is the most cost-effective for that entity. The buyer of permits or allowances is effectively paying for polluting, while the seller is rewarded for reducing its emissions.
Most importantly, the overall environmental outcome is however not affected as the total amount of permits or allowances in the system, the cap, is independent of actual emissions.
- Figure 1 – diagrammatic representation of how emissions trading works in practice
The European Union Emissions Trading System
The European Union has established the largest multi-country (to date covering 27 EU Member States, with the participation also of Norway, Iceland and Liechtenstein) and multi-sector emissions trading system, as a cornerstone of the Union’s policy to combat climate change, being the Union’s key tool for reducing greenhouse gas emissions cost-effectively.
The EU ETS is established by Directive/2003/87/EC, which has been amended a number of times. Originally covering stationary installations, it has been extended to also include aviation activities, and shipping. A separate, parallel system, is also due to start, covering the emissions relating to the release for consumption of fuels which are used for combustion in the sectors of buildings and road transport, and additional sectors.
European Commission EU ETS page
EU ETS Directive (latest available consolidated version)
Implementing the EU ETS in Malta
The Competent Authority for the implementation of the EU ETS in Malta is the Malta Resources Authority, email address emissions_trading_scheme@mra.org.mt.
The legislation transposing the EU ETS Directive into Maltese law may be accessed in the Publications page of this website.
Carbon Border Adjustment Mechanism (CBAM)
The Carbon Border Adjustment Mechanism Regulation is governed by Regulation (EU) 2023/956 and Commission Implementing Regulation (EU) 2023/1773.
CBAM was created to address carbon leakage. Carbon leakage takes place when businesses transfer the production of goods /services to other countries with less stringent emission constraints (i.e. lower environmental standards/climate policies).
CBAM puts a fair price on the carbon emitted during the production of carbon intensive goods that are entering the EU, to encourage cleaner industrial production in non-EU countries. The gradual introduction of the CBAM is aligned with the phase-out of the allocation of free allowances under the EU Emissions Trading System to support the decarbonisation of EU industry.
CBAM applies to imports of cement, iron & steel, aluminium, fertiliser, hydrogen, and electricity, imported from outside the EU into the EU, and of a total value exceeding €150.
A Transitional Period will run from the 1/10/2023 to the 31/12/2025, which will then be followed by the Definitive period, from 01/01/2026 onwards.
During the Definitive Period importers will have to bear a “CBAM obligation” in the form of certificates. EU importers of goods falling within the scope of CBAM will need to buy CBAM certificates. The price of the certificates will be calculated depending on the weekly average auction price of the EU ETS allowances expresses in euro/Tonne of CO2 emitted.
The Malta resources Authority is the National Competent Authority for CBAM. Email address cbam@mra.org.mt