The ETS was created in 2005 in order to reach the Kyoto Protocol objective of reducing by 8% the greenhouse gas emissions before 2012. The limits only apply to energy-intensive industries such as steel, cement and electricity. The mechanism aims at encouraging companies to invest in low-polluting technologies. Emissions allowances give the right to emit one tonne of CO2. They are either given, bought at auction or traded. 

Several flaws jeopardise the ETS

The ETS has been the target of criticism since its creation. Several flaws have yet to be resolved to support a transition to a low-carbon economy. The European Court of Auditors regrets that there is no clear legal definition of emissions allowances. The price of permits is only about 7 euros a tonne because of the high number of permits in circulation. Moreover, free permits were given to polluting companies for a value of 150 billion euros. 

Fraud such as VAT fraud (cross-border transactions fraud), scams and quota thefts shows the ETS's failure. To prevent this phenomenon to continue, the European Commission launched a new legislation to allow member states to put obligation on the person buying the allowances. The auditors note that a third of the governments did not implement the mechanism.

The emissions market is not controled at EU-level. It depends on the cooperation between the Commission and national regulators which is not very efficient. In addition, national regulators have little information over cross-border transactions for example.  

Reforms of the ETS are intented for 2019, which puts at risk the EU's credibility and leadership at the COP 21 held in the end of 2015 in Paris since carbon market solutions are likely to be promoted by many participants, citizens, NGOs and companies included.