In the European Union, major GHG emitters such as electricity producers and manufacturing companies are obliged to take part in the emissions trading system (ETS). This system regulates 40 percent of all GHG emissions in Europe. The European Union’s target for 2020 is at least 21 percent reduction compared to 2005.
Carbon pricing does not carry any targets and is determined by market forces. Each participating company must trade in the equivalent of its GHG emissions for emission allowances annually. A portion of the emission allowances is granted to companies free of charge. If a company has any allowances left, it is permitted to trade them. If a company does not have sufficient allowances, it can purchase them, or reduce its emissions by means of targeted investments. The higher the carbon price level, the more interesting the latter option will be.