The European Union Emission Trading Scheme (EU ETS) is the largest multi-national, emissions trading scheme in the world,[1] and is a major pillar of EU climate policy. The ETS currently covers more than 10,000 installations in the energy and industrial sectors which are collectively responsible for close to half of the EU's emissions of CO2 and 40% of its total greenhouse gas emissions.

Under the EU ETS, large emitters of carbon dioxide within the EU must monitor and annually report their CO2 emissions, and they are obliged every year to surrender (give back) an amount of emission allowances to the government that is equivalent to their CO2 emissions in that year. The installations may get the allowances for free from the government, or may purchase them from others (installations, traders, the government.) If an installation has received more free allowances than it needs, it may sell them to anybody.

In January 2008, the European Commission proposed a number of changes to the scheme, including centralized allocation (no more national allocation plans), a turn to auctioning a greater share (60+ %) of permits rather than allocating freely, and inclusion of the greenhouse gases nitrous oxide and perfluorocarbons.[2]. Also, the proposed caps foresee in an overall reduction of greenhouse gases for the sector of 21% in 2020 compared to 2005 emissions.