European Union Emissions Trading Scheme

The European Union Emissions Trading Scheme (EU ETS) is a market-based system that limits greenhouse gas emissions from industries. The EU sets a cap on total emissions and divides it into allowances, each representing the right to emit a specific amount of CO₂. Companies buy and sell these allowances, encouraging them to innovate and reduce emissions cost-effectively. If a company emits less, it can sell surplus allowances; if more, it must buy extra. This creates financial incentives to lower pollution, helping the EU meet its climate targets in an economically efficient way.