What are EUAs?
EUAs are European Union Allowances, which permit the holder to emit one tonne of carbon dioxide. EUAs are issued under the European Union Emission Trading Scheme (EU ETS), which was established by member states in the EU as a mechanism to meet their commitments to reduce carbon dioxide emissions agreed in the Kyoto Protocol. The Kyoto Protocol is a global agreement between many of the leading industrialised nations in the world to reduce greenhouse gas emissions by 2012.
How do EUAs work?
The EU ETS works by setting a limit on the amount of carbon dioxide produced in the EU. Companies in certain industries are required to participate in the scheme (typically heavy and energy intensive industry) and are issued with a certain number of EUAs, which essentially act as ‘licenses to pollute’. Each EUA allows these companies to produce one tonne of carbon dioxide, or an equivalent amount of other greenhouse gases, through their business activities. If they produce more than their allowance, they must buy additional EUAs in the market from companies that have a surplus, or risk facing substantial financial penalties.
The idea is that the total number of EUAs issued is less than the total amount of carbon dioxide that would be produced if companies could pollute unhindered. Thus the number of EUAs issued acts as a ‘cap’, forcing downward pressure on total EU emissions.
EUAs issued under the Trading Scheme are fully regulated by both national governments and the EU. As such, there are extremely robust procedures in place to ensure that they are used and regulated correctly. Each EUA has a unique identification number and a register is kept detailing their ownership.