The EU Emissions Trading Scheme (ETS) is the official title of the European Union's carbon emissions cap-and-trade scheme.
First launched in 2005, the scheme is designed to cap emissions from the bloc's most polluting businesses, impose a price on carbon and create a market for trading pollution permits.
Under the cap-and-trade mechanism, EU member states allocate or auction emission allowances to more than 10,000 organisations across the region, which currently operate mainly in the energy and other heavy industry sectors.
Members of the scheme may then either purchase additional allowances from others if they generate more emissions than permitted or sell on a portion of their allowance if they produce less, providing companies with a financial incentive to cut emissions. They are also obliged to monitor and report on their carbon emission levels on an annual basis.
The EU initiative is the largest multi-national emissions trading scheme in the world and is a major pillar of the EU's climate policy.
The scheme has been the subject of fierce debate. Advocates of the scheme have argued that it has proved effective at curbing emissions and driving investment in clean technology, while critics maintain that the caps on emissions have consistently been set too high and as a result the market has been undermined by a glut of emission allowances that has kept the carbon price too low.
Some business groups have also argued that cost burden on European heacy industry has undermined its international competitiveness.
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