Emissions trading—essentials
Emissions trading—essentials

The following Financial Services guidance note provides comprehensive and up to date legal information covering:

  • Emissions trading—essentials
  • Background
  • Emissions trading schemes
  • Examples of emissions trading schemes
  • Regulation of bidding in emissions auctions and exclusions
  • FCA view on carbon trading


Emissions trading is a market-based approach to controlling pollution. It aims to reduce emissions of carbon dioxide and other harmful greenhouse gases (GHGs) which result in climate change. Emissions trading in GHGs is also known as carbon trading.

Emissions trading allows parties to buy and sell rights to emit certain pollutants through emissions trading schemes (ETS). The objective is to put a price on emissions so that companies become encouraged to help prevent climate change. If the cost of the rights is sufficiently high, companies should be incentivised to reduce their emissions, for example by becoming more energy efficient.

Emissions trading is high on the European Commision’s (EC) priority list. According to the EC’s report on the EU Emissions Trading System (EU ETS) the growth in GHG emissions needs to be stopped by 2020 at the latest. The EC has also produced a report on climate change which states that the EU has put in place measures to cut its emissions by 20% by 2020 and is offering to scale up this reduction to 30% if other major economies agree to do their fair share of a global effort.

Emissions trading schemes

Emissions trading schemes are ‘cap and trade’ schemes. Under these schemes the relevant body, such as the EC or government, sets a limit on the amount