Paragraph 34, p12:
Companies receive or buy emission allowances, which they can trade. Box 1 gives an overview of the EU ETS.
Box 1 — Overview of the EU ETS
The EU ETS works on the ‘cap and trade’ principle. The overall volume of greenhouse gases that can be emitted over a multi-year period by power plants, factories and other companies covered by the system is subject to a cap set at EU level. Within this cap, companies receive or buy emission allowances, which they can trade if they wish to do so.
Over the period 2013-2020, the cap on emissions from power stations and other fixed installations is being reduced by 1,74 % every year. From 2021 onwards, the annual reduction rate will be 2,2 %.
Auctioning allowances provides revenue for the Member States, which collected 21,3 billion euros over the period 2013- 2017. Under the EU ETS Directive, at least 50 % of this revenue should be used for climate-related purposes. According to the Commission, the share of ETS revenue used for these purposes is around 80 %.
The ETS FAQ is a bit more specific on how it works in practice:
- What is a Community registry and how does it work?
Registries are standardised electronic databases ensuring the accurate accounting of the issuance, holding, transfer and cancellation of emission allowances. As a signatory to the Kyoto Protocol in its own right, the Community is also obliged to maintain a registry. This is the Community Registry, which is distinct from the registries of Member States. Allowances issued from 1 January 2013 onwards will be held in the Community registry instead of in national registries.
In other words, there are two types of exchanges:
- At the national level of each EU member.
- At the EU level.
If I am not mistaking these are all organized by the Union registry itself (cheaper than everyone rolling their own, I would presume), and the EU then funnels a large chunk of the surplus to applicable member states. (The part that the EU keeps represents around 2% of the EU's total budget, according to paragraph 37 in the first doc I quoted.)
The EU-wide exchange has been the one granting allowances since 2013. Other sections of the FAQ cover how the allowances are allocated. In short, member states set their own target, and then these are reviewed and approved by the EC.