Climate glossary

The quota system (the EU Emissions Trading Scheme, or ETS) is a trading system that was established to help European countries fulfil their obligations under the Kyoto Protocol to reduce carbon emissions by 8% from the 1990 level in the period 2008-12.

The purpose of the system is to limit the largest energy-intensive companies' carbon emissions by placing a ceiling on their emissions. These companies are allocated a number of "free" allowances that give them the right to emit a certain amount of CO2 every year (one ETS allowance gives the right to emit one tonne of CO2). If a company emits more CO2 than its free allowances, it can choose to reduce its emissions or purchase extra allowances.

The idea behind the quota system is that companies, in meeting their obligations under the Kyoto Protocol, will choose the most economical solution. For example, if it is cheaper to reduce emissions than to purchase allowances, a company will reduce emissions. But if it is cheaper to purchase allowances, the company will do so. The emissions reductions will thus take place according to the most economical arrangement.

Companies that emit more CO2 than the allowances they have been allocated can also buy carbon credits instead of allowances. Companies that are not subject to the quota system, as well as organisations and private individuals, can buy carbon credits as well.

Last updated on February 5, 2009