EU Allowance
EU Allowances are climate credits used in the European Union Emissions Trading Scheme. EU Allowances are issued by the EU Member States into Member State Registry accounts. By April 30 of each year, operators of installations covered by the EU ETS must surrender an EU Allowance for each ton of CO2 emitted in the previous year.
The emission allowance is defined in Article 3 of the EU ETS Directive as being "an allowance to emit one tonne of carbon dioxide equivalent during a specified period, which shall be valid only for the purposes of meeting the requirements of this Directive and shall be transferable in accordance with the provisions of this Directive".
Cap and trade system
The EU ETS works on the 'cap and trade' principle. Companies receive or buy emission allowances within the cap and they are allowed to trade them with one another. The total number of allowances is limited, which ensures that they have a value. If a company emits more in a year than its allowances, then heavy fines can be imposed. The fine is 100 euros per excess tonne. Companies that do not use their allowances can "bank" them to cover future needs or sell them to other companies.Free allocation of Allowances
Free allocation of allowances decreases each year. Over the 2013 to 2020 trading period 43% of allowances were available for free allocation; and the manufacturing industry received 80% of its allowances for free at the beginning of that trading period which decreased gradually to 30% in 2020. On the other hand, power generators in principle do not receive any free allowance but have to buy them.Auctioning of allowances
The default method of allocating allowances, which were not allocated for free within the EU emissions trading system is auctioning. This is the most transparent allocation method, as it shows that polluters should pay and how much. The auctioning is governed by the EU ETS Auctioning Regulation, which ensures that it is conducted in an open, transparent, harmonized, and non-discriminatory manner. Currently, there are two auctioning platforms:- European Energy Exchange, in Leipzig, is the common auction platform for the large majority of countries participating in the EU ETS and also conducts emissions auctions for Poland during the transitional period. EEX also published the volumes that will be auctioned in 2020.
- ICE Futures Europe, which acts as the United Kingdom's platform and is located in London. The first EUAA auction on ICE took place in September 2014. the UK remains in the ETS despite having left the EU.
Allocation of allowances in phases
Auctioned allowances in 2013-2020
| Year | Estimated amount | Estimated amount after deducting the maximum transitional free allocation for electricity generators | Amount published in the auction calendars or foreseen to be auctioned |
| 2013 | 1,066,444,135 | 914,878,081 | 808,146,500 |
| 2014 | 1,055,457,778 | 925,952,714 | 528,399,500 |
| 2015 | 1,043,568,216 | 929,045,589 | 632,725,500 |
| 2016 | 1,030,777,152 | 932,392,360 | 715,289,500 |
| 2017 | 1,017,062,324 | 935,935,359 | 951,195,500 |
| 2018 | 1,002,630,749 | 939,881,596 | 937,557,000 |
| 2019 | 987,734,136 | 945,663,715 | 945,669,641 |
| 2020 | 972,518,667 | 972,518,667 | 972,518,667 |