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The European Union Emissions Trading Scheme (EU ETS) has a dual climate impact: it reduces industrial carbon emissions while also financing extensive public climate initiatives.
The European Union Emissions Trading Scheme (EU ETS) has a dual climate impact: it reduces industrial carbon emissions while also financing extensive public climate initiatives.
The EU ETS is more than just a financial incentive for industries to change their operations. It is a robust funds redistribution mechanism to fund public climate projects. Polluters pay for the pollution that they are responsible for. But where does this money go? Further decarbonization. The funds collected from carbon allowances are invested in green projects that benefit the wider public.
The EU ETS aims to drive long-term decarbonization without imposing rigid controls on the specific initiatives that benefit from the funds. By establishing European-level rules for carbon emissions but allowing flexibility in fund distribution to member states, the system ensures that investments are directed towards substantial, verified decarbonization projects. And above all, adapted to every local context within every country.
Within the EU ETS primary market, participants purchase European Union Allowances (EUAs), which are sold through daily auctions. The revenue from these auctions is then centralized and redistributed to fund climate-related projects. This proceeds generation is organized in a way to make sure that the process is as transparent and fair as possible. The decision to hold auctions regularly and to make the results immediately publicly available, ensures that the pricing of allowances reflects real market conditions. The European Commission oversees these auctions, and the proceeds are collected by the European Energy Exchange (EEX) since the platform is the auction host.
Member states have historically been required to allocate at least 50% of their EU ETS revenue to climate-related projects. In practice, many countries have invested nearly all their proceeds in environmental initiatives, showing a strong commitment to leveraging these funds for climate action. Between 2012 and 2022, 76% of the revenues have been allocated for climate.
For instance, France uses its EU ETS revenue to support energy renovation projects through the “Ma Prime Renov” program. It is a large-scale initiative which improves the energy efficiency of residential buildings. Italy directs its funds towards sustainable mobility and retrofitting buildings, while Germany invests in energy-efficient buildings, electric vehicles, and renewable heating programs.
From 2024 onwards, 100% of the revenues from the EU ETS will be dedicated exclusively to climate projects, as decided by the latest European legislation. This reform shows the growing EU climate ambition to use carbon pricing as a tool for achieving long-term decarbonization goals. It targets the larger public and helps individual countries faster achieve their national environmental objectives.
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