The European Union Emissions Trading Scheme (EU ETS), the largest emissions cap-and-trade scheme in the world, commenced on January 1, 2005. In addition, the United Kingdom's Climate Change Act 2008 has established the world's first legally binding emissions-reduction target, which requires at least an 80% reduction on 1990 emissions levels in the United Kingdom by 2050. The following article gives a brief overview of the EU ETS and of some of the steps being taken to reach the 80% reduction target under the Climate Change Act 2008.

The EU ETS, entered into under the provisions of the European Union (EU) Emissions Trading Directive, represents one of the steps taken by the EU to meet its greenhouse-gas-emissions reduction target under the Kyoto Protocol. In accordance with the Kyoto Protocol, the EU is aiming to attain an 8% reduction on 1990 emissions levels during the Protocol's first "commitment period" (2008-2012), while the UK itself is seeking to achieve a 12.5% reduction in that period. The EU ETS is being rolled out in phases, the first of which ran from 2005 to 2007 and the second of which is running from 2008 until 2012. In preparation for the third phase, commencing in 2013, the EU is reviewing the Emissions Trading Directive.

In connection with the 80% reduction target under the Climate Change Act 2008, the United Kingdom government intends to publish, with the advice of the Committee on Climate Change, a series of five-year "carbon budgets," the first of which covers the first Kyoto Protocol "commitment period" (2008-2012). The government has also produced the UK Low Carbon Transition Plan, describing how the United Kingdom will meet the cut in emissions set out in the budget, which requires a reduction of 34% on 1990 levels by 2020. A key objective of the United Kingdom's low-carbon industrial strategy is to try to ensure that British businesses and workers are equipped to maximise the economic opportunities and minimise the costs involved in moving to a low-carbon economy.

Currently, the EU ETS applies to four areas of industrial activity: energy activities (including, in particular, electricity generation); production and processing of ferrous metals; mineral industries; and pulp-and-paper industries. It is currently expected that aviation will be added to the list beginning in 2012. UK law requires all installations carrying out any of the above activities to hold a Greenhouse Gas Emissions Permit and to monitor and report emissions.

EU Member State governments are required to set emissions limits for all installations in their country covered by the scheme, and each installation is then allocated allowances equal to that cap for the phase in question. Under the current UK National Allocation Plan, the Government allocated most of the emissions allowances among the installations affected by the scheme without charge, but 7% of the allowances - which would in the main have gone to large electricity producers - were auctioned. It is currently expected that the percentage of total emissions allowances to be auctioned will increase over time. Allowances in the EU ETS are held in electronically registered accounts , overseen by a central EU administrator.

As with other cap-and-trade schemes, the broad objective of the EU ETS is to provide an incentive-based system that will trigger investment in future energy efficiency and cleaner technology. Under the scheme, installations can meet their cap either by reducing their emissions below the cap - in which case, they are then free to sell any surplus - or, to the extent their emissions exceed their cap, by buying emissions allowances from others (including certain carbon credits derived from certain international climate-change projects) to cover the difference. As a result, a secondary market in allowances has developed.