Concept
EU Allowances (EUA) are climate credits (or carbon credits) used in the European Union Emissions Trading Scheme (EU ETS). 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(a) 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". The EU Allowances are connected to the EUs goal of achieving climate neutrality in the EU by 2050 and a 55% reduction in greenhouse gas emissions by 2030. 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, but the company still needs to surrender EUAs for the uncovered emissions in the subsequent year - so the 100 EUR fine does not present a ceiling price for EUAs. Companies that do not use their allowances can "bank" them to cover future needs or sell them to other companies. 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 (except in some member states like Poland, Bulgaria, Hungary, Lithuania, etc.).
