Allocation and settlement of emission allowances European Union

Published on:
17 October 2023
Last checked on:
27 November 2023

Monitoring and accounting of greenhouse gas emissions is often presented side by side. There is however a clear distinction between the two. Emissions in national inventory reports represent the results from monitoring of national emissions. Accounting of emissions takes place in Emissions Trading System (EU ETS), Effort Sharing Regulation (ESR) and Land use, land use change and forestry (LULUCF), where fixed annual emission allowances are defined over a specific period.

Difference between monitoring and accounting

The terms monitoring and accounting of greenhouse gas emissions are sometimes used interchangeably. It should be clear that there is a distinction between the two.

  • Emissions in reports such as the National Inventory Report (NIR) represent the results from monitoring of national emissions. These represent the best estimate of actual emissions in line with IPCC guidelines and can be subsequently refined based on new insights, improvements in activity data or methodologies, and so forth.
  • Emission accounting in the context of EU ETS, ESR or LULUCF is slightly different in nature as this is related to emission allowances. These emission allowances are fixed, they are drawn from a limited overall carbon budget. They essentially represent the right to emit a certain share of greenhouse gases from that total.

Emissions under the Effort Sharing Regulation (ESR) represent EU economy-wide emissions reduction targets. These are set out through agreed upon maximum emissions at a Member State level. As such, when discussing emissions under the ETS and ESR this takes place within the framework of their respective emission accounting systems.

Whereas a single ETS cap covers all the EU Member States, under the ESR specific national reduction targets are set out in recognition of the differing capacities of Member States as well as the varying availability of cost-effective measures. In order to meet the requirements following from the EU ETS and the ESR, Member States need to have robust emission accounting systems in place. These systems help ensure there is no double counting and enable tracking of progress towards binding targets. 

Emissions trading system (EU ETS)

The EU ETS covers most of Europe’s power stations and energy-intensive heavy industry, as well as a limited number of companies in other sectors. For instance in the Netherlands some horticulture also falls under the ETS. The system lets companies trade in emissions allowances which enable the holder to emit a certain amount of greenhouse gases. Since the number of available permits is capped and reduced further every year, if demand is steady the price of the declining available supply of carbon permits rises and companies are increasingly incentivized to take emission reduction steps in a cost-effective manner. By 2030, the cap on emissions from sectors covered by the EU ETS is set to decrease by 62% compared to 2005 levels.

A separate emissions trading system has also recently been agreed upon for fuel combustion in buildings, transport and smaller-scale industry that was not yet covered by the existing ETS.

Dutch part of the ETS registry

The trade in permits is tracked through the EU ETS Registry, where the accounts and allowances of participating companies are maintained. Companies are required to supply verified data about their annual emissions and surrender the corresponding number of necessary emission allowances. The Dutch Emission Authority (Nederlandse Emissieautoriteit – NEa) is the independent national authority responsible for implementing and monitoring the Dutch part of the ETS registry. It is also responsible for the allocation of free allowances in certain sectors.

Effort Sharing Regulation (ESR)

Under the Effort Sharing Regulation, national emission reduction targets have been agreed upon for sectors that fall outside the EU ETS (and LULUCF). This concerns emissions from transport, the built environment, agriculture and emissions from smaller-scale industry outside of the ETS. As part of the Green Deal and European Climate Law, the original targets for the period 2021-2030 were recently revised. For the Netherlands, the reduction target has increased from 36% to 48% in 2030 compared to 2005 levels. The national targets are expressed as Annual Emission Allocations (AEAs) in tonnes of CO2 equivalent. For the years 2021-2025, please refer to this document.

Land Use, Land Use Change and Forestry (LULUCF)

The EU member states have agreed upon targets for the greenhouse gas emissions and removals from land use, land use change and forestry (LULUCF). In 2023, the targets towards 2030 were revised. Previously a 'no debit' rule was in place, but since the revision,  member states must show a decreasing trend of net emissions/ increasing trend of net removals towards 2030 (compared with 1990 emissions) in their LULUCF compliance reports. There is an overall EU-level objective of 310 megaton CO2 equivalent of net removals in the LULUCF sector in 2030, as well as binding national targets for Member States. This, and all flexibilities that are allowed (such as an exchange of emission allowances with the ESR or other member states), are specified in more detail in the Land Use, Land Use Change and Forestry (LULUCF) Regulation

Commissioned by:
  • Ministry of Economic Affairs and Climate Policy
Is this page useful?