Italy Has a Cap and Trade System Based on the EU ETS

The EU Emissions Trading System (EU ETS) is a strategy developed by the European Union to efficiently reduce greenhouse gas emissions, representing one of the primary climate-change policies of the EU. Operating across 31 countries in Europe, the scheme was adopted in 2005, and it regulates emissions from over 10,000 energy-intensive installations, including combustion and industrial plants, as well as emissions from airlines flying within these countries. Approximately 45% of the EU’s greenhouse gas emissions are affected by this system.

The ETS in Italy

Italy actively participates in the EU ETS as a member state of the EU. The system functions on the principle of cap and trade, wherein sector-wide emissions are limited and traded. Under this scheme, a cap is established on the total amount of greenhouse gases emitted. Over time, this cap is progressively reduced to encourage an overall decrease in emissions. The gradual reduction of available quotas also ensures their economic value. Within the designated cap, companies either receive or purchase emission allowances, which they can trade. Allowances are the central currency of the system, granting the holder the right to emit one tonne of CO2 or the equivalent amount of another GHG. For instance, if a company in a high-emitting sector, such as refineries, exceeds its GHG allowances, it can purchase them from other companies, maybe ones in lower-emitting sectors, such as waste management, more unlikely to use up all their allocated quotas.

Since 2019, the ETS in Italy has encompassed 1006 installations, spanning various high-emission sectors such as thermoelectric, paper, construction, food, chemicals, steel, district heating, mechanics, glass, textile, mining, refining, and waste management. Smaller enterprises are exempted from the system under the ETS Directive (Article 27). This directive allows member states to exclude ‘small emitters,’ i.e., installations with emissions totaling less than 25,000 tonnes of CO2 equivalent per year. This exclusion is contingent upon member states notifying the European Commission of the ‘Equivalent Measures’ they propose to implement and if the Commission accepts these.

The system is continuously developing and improving, and it is currently in its fourth trading phase. Reflecting on earlier phases, the EU recognized that simply distributing free allowances was insufficient to incentivize companies, leading to refinements in subsequent phases of the plan. Since the start of the third phase in 2013, the allocation of emission allowances has shifted from primarily free to auctioning.

Prospects for Enhanced Effectiveness

It is unclear whether this system has successfully reduced GHG emissions in Italy. According to the latest ISPRA data, ETS emissions covered just over 33% of overall emissions in 2019, a decline from the 42% estimated in 2013. Regarding penalties, while they are currently fixed per tonne of excess emissions, there is a chance they could be more effective if relative to a company’s profits for the year, providing a stronger deterrent against non-compliance.

Moreover, a recent proposal by the European Commission envisages establishing, starting in 2025, a separate emissions trading system for road transport and construction (ETS II). Since GHGs are emitted by small entities, such as households and car drivers, the regulated entities would be fuel distributors, who, in 2026, would have to start surrendering allowances based on the volume and carbon intensity of fuels released for consumption. All allowances would be auctioned, and none would be provided free of charge. This could be a promising addition to the existing emission trading tool, as the system’s range of action was already expanded to include more sectors, resulting in increased effectiveness.


This Post was submitted by Climate Scorecard Italy Country Manager Sara Biondi

Learn More References


Climate Scorecard depends on support from people like you.

We are a team of researchers providing information on efforts to reduce global emissions. We help make you better informed and able to advocate for improved climate change efforts. Donations of any amount are welcome.