EU Emissions Trading Scheme (EU ETS) 

A market-based policy tool aimed at reducing greenhouse gas (GHG) emissions across the European Union. It operates on a cap-and-trade principle, where a cap is set on the total amount of emissions that can be emitted by high-emitting sectors such as power generation, industry and aviation. Companies within these sectors are allocated a certain number of emission allowances, which represent the right to emit a specific amount of CO₂ or its equivalent in terms of GHG emissions. If a company emits less than its allowance, it can sell the surplus; if it emits more, it must buy additional allowances. The cap decreases over time, driving a continuous reduction in emissions. The EU ETS incentivises companies to reduce emissions cost-effectively by providing financial rewards for cutting emissions and penalties for exceeding limits.