European Union Allowances (EUAs) are the quotas allocated by the National Allocation Plans within the EU Emission Trading Scheme (ETS). The EU ETS, devised in response to the Kyoto Protocol, led to member states drawing up national allocation plans which give companies a certain number of credits for each installation in the scheme, thus allowing them to emit the corresponding amount of CO2.
The limit or ‘cap’ on the number of credits allocated, creates the scarcity required for a trading market to emerge. Companies that keep their emissions below the limit can sell their excess credits at a market price determined by supply and demand.
Companies facing difficulty remaining within their emissions limit, have a choice between taking measures to reduce their emissions, such as investing in more efficient technology, using a less carbon-intensive energy source, buying the extra credits they need at the market rate, or a combination, whichever is cheapest.
Most credits are allocated free of charge, at least 90% from 2008 to 2012. Though only power plants covered by the scheme are given credits, any party is free to buy and sell in the market in the same way as companies covered by the Scheme. One EUA signifies an emission reduction of one tonne of CO2 equivalent.