General information on the EU ETS

How does the EU ETS work?

The EU ETS is based on the polluter pays principle. This means that those who pollute pay for their emissions.

The lower the emissions, the lower the cost for participants in the system.
Over time, the number of emission allowances decreases, and prices for them are expected to increase.

Companies have an obligation to surrender emission allowances equal to their verified emissions within a set deadline.
If they fail to do so, the competent authority imposes an administrative fine.

In this way, those who pollute more pay more, in line with the polluter pays principle.

What is free allocation of emission allowances?

Some emission allowances are allocated free of charge to operators in industry, while others are auctioned.

Sectors or subsectors that are considered at risk of carbon leakage are allocated a higher share of free allowances.
Free allocation is being gradually phased out, and the EU’s long-term goal is for all emission allowances to be auctioned.

Where do the revenues from emission allowances go?

Member States receive most revenues from the auctioning of emission allowances and are required to use the revenues for climate-related measures.
In Iceland, the revenues are directed to the state treasury.

A share of the revenues is allocated to the Modernisation Fund and the Innovation Fund.

Once emission allowances are in circulation, they may be traded by entities covered by the EU ETS Directive, and other parties that choose to trade allowances for investment or other purposes.

Who is responsible for the EU ETS in Iceland?

The Icelandic Environment and Energy Agency is responsible for administering the EU ETS in Iceland.

The Agency:

issues emission permits
acts as the national administrator of the Union Registry
allocates free emission allowances
ensures compliance with monitoring and reporting requirements
enforces compliance through sanctions where applicable

Who is covered by the EU ETS in Iceland?

Stationary installations

Icelandic operators of stationary installations with activities listed in Annex I to Act No. 96/2023 on the EU Emissions Trading System are covered by the EU ETS.

Aviation

Aircraft operators are covered by the EU ETS in Iceland if:

they hold an air operator licence issued in Iceland, or
they do not hold an air operator licence issued in an EEA State, but the largest share of their ETS-covered emissions is attributed to Iceland in the reference year.

A regulation is issued regularly listing which aircraft operators are attributed to each participating country.

Maritime transport

Shipping companies are covered by the EU ETS in Iceland if:

they are registered in Iceland, or
they are registered outside the EEA, but the greatest share of port calls from voyages performed by that shipping company in the preceding four years within the EEA were in Iceland, or
they are registered outside the EEA and had no port calls in the EEA in the preceding four years, and their first port call is in Iceland