<P> The European Union Emissions Trading System (EU ETS), also known as the European Union Emissions Trading Scheme, was the first large greenhouse gas emissions trading scheme in the world, and remains the biggest . It was launched in 2005 to fight Global warming and is a major pillar of EU climate policy . As of 2013, the EU ETS covers more than 11,000 factories, power stations, and other installations with a net heat excess of 20 MW in 31 countries--all 28 EU member states plus Iceland, Norway, and Liechtenstein . In 2008, the installations regulated by the EU ETS were collectively responsible for close to half of the EU's anthropogenic emissions of CO and 40% of its total greenhouse gas emissions . By 2020 the EU hopes to cut greenhouse gas emissions by 20% compared with 1990 and to increase energy efficiency by 20% . </P> <P> Under the' cap and trade' principle, a maximum (cap) is set on the total amount of greenhouse gases that can be emitted by all participating installations . "Allowances" for emissions are then auctioned off or allocated for free, and can subsequently be traded . Installations must monitor and report their CO emissions, ensuring they hand in enough allowances to the authorities to cover their emissions . If emission exceeds what is permitted by its allowances, an installation must purchase allowances from others . Conversely, if an installation has performed well at reducing its emissions, it can sell its leftover credits . This allows the system to find the most cost - effective ways of reducing emissions without significant government intervention . </P> <P> The scheme has been divided into a number of "trading periods". The first ETS trading period lasted three years, from January 2005 to December 2007 . The second trading period ran from January 2008 until December 2012, coinciding with the first commitment period of the Kyoto Protocol . The third trading period began in January 2013 and will span until December 2020 . Compared to 2005, when the EU ETS was first implemented, the proposed caps for 2020 represents a 21% reduction of greenhouse gases . This target has been reached six years early as emissions in the ETS fell to 1812 mln tonnes in 2014 . </P>

The european union emissions trading system works on what principle