The participating companies bid for CO2 certificates from the EU. A CO2 certificate entitles the bidder to emit one tonne of CO2 or an equivalent amount of other greenhouse gases once. In total, the EU sells as many certificates each year as it has set as the annual cap.
Once a year, EU companies must calculate how much CO2 they have emitted and submit the corresponding amount of CO2 certificates. These are then cancelled.
If a company does not have enough certificates, it can buy additional certificates at auction from the EU or buy them from other market participants. This creates a price for CO2 certificates.
The higher the demand for certificates or the lower the available quantity, the higher the price.