The EU defines an annual upper limit of CO2 equivalents for the European area in accordance with the climate protection targets, which is constantly decreasing, and issues the resulting number of allowances. Power plant operators and large industrial companies in particular are obliged to participate in the ETS. However, there are also voluntary participants, e.g. traders. All participants can bid for certificates from the EU. The EU issues a smaller number of certificates free of charge.
Once a year, each EU plant operator must calculate how many greenhouse gas emissions it was responsible for this year. Then they have to hand over the corresponding quantity of CO2 certificates to the EU, which are then cancelled there. A certificate can only be redeemed once.
If a plant operator does not have enough allowances, it must buy additional allowances at auction or from other market participants. If not, a severe penalty is imminent. The certificates are traded either bilaterally between two companies or via a marketplace, e.g. the EEX in Leipzig. The auctioning and trading results in a market price for CO2 certificates.
The money that the EU earns through the auctioning of certificates ends up in European Innovation and Modernisation Funds, e.g. the German Energy and Climate Fund, with which the transition to a CO2-neutral European Economic Area is to be supported.