Emissions trading in the enlarged EU will start on 1 January 2005. It will cover more than 12.000 energy-producing and energy-intensive plants. Member States will set limits on their greenhouse gas emissions by allocating "emissions allowances" to them. When trading starts next year, companies that do not use all their allowances will be able to sell them to companies that have difficulties to keep their emissions within the allocated allowances. These latter companies are also likely to be interested in credits from CDM and JI projects. Emissions trading is an innovative system that takes advantage of market forces and will make sure that emissions are cut where it is cheapest, thus allowing the EU to achieve its Kyoto targets at the least possible cost.

While the implementation of the three flexible mechanisms at international level will become possible only once the Kyoto Protocol comes into force, the EU is moving ahead with its own internal emissions trading system. The Directive was approved by the European Parliament on 2 July 2003, and the Council on 22 July. Emissions trading will start in 2005 and cover the Member States of the enlarged European Union. The EU scheme will be the first multi-national emissions trading scheme in the world and is considered a forerunner of the international emissions trading scheme under the Kyoto Protocol.