The new regulations limit the levels of carbon that most energy-intensive industries can be emit. Companies must now monitor and lower their carbon emissions or face penalties. Businesses that stay under their limits can sell the emission rights they have not used to those that have exceeded their carbon output quotas.
This scheme covers all 25 European Union countries and is intended to prepare them for the Kyoto Protocol, which will come into effect in February following Russia's ratification last October.
The scheme is intended to ensure Europe meets its Kyoto target of a cutting its 1990 levels of carbon emissions by 8% by 2012.
Many European companies fear they will be at a competitive disadvantage compared to their US rivals, which are not subject to compulsory constraints because the US refused to sign the Kyoto treaty.
According to a recent poll by the UK's New Economics Foundation, 85% of European businesses believed that companies not restricted by the Kyoto Protocol would have an unfair advantage.
But environmentalists want steeper reductions in emissions of CO2. Environmentalists have said lenient CO2 reduction plans from many countries will limit the impact of the first phase of the scheme from 2005-2007, requiring much tougher measures from 2008 if the EU is to meet its Kyoto goal.
The scheme covers industrial installations in sectors such as: electricity generation; heat and steam production; mineral and oil refineries; the production and processing of ferrous metals; the manufacture of cement, bricks, glass and ceramics; and the pulp and paper sector. The second stage of the scheme, from 2008 to 2012, may be expanded to include sectors such as chemicals, aluminium and aviation, Reuters reports.
Emissions of carbon dioxide from transport and domestic residences will not be covered by the scheme. With transport emissions growing rapidly – they were 22% higher in 2002 than in 1990 – the EU will struggle to meet its targets.
Germany, Europe's top CO2 polluter, has agreed more generous carbon emissions than many people were expecting while the UK recently watered down its allocation plan after complaints from companies that it was too tough.
The UK's revised plan has yet to be approved by Brussels so British companies do not know how many allowances they have which make it hard for them to start trading immediately.
Other states whose plans have yet to be approved by Brussels include Italy, Poland the Czech Republic and Greece.
Companies in these countries are expected to monitor their emissions from the start of the scheme in any case, as their carbon emission limits will be set within a few months, but businesses have complained of the uncertainties.
Under the scheme, industrial sites are set CO2 limits and if they exceed them they either pay a fine or buy quotas from firms which undershoot their targets.
EU states set an emissions cap for each of the industrial installations covered. Businesses can sell any carbon allowances they do not use, or buy extra allowances on an open market. About 12,000 installations will be included, accounting for almost half of Europe's overall emissions, according to Reuters.
The EU has now set up an electronic registries system that will track the ownership of the allowances as they change hands in the market. This registries system will allow a "spot" trading market to develop, replacing the existing system of forward contracts.
While the EU scheme will be independent, other countries that have ratified Kyoto could choose to join in the future.
