The European Union Emissions Trading System (EU ETS) is a market-based approach designed to reduce greenhouse gas emissions. It operates on a "cap and trade" principle, where a limit (cap) is set on the total emissions allowed from certain sectors. Companies receive or buy emission allowances, which they can trade with one another, incentivizing them to reduce their emissions. By creating a financial incentive for companies to lower their carbon output, the EU ETS aims to promote investment in cleaner technologies. It covers various industries, including power generation and manufacturing, and is a key component of the EU's climate policy to combat climate change.