Starting 1 January 2005 companies will have to keep track of their emissions and produce at the end of each year a report on annual emissions that will be verified by a third party (similar to an auditor verifying the financial accounts of a company). At the same time they will have to make sure that they are in possession of a sufficient number of allowances to surrender year by year (first surrender date is end of April 2006) so not to be subject to financial sanctions. If a company does not meet the reduction requirements, sanctions are due, which amount to 40 euro per tonne of carbon dioxide. The failed reduction requirement still has to be fulfilled in the following year.

Member States will have to issue allowances by the end of February each year in accordance with the final allocation decisions, operate the national registry, collect verified emissions data and make sure that a sufficient number of allowances is surrendered by each company. Each Member State will also have to produce a regular annual report to the Commission.

The Commission will operate the European hub of the registry system, and prepare an annual report on the basis of Member States reports. It will follow the performance and review the experience with the EU Emissions Trading Scheme closely. In accordance with the Directive, the Commission present a report to Council and Parliament by 30 June 2006. In preparation of this report the Commission will seek input from stakeholders.

The principle of the EU Emission Trading scheme is presented in the following picture: