Six months before the launch of the UK scheme, the European Commission released its Proposed Directive on Greenhouse Gas Emissions Trading. The draft document calls for a mandatory EU-wide cap and trade system beginning in 2005. It is directed at large industrial facilities such as power plants, cement manufacturers and refiners. The system would create by far the largest greenhouse gas emissions market in the world, with approximately 4000-5000 facilities taking on absolute targets. Taken together these facilities account for just under half of all the carbon dioxide emissions from the European Union. The first compliance period would last until the end of 2007, and subsequent periods would be timed to the five year commitment periods of the Kyoto Protocol starting in 2008.

If the draft proposal were to be accepted in its current form, it would conflict with the UK trading scheme in several ways. For example:

• The EU proposal includes all electricity generators over 20 Megawatt capacity, whereas the UK system specifically excludes all generators. This could lead to significant double counting if both the generator and the consumer are credited with the same reductions.
• UK firms are already subject to the Climate Levy, a tax on energy consumption. Many industries have recently signed negotiated agreements with the government to reach energy efficiency and emission targets out to 2010 in return for an 80% reduction in the levy.
• The UK scheme is open to all sectors (except generators) and gases, while the EU draft is limited to CO2 only and a much narrower array of industrial activities.