EMISSIONS TRADING BOOMING

In the European Union (EU) Emissions Trading Scheme (ETS), each country is assigned allowances for the amount of emissions it can generate. Each industry within that country and each company within that industry is likewise capped. The companies are allowed to buy more allowances in a general auction.

If a company is unable to conduct business with the total greenhouse gas emissions allowances given and purchased at auction, it can purchase more “credits” in the ETS (1 credit per tonne of carbon dioxide equivalent, CO2e) from companies that are able to conduct business with less than the allowances they obtained. The value of the credits tends to go up over time as the pressure to cut emissions becomes more stringent. The idea is to create rewards for companies that cut emissions.

(“Tonne” = “metric ton” - 10% greater weight than the U.S. ton. CO2e is used because there are many greenhouse gases, some of which are equivalent to more than a tonne of carbon dioxide - in terms of the harm they have on global climate change - and some of which are equivalent to less than a tonne of CO2.)

The United Nations (UN) Clean Development Mechanism (CDM) operates under the terms of the Kyoto Protocols to approve projects that companies in signatory nations, including EU nations but not limited to them, can invest in to offset their own emissions. Purchase of 1 Certified Emissions Reduction (CER) from the CDM offsets a tonne of CO2e.

The international emissions trading market is booming. Most observers expect it to boom bigger (especially after the U.S. comes on board in the 2009 to 2012 period).

Emissions trading is not, however, without problems. Growth depends on the availability of credits. The supply has slowed since the CDM tightened down on its approval process. The CDM did so to protect the quality of the projects it approves. This appears to be a temporary bureaucratic snafu but the trading community, forced to hold ready money, is concerned.

The EU ETS has worked through early difficulties and should be applauded for working out the complexities of the allowances-given-to-allowances-auctioned ratio. The system, though, has yet to prove truly effective at emissions reduction. To do so, its members must face more severe caps without pulling away.

When emissions caps are further ratcheted down, if nations that have invested aggressively in New Energy are able to sustain stable power prices, the system must be considered a complete success. The question is whether EU nations will stay within the parameters of the system until then.

Andrew Ertel, chief executive of Evolution Markets: “Lack of clarity...post-2012 is countering growth of markets such as the EU ETS…The market is truly at a crossroads as participants appreciate the complexity and risks of carbon trading.”

Perhaps only one thing is at a more crucial crossroads than the European cap-and-trade system: The earth it was designed to protect.

From the World Bank report. (click to enlarge)

Global carbon market more than doubled in 2007
May 7, 2008 (Reuters via International Herald Tribune)
and
World carbon trading value doubles
Fiona Harvey, May 8, 2008 (Financial Times)
and
State And Trends Of The Carbon Market 2008
May 7, 2008 (World Wire)

WHO
Karan Capoor, study author/markets expert, World Bank

From the World Bank report. (click to enlarge)

WHAT
The World Bank’s State and Trends of the Carbon Market 2008 finds the value of the world emissions trading market doubled from 2006 to 2007 and is expected to grow as much or more in 2008.

WHEN
- The EU ETS kicked off in 2005.
- 2006: $24 billion EU ETS value
- 2006: $1.1 billion UN CDM value
- 2007: $50 billion EU ETS
- 2007: $2.1 billion UN CDM value

From the World Bank report. (click to enlarge)

WHERE
The main emissions trading venues are the European Union (EU) Emissions Trading Scheme (ETS) and the United Nations (UN) Clean Development Mechanism (CDM).

WHY
- The EU ETS is a cap-and-trade system in which EU companies are given rigid allowances for greenhouse gas emissions by the European Commission, the EU executive body.
- The UN CDM was set up in support of the Kyoto Protocols agreement to evaluate and approve of projects in developing nations in which companies in Kyoto signatory countries could invest to offset emissions generated in at home, thereby facilitating the reductions in global emissions and stimulate investment in New Energy and low emissions projects.
- Under the Kyoto treaty, industrial nations must cut emissions 5% below 1990 levels by 2012.
- The rate of growth of emissions market credit sales dropped off as the CDM and other project evaluation processes tightened. Last year, ~551million new carbon credits were sold ($7.4 billion value); the previous year ~537 million credits were sold ($5.8 billion value).

From the World Bank report. (click to enlarge)

QUOTES
Karan Capoor, study author/markets expert, World Bank: “Sixty-eight developing countries participate in the CDM, among them Jamaica, Kenya, Mali and Madagascar, which offered climate-friendly projects for the market for the first time in 2007. But, at a time that global cooperation to reduce the risk of climate change is more important than ever before, the prospects for developing countries benefiting from the carbon market are in question. It would be a shame for the world to lose this momentum now…