Emissions Trading

Emissions trading is a market-based approach to achieving environmental change. It allows those reducing greenhouse gas emissions, particularly carbon dioxide, to use or trade the excess reductions to offset emissions at other sources. The controversy lies within the detailed framework of the Kyoto Protocol allowing thriving countries to receive profits for their efforts in reducing GHGs. In an effort to place some limits on what some consider a unbridled market, the European Union (EU) working with Kyoto Protocol had implemented measures to monitor the daily workings of this “carbon market”.

The EU European Trading System is a cap and trade scheme and is the largest GHG emissions trading schemes in the world. In this system a cap is set on the total amount of emissions allowable by those sectors that are subject to the scheme. Allowances (permits) are then allocated to individual emitters or installations with the total number of allowances adding up to the cap.

Several nations now adhere to the legally binding measures of what is known as the Kyoto Protocol. The treaty was able to begin enforcing regulations in February, 2005. The Protocol targets six main GHGs; carbon dioxide, methane, nitrous oxide, hydro fluorocarbons, per fluorocarbons and sulfur hexafluoride. Industry, agriculture and deforestation are considered the sources of theses gases. Carbon dioxide is now the most traded greenhouse gas because of wide global production.

Countries complying with their commitment to the Protocol use three specific methods; they can accomplish the reduction in emissions in their own countries, implement projects or programs in other countries leading to reductions or purchase emissions allowances from countries that have exceeded their specific commitment under the scheme.

The Kyoto Protocol’s goal is to cut emissions by at least 5% in the period 2008-2012. The European Union has committed to reduce GHG emissions by 8%. The EU ETS set out a trading emissions framework in two phases, the first being a pilot phase starting in 2005 and ending in 2007 and the second phase covering the period 2008 to 2012. The scheme covers only carbon dioxide in the first phase but anticipates other GHGs to be included in later phases. The EU ETS is the first international trading system for carbon dioxide in the world and covers around 12,000 energy-intensive installations.

In terms of continued global support, the price of carbon will continue to be a key issue. The effect of weather patterns on energy prices can also effect GHG emissions. The ETS must monitor the continuous effects of weather to allow for allowance deficits and allowance surplus in any given time frame. These signals will determine the status of the market.

There has been a softening of the terms surrounding the larger power companies which causes more discretion on the part of environmentalists and under developed countries whose emissions are fewer than that of the larger companies. However, the larger entities seem to be benefiting more from the market.

Supply and demand could also be significantly effected should the United States deem the ETS successful in the first phase and ratify the Kyoto Protocol by the second phase. The market will fluctuate and given the complicated workings of the protocol, changes may be implemented effecting the market worldwide.

GHG emissions is an ongoing consequential issue and the key players, power companies, governments, politicians and environmentalists will always have a large role to play in the daily workings of the market. It is said that emissions prices will continue to rise and fall and the fundamental workings and behavior of participating entities may continue to be obscure. It is a global problem that in order to be globally successful must also be politically acceptable. It is therefore important to keep abreast of all issues in the market.

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