Carbon Trading
see also: carbon offsets (buying a clean conscience) and effects of climate Policy on carbon-intensive manufacturing industries
Market size:
The carbon emission trading market reached €22 billion in 2006 and is likely to increase. While it is difficult to make assumptions about a market that is so dependent on regional and international regulations, Celent expects the market to surpass €40 billion by 2012.
source: http://www.celent.com/PressReleases/20071018/CarbonEmissions.htm
Legislation:
“The carbon emission market is based on ‘negative assets’ created by regulators. Therefore it is highly dependent on the regulatory framework and its evolution. But, despite lack of harmonization and regulatory uncertainty, the carbon emission trading market has promising potential,” says Axel Pierron, analyst at Celent and author of the report.
Senate supporting cap-and-trade bill — A subcommittee of the Senate Environment and Public Works group narrowly approved legislation to set up a trading system for greenhouse gas emissions. The full committee may vote in the measure before the year is over, but its passage if it reaches the House isn’t as certain. For a take on cap-and-trade by one of its supporters, look here.
European emission trading
European emission regulations are more advanced than those in the US. As a result, the industries there have more incentive to innovate, both financially, and technologically. This should (1) harm EU business in global competition in the short term, but (2) give european firms the long term advantage in innovation (green business models).
Effects of climate Policy on carbon-intensive manufacturing industries
Investing in carbon credits
Companies such as "
Eco-Carbone", a French company, are active in collecting carbon credits for sale on international markets. What they do is work with companies in developing nations, such as coal miners in China, to capture methane emmissions. The company also grows seeds in Central america called "Jatropha", which is particularly good for biofuel.
"As a consultant to coal mines for the recuperation of methane emissions and their transformation into energy : these projects result in important amounts of " carbon credits " which are then sold on the international markets. Eco-Carbone currently has exclusive relationships with six large Chinese mining companies, for which it sells about 2 million tons of carbon credits per year."
Green Exchanges - trading
The lack of liquidity is a plague to the carbon emission exchanges; the carbon market is still mainly an OTC market. The fact that many exchanges provide reporting capacity to market participants that conduct OTC transactions inflates the transaction volume of carbon emission exchanges. In reality, 72% of the trades in the carbon market are conducted OTC, with a significant share of bilateral trading. Axel Pierron observes: “We certainly believe that the carbon emission market is benefiting from the emergence of exchanges such as the ECX. The question is more about the economic viability of these exchanges. We have not seen any brokers jumping into the market and developing their own platforms. We estimate that the current uncertainty over the existence of the market generates too much economic uncertainty.“
Emissions trading article from Wikipedia
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Kyoto is a 'cap and trade' system that imposes national caps on the emissions of Annex I countries. On average, this cap requires countries to reduce their emissions 5.2% below their 1990 baseline over the 2008 to 2012 period. Although these caps are national-level commitments, in practice most countries will devolve their emissions targets to individual industrial entities, such as a power plant or paper factory. One example of a 'cap and trade' system is the 'EU ETS'. Other schemes may follow suit in time.
This means that the ultimate buyers of credits are often individual companies that expect their emissions to exceed their quota (their Assigned Allocation Units, AAUs or 'allowances' for short). Typically, they will purchase credits directly from another party with excess allowances, from a broker, from a JI/CDM developer, or on an exchange.
National governments, some of whom may not have devolved responsibility for meeting Kyoto obligations to industry, and that have a net deficit of allowances, will buy credits for their own account, mainly from JI/CDM developers. These deals are occasionally done directly through a national fund or agency, as in the case of the Dutch government's ERUPT programme, or via collective funds such as the World Bank’s Prototype Carbon Fund (PCF). The PCF, for example, represents a consortium of six governments and 17 major utility and energy companies on whose behalf it purchases Credits.
Since allowances and carbon credits are tradeable instruments with a transparent price, financial investors can buy them on the spot market for speculation purposes, or link them to futures contracts. A high volume of trading in this secondary market helps price discovery and liquidity, and in this way helps to keep down costs and set a clear price signal in CO2 which helps businesses to plan investments. This market has grown substantially, with banks, brokers, funds, arbitrageurs and private traders now participating in a market valued at about $60 billion in 2007[15]. Emissions Trading PLC, for example, was floated on the London Stock Exchange's AIM market in 2005 with the specific remit of investing in emissions instruments.
Although Kyoto created a framework and a set of rules for a global carbon market, there are in practice several distinct schemes or markets in operation today, with varying degrees of linkages among them.
Kyoto enables a group of several Annex I countries to join together to create a market-within-a-market. The EU elected to be treated as such a group, and created the EU Emissions Trading Scheme (ETS). The EU ETS uses EAUs (EU Allowance Units), each equivalent to a Kyoto AAU. The scheme went into operation on 1 January 2005, although a forward market has existed since 2003.
The UK established its own learning-by-doing voluntary scheme, the UK ETS, which ran from 2002 through 2006. This market existed alongside the EU's scheme, and participants in the UK scheme have the option of applying to opt out of the first phase of the EU ETS, which lasts through 2007[citation needed].
The sources of Kyoto credits are the Clean Development Mechanism (CDM) and Joint Implementation (JI) projects. The CDM allows the creation of new carbon credits by developing emission reduction projects in Non-Annex I countries, while JI allows project-specific credits to be converted from existing credits within Annex I countries. CDM projects produce Certified Emission Reductions (CERs), and JI projects produce Emission Reduction Units (ERUs), each equivalent to one AAU. Kyoto CERs are also accepted for meeting EU ETS obligations, and ERUs will become similarly valid from 2008 for meeting ETS obligations (although individual countries may choose to limit the number and source of CER/JIs they will allow for compliance purposes starting from 2008). CERs/ERUs are overwhelmingly bought from project developers by funds or individual entities, rather than being exchange-traded like allowances.
Since the creation of Kyoto instruments is subject to a lengthy process of registration and certification by the UNFCCC, and the projects themselves require several years to develop, this market is at this point largely a forward market where purchases are made at a discount to their equivalent currency, the EUA, and are almost always subject to certification and delivery (although up-front payments are sometimes made). According to IETA, the market value of CDM/JI credits transacted in 2004 was EUR 245 m; it is estimated that more than EUR 620 m worth of credits were transacted in 2005.
Several non-Kyoto carbon markets are in existence or being planned, and these are likely to grow in importance and numbers in the coming years. These include the New South Wales Greenhouse Gas Abatement Scheme, the Regional Greenhouse Gas Initiative and Western Climate Initiative in the United States, the Chicago Climate Exchange, the State of California’s recent initiative to reduce emissions.
These initiatives, taken together may create a series of partly-linked markets, rather than a single carbon market. The common theme across most of them is the adoption of market-based mechanisms centered on carbon credits that represent a reduction of CO2 emissions. The fact that some of these initiatives have similar approaches to certifying their credits makes it conceivable that carbon credits in one market may in the long run be tradeable in other schemes. This would broaden the current carbon market far more than the current focus on the CDM/JI and EU ETS domains. An obvious precondition, however, is a realignment of penalties and fines to similar levels, since these create an effective ceiling for each market.
Canada having trouble meeting Kyoto protocol
Baird has warned that adherence to the Kyoto standards would drive the economy into recession, and has argued that Canada must produce its own environmental plan with reasonable goals for emission reductions. Baird’s plan calls for mandatory intensity-based targets to reduce industrial emissions of greenhouse gases and air pollutants, the setting up of an emissions-trading system, and increased regulations on energy use covering a variety of energy consuming products.
There must be an opportunity here for entrepreneurs!
The burgeoning oil sands extraction business (in Western Canada) may be one the biggest hurdles to reducing emissions. The process of extracting oil from oil sands produces two to three times more carbon dioxide than normal well-based production. The government’s plan will require oil-sands projects to reduce the ratio of emissions to oil by 2% per year. However, production may decrease significantly if California and 11 other US states move ahead with plans to ban the sale of petroleum derived from emissions-intensive sources.
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