Carbon Market

Kyoto Protocol

The carbon market has been created in response to the Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC). In order to minimize the cost of reducing emissions, the Protocol provided for 3 mechanisms to allow industrialized countries flexibility in meeting their commitments. The International emissions trading (ET) – trading of emission permits (called Assigned Amount Units or AAUs) among the industrialized countries, and functions as a cap and trade mechanism. The other two Kyoto mechanisms, Joint Implementation (JI) and Clean Development Mechanism (CDM), are 'baseline and credit' systems, which allow industrialized countries and industries to take credit for projects or programs which reduce emissions outside of the cap and trade market. The flexibility in the geographical dimension of the actions taken by industrialized countries to reduce emissions is justified by the scientific fact that it is the concentration of greenhouse gases in the upper atmosphere that matters in the case climate change. JI involves project-based schemes whereby one country can receive emissions credits for financing projects that reduce emissions in another developed country (called Emission Reduction Units or ERUs).  CDM allows developed countries to gain emissions credits for financing projects based in developing countries (called Certified Emission Reductions or CERs).⁵ 

European Union Emission Trading Scheme

The European Union's Emission Trading Scheme (EU ETS), which was officially launched in January of 2005, is the world’s largest GHG emissions compliance market. In 2008, the EU ETS accounted for 70% of the volume of and 80% of the value of carbon emissions traded in 2008 . New Carbon Finance, Press Resease - Carbon Market up 84% in 2008 at US$118 billion, 2009, http://www.newcarbonfinance.com. Currently the EU ETS includes some 11,000 heavy energy-consuming installations in power generation and manufacturing across 27 European member states. Since the start of 2008, the EU’s neighbours Iceland, Liechtenstein and Norway have also participated in the system. Starting in 2012, the EU ETS  will be expanded to include aviation emissions from flights to and from European airports.⁶

The scheme is based on a company-level cap and trade system that allows members to trade emissions, combined with a baseline and credit system through which members can use offsets from Joint Implementation (JI) and Clean Development Mechanism (CDM) projects to help them achieve the mandatory emission reduction targets called for in the Kyoto Protocol. The trading 'currency' in use in the EU ETS is the European Union Emission Allowance (EUA). One EUA gives the right to emit one ton of CO2. The EU Member States draw up national allocation plans setting out how many allowances installations or companies receive each year. Participation in the EU ETS is mandatory for  businesses in the sectors covered by the scheme.

The EU ETS is being implemented in three phases:

• The first phase, from 2005 to 2007, aimed to pilot the scheme.  It successfully established a price for carbon, free trade in emission allowances across the EU and the necessary infrastructure for monitoring, reporting and verifying actual emissions from the businesses covered.
• Phase two, running from 1 January 2008 to 31 December 2012, coincides with the ‘first commitment period’ of the Kyoto Protocol – the five-year period during which the EU and its Member States must comply with their emission targets under the Protocol. On the basis of the verified emissions reported during phase 1, the Commission has cut the volume of emission allowances permitted in phase 2 to 6.5% below the 2005 level, thus ensuring that real emission reductions will take place.
• The third phase will run from 2013 to 2020. In December 2008, the EU member states agreed on a package of rules to strengthen the EU ETS during that period. Currently most EUAs are allocated to companies for free.⁷ From 2013, power companies in the EU, except for those in Eastern European countries, will have to buy all their EUAs through auction. To give Eastern European countries, which are highly reliant on coal, time to adapt, electricity companies in these countries will only need to buy 30% of their allowances through auctions in 2013. In 2020, they will have to buy 100% at auctions. Other companies will have to buy a proportion of their EUAs, and will receive another part for free. The proportions that have to be bought will increase through the year 2020.

The value of the EU ETS has increased from US$7,908 million in 2005 to US$94,276 million in 2008.⁸ The value of a metric ton of carbon in the EU ETS was US$30 in August 2008. As a result of the current economic unstability the value of a metric ton of carbon has decreased to around US$9 in February 2009.⁹ 

New South Wales Greenhouse Gas Abatement Scheme

The New South Wales Greenhouse Gas Abatement Scheme (NSW GGAS) commenced on 1 January 2003. Initially scheduled until 2012, the government of the Australian state of New South Wales is extending the scheme to 2020. The GGAS is a mandatory scheme for electricity retailers and certain other parties who buy or sell electricity in NSW. Voluntary participation is also allowed. It imposes annual targets - called benchmarks - for reducing or offsetting the emissions of greenhouse gases from the production of the electricity they supply or use. The benchmarks for the participating companies are expressed in tons of CO2 equivalent per capita, and are based on the size of the participants share of the electricity market. They are gradually decreased.¹⁰

GGAS is a "baseline and credit" form of emissions trading, in which participants can purchase emission credits from projects through which emissions are offset. If a GGAS participant emits more than its individual benchmark in a specific year, it needs to purchase NSW Greenhouse Abatement Certificates (NGAC) from Abatement Certificate Providers (ACP).¹¹ ACPs develop project activities that offset greenhouse gases, including reduced emission generation, energy efficiency and forest generation, energy efficiency and forest sequestration.¹² APCs receive certificates for the amounts of CO2 equivalent they offset, and can trade these on the GGAS market. Each NGAC represents a ton of emissions reductions.

The value of the NSW GGAS has increased from US$59 million in 2005 to US$269 in 2008.¹³ The value of one ton of carbon was around US$2 as of February 2009.¹⁴

Regional Greenhouse Gas Initiative

The Regional Greenhouse Gas Initiative (RGGI) is the first mandatory, market-based effort in the United States to reduce greenhouse gas emissions. The RGGI trading market opened in February 2008.¹⁵ The objective of the RGGI is to reduce carbon emissions from the power sector by ten percent by 2018. Ten Northeastern and Mid-Atlantic states - Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont - have recently set a regional cap on carbon emissions, and required fossil-fuel power plants to purchase allowances that match their carbon emissions. The cap is set slightly above the emissions level expected over the next few years under business-as-usual conditions. From 2015 to 2020, the cap will decrease annually.¹⁶

The RGGI is a cap and trade program with "baseline and credit" components. Utilities can buy emission allowances at auctions or from other participants of the RGGI, who have emitted less CO2 than their allowance. In addition, participants can buy credits from US-based carbon offset projects outside of the capped sector that reduce or sequester emissions of greenhouse gases. Projects are allowed in five categories: landfill methane capture and destruction, reduction in emissions of sulfur hexafluoride (SF6) in the electric power sector, sequestration of carbon due to afforestation, reduction or avoidance of CO2 emissions from natural gas, oil, or propane end-use combustion due to end-use energy efficiency in the building sector, and avoided methane emissions from agricultural manure management operations. Under limited circumstances, RGGI also allows purchasing of emission credits from mandatory programs outside the United States (for example from the CDM).¹⁷

The value of the RGGI market was US$19 million in 2008.¹⁸ RGGI permits sold were sold, through auction, for US$3.07 per ton in September and US$3.38 in December 2008. The next auction will take place in March 2009.¹⁹ 

Chicago Climate Exchange

The Chicago Climate Exchange (CCX) operates North America’s only cap-and-trade system for GHG. All participants in the CCX make voluntary, but legally binding, commitments to meet annual GHG reduction targets. Members who reduce beyond their targets have surplus allowances to sell or bank. In order to meet their reduction commitments, members can purchase credits from other members who have made reductions beyond their targets. The credits in the CCX are called Carbon Financial Instrument (CFI) contracts, each of which represents 100 metric tons of CO2 equivalent. CFI contracts are comprised of Exchange Allowances and Exchange Offsets. Exchange Allowances are issued to emitting Members in accordance with their emission baseline and the CCX Emission Reduction Schedule.²⁰ 

The value of the CCX carbon market has increased from US$3 million in 2005 to US$316 million in 2008.²¹The value of a metric ton of carbon in the CCX increased from around US$1 in December 2003 to around US$4 in August 2008. As a result of the current economic unstability the value of a metric ton of carbon has decreased to around US$2 in February 2009.²²

Green Exchange

The Green Exchange was launched in December 2007,  as part of the New York Mercantile Exchange (NYMEX). It serves as a trading market for various international environmental products, including carbon markets products. It trades European EU ETS European Union Emission Allowances (EUA), CDM Certified Emission Reductions (CER), as well as RGGI credits. Currently, all of the emissions and other environmental contracts that are associated with the Green Exchange are listed for trading and clearing by NYMEX. It is expected that the Green Exchange will become a separate designated contract market (DCM) or futures exchange in 2009.²³

Over-the-counter market

Outside of CCX and the Green Exchange, a wide range of voluntary transactions exist that are not driven by an emissions cap, and mostly do not trade on a formal exchange. The over-the-counter (OTC) segment does not have a regulated marketplace or agreed to standards. Customers this market are companies and individuals that want to reduce or offset their “carbon footprint.” The market is highly fragmented, with many diverse buyers, sellers, projects developers and project types.²⁴