Emissions trading
Emissions trading arises from the creation, within the last few years, of a new market in emissions ‘allowances’. Companies and businesses are granted a certain number of permits for a specified level of emissions of greenhouse gases (a ‘capped’ level).
They then can choose to meet the required emissions limits either by modifying their own activities, or by buying credits from other companies who emit less polluting gases – therefore have allowances to spare.
A brief background
The European Union Greenhouse Gases Trading Emissions Scheme (EU ETS) was launched on 1 January 2005. The ETS is the lynchpin of the EU’s commitment to combat climate change and to move towards creating a low carbon economy.
The launch of the scheme reflected the EU’s part in the Kyoto Agreement – a landmark Agreement made by the International Framework Convention on Climate Change in 1997. The Kyoto protocol was agreed by 38 developed countries, with the aim of fighting climate change through reducing greenhouse gas emissions. It finally came into effect in 2005.
The Kyoto Agreement has been ratified by 175 countries, of which 137 are developing countries. (The USA was notable by its non-participation.) All the developed countries have been working since to find ways of reducing emissions to their Kyoto targets. The developing countries are not required to reduce greenhouse gas emissions, but only to monitor and record them.
Through further world debate at the United Nations Climate Change Conference at Bali in November 2007, a ‘road map’ has been drawn up outlining the next stage of steps and measures towards achieving a safer climate future for the world.
In January 2008 the European Commission agreed a package of proposals to deliver on the European Union's commitments made at Bali, with new targets for 2020 and 2050.
Our goal for the year 2020 is now a minimum of 20 per cent reduction in overall EU carbon emissions from 1990 levels – increasing to 30 per cent when there is an international agreement on climate action. Alongside this, 20 per cent of EU energy is by 2020 to be derived from renewable sources.
Each member state’s individual targets vary depending on their wealth and resources. For Britain, the challenge will be to increase ‘green’ energy generation to 15 per cent of total energy generation, while cutting emissions by 16 per cent.
The EU emissions trading scheme
The EU is currently leading the way in emissions trading, with every member state participating in the scheme that is fundamental to Europe’s efforts to move towards a low carbon economy. It is a crucial measure in helping countries to reduce their greenhouse gas emissions and to meet their targets.
The emissions trading scheme monitors and regulates more than 10,000 industries across the EU – principally heavy industries such as electricity generation, iron and steel manufacture, and pulp and paper processing plants. Together, such facilities generate around half of the EU's emissions of carbon dioxide and 40% of its total greenhouse gas emissions.
Not all companies are covered by the scheme: certain industries such as farming, construction and transport are outside it, but these also now have (or will have) national caps imposed.
How the scheme works
All the companies within the scheme have to monitor and report each year their own emissions of carbon dioxide. They must then ‘pay’ the government for their emissions with an equivalent quantity of emission allowances for that year.
At the start of the trading year, the government provides a restricted or ‘capped’ number of credits free to each company. Those companies that have emitted more than their total allowance are then obliged to purchase further credits from other companies, traders or the government.
There are severe penalties on any company that exceeds its allowance. However, any installation that has more free allowances than it needs may sell them to anybody else. This means that companies that invest in new technology and production methods to reduce their CO2 are in a strong trading position. There is thus a strong financial incentive on all companies to reduce their own emissions.
The creation of a market through this ‘cap and trade’ approach means that overall CO2 reductions can be made at the least cost to the nations.
The European Commission’s proposals in January 2008 include various changes to the scheme, aimed at tightening its effectiveness. Their proposals include:
- centralising the allocation of carbon allowances, rather than leaving this responsibility with individual nations
- a move to auctioning a larger quantity of the allowances rather than allocating them freely (more than 60 per cent overall)
- inclusion of other greenhouse gases as well as carbon dioxide, namely nitrous oxide and perfluorocarbons.
How EquiClimate fits in
The EU carbon allowances are unusual as a trading commodity – they exist only as electronic records in national registries set up by member states. Anyone holding an account with a national registry is thus able to trade in CO2 allowances, including people who do not have an initial allocation.
EquiClimate takes advantage of this. Our vision is to use the scheme so that anyone can buy into it to offset their own carbon by buying an allowance – but instead of re-selling the permits, we retire them. As the overall number of allowances is limited, this will contribute to the growing pressure on polluters to cut their emissions.