Emissions limit to set trade values
WITH the report of the Government’s emissions trading task group, the process is under way that will see a national carbon emissions trading system operating by 2012. The system is expected to be a ‘‘ cap- andtrade’’ system as operated in the European Union’s Emission Trading Scheme ( EU ETS), established in 2005, which accounts for about 90 per cent of the value of the worldwide carbon emissions market.
The EU has established a cap that limits emissions for its member states, each of which has been given a specific number of carbon credits. Participants are free to trade these credits in a free market.
If they emit less than their allowance, they have surplus credits for sale; if they emit more, they must buy credits from the market. Carbon trading puts a price on emitting carbon and makes the right to emit tradeable.
Carbon trading is one of the major global policies for the reduction of carbon dioxide emissions agreed under the Kyoto Protocol to the United Nations Framework Convention on Climate Change, negotiated in 1997 and beginning operation in February 2005. Carbon dioxide is the first of six greenhouse gases that signatory developed countries must reduce, and/ or start a carbon emissions trading system by 2012.
The Australian Government’s emissions trading taskforce report does not set a price on carbon or name a specific target for greenhouse gas reductions, as does the Kyoto Protocol ( which Australia has not ratified). It is expected to use revenue from the sale of emission permits to assist low- income households with potentially higher power bills, as well as to accelerate development of new lowemission technologies.
Treasury is expected to co- ordinate the detailed design work for the trading scheme, with enabling legislation ready by 2009, trials and permit allocations in 2010, and a notional 2012 start date to coincide with the start of any post- Kyoto agreement.
Worldwide the carbon emissions market has developed into a new asset class, created on the back of the Kyoto Protocol target to reduce aggregate global emissions of greenhouse gases to 5.2 per cent below their 1990 levels. The targets for different countries within the protocol differ, depending on factors such as current levels or pollution and expected level of economic growth.
The asset being traded in carbon markets is not actual carbon, but the right to emit carbon dioxide. Companies or entities are assigned the right to emit a stated amount of carbon dioxide over a time period: this is a carbon ‘‘ credit’’ or ‘‘ allowance’’. The basic unit of the market is the right to emit one tonne of carbon dioxide a year.
According to a report from the World Bank, the global carbon market tripled in size in 2006, to reach $ US30 billion. dominated by the trading of EU allowances ( EUAs) in the ETS. More than 1.1 billion tonnes in EUAs were traded in 2006, compared with 321 million tonnes traded in 2005, worth just under $ 8 billion.
More importantly, the market is maturing after experiencing teething problems last year. On the European Climate Exchange ( ECX), carbon prices dropped by more than 50 per cent in a week in May 2006 on reports that a group of countries including Spain, the Czech Republic, France and the Netherlands emitted far less CO2 in 2005 than initially anticipated by the market. France, for example, ended up with 19 million tonnes of Continued next page