Way clear for cap and trade market
surplus CO credit allocations. If emissions are below the cap, companies can sell their surplus carbon credits, dampening demand: if there is a net carbon credit surplus, there is no incentive to reduce emissions.
‘‘ In the first round of emission credits allocation, lots of countries and businesses said ‘ we need X amount of credits’, but in the end they didn’t need anywhere near that many,’’ says Jonathan Fieldsend, funds manager at EEA Funds Management in London, which advises carbon trader Trading Emissions plc. ‘‘ As a result, prices in the short- dated December 2007 EUAs have been a disaster, they have fallen away to very low levels. But in the next round, for emissions over the period 2008 to 2012, the EU was a lot tighter, and therefore there are less permits available, so carbon prices have been going up.’’
The most liquid contract on the ECX, the December 2008 EUAs, have moved from 17.5 euros at the start of the year to 22.97, a rise of 31 per cent. The December 2009 EUAs have gained 29 per cent, climbing from 18.05 euros to 23.30. ‘‘ It’s working a lot better as far as everyone is concerned,’’ says Fieldsend.
Despite not having signed the Kyoto Protocol, Australia had the first operating carbon emissions trading scheme in the world, in the NSW Greenhouse Gas Abatement Scheme which began operating in January 2003. The scheme is still the second- largest in the world behind the EU ETS.
Under the scheme, all electricity retailers in NSW are obliged to offset the emissions intensity of the electricity they sell by a certain percentage. They do that, in effect, by buying offsets in the form of NSW Greenhouse Abatement Certificates ( NGACs), which are created by generators producing electricity with a lower emission intensity than the pool average; by companies modifying an existing emission situation ( for example, a factory) in a way that reduces emissions; by companies reducing their energy demand; by companies doing energy- efficient projects; or by companies actually ‘‘ sequestering’’ carbon by removing it from the atmosphere through planting trees.
Participants can trade the NGACs among themselves and outside parties — such as banks, or even retail investors — can also trade them. But only companies with assets in NSW are eligible.
More than 42 million NGACs have been issued, with power generators the bulk of the market at 68 per cent of NGACs, followed by demand- side abatement ( DSA) at 27 per cent, with the remainder accounted for by carbon sequestration and ‘‘ large- user’ participants, who have on- site greenhouse emissions not directly related to electricity consumption. At present, 185 participants have been accredited in the Greenhouse Gas Abatement Scheme.
The NSW scheme credits are not fungible ( where one unit of commodity or currency is equivalent to another, and may be substituted for the other with no loss of value) with the credits being traded in Europe. The EU ETS is only open to countries that have signed the Kyoto Protocol.
The US has no formal carbon emissions trading market, although some states ( for example California) are investigating ‘‘ cap and trade’ markets.
The US is no stranger to cap- and- trade markets, having established one for sulphur dioxide, the key ‘‘ acid rain’ pollutant, in the mid- 1990s. Coal- fired power plants were allocated emission rights by the US Environmental Protection Agency ( EPA), and trading in these rights began on the Chicago Board of Trade. Emissions of sulphur dioxide have dropped by more than 6.5 million tonnes from 1980 levels, according to US EPA. By 2010, it estimates that sulphur dioxide emissions will fall to half 1980 levels.
The lessons learned in the sulphur dioxide trading success story were applied in the development of the Chicago Climate Exchange ( CCX), which opened for business in December 2003. The CCX is a self- regulated voluntary program that allows its 250- plus participants — companies, institutions and liquidity providers ( or speculators) — to trade greenhouse gas emissions through direct trading and through credits from offset providers, such as plantation forestry companies.
In 2005, contracts covering 1.5 million tonnes of emissions were traded. That amount jumped to 10 million tonnes last year: by the end of April 2007, CCX volume had already exceeded threequarters of the 2006 volume.
In the absence of a national carbon emissions trading market in Australia, some non- NSW participants participate on the CCX: for example, the City of Melbourne was the first municipal entity outside the US to join. Australian utility AGL Energy is also a member, as is Melbourne law firm Coady’s.