Europe leading the way

In an article in the Australian Financial Review on March 26, journalist Mark Lawson reported how guidelines have been tightened to guard against Europe’s carbon prices suffering another collapse.

“The European Commission says that its own carbon trading scheme has shaken off initial problems to become a success,” Lawson wrote.

“Prices for phase two of the EU Emissions Trading System (ETS), which covers very large emitters (mainly power stations) in the 27-member union, are showing signs of stability backed by healthy trading.

“In mid-March, the European system valued a tonne of carbon dioxide emitted at about 22 Pounds ($36) and climbing, up from about 19.70 Pounds in early February. This activity is better than the first phase, which an EU release describes as one of ‘learning by doing’.

“In that three-year phase, which ended at the beginning of this year, prices collapsed from 30 Pounds a tonne in April last year to just 10 Pence, well before the end of the trading period.

“As is widely acknowledged, the collapse in the price was due to member governments handing out too many free allowances (one allowance gives the holder the right to emit one tonne of carbon dioxide equivalent) to its own emitters.

“For phase two, which runs to the end of 2012, the allocation guidelines have been tightened.”

The EU ETS is a cap-and-trade system. It caps the overall level of emissions but, within that limit, allows participants in the system to buy and sell allowances as they require. At the end of the year, installations must surrender allowances equivalent to their emissions. Companies with allowances left over can sell the excess on the exchange.

Trading mechanisms begin to blossom

In another article in the Australian Financial Review on March 26, journalist Christopher Jay reported that emissions trading schemes will work rather like a futures market.

“In Europe, 70 per cent of the trade in emissions assets is conducted over the counter, the remaining 30 per cent through seven competing carbon exchanges,” Jay wrote. “The dominate exchange is the London-based European Climate Exchange, an affiliate of the US-based Chicago Climate Exchange which operates a voluntary carbon exchange market in America.

“The dominance of over-the-counter trading, rather than packaging and allocations of trading instruments by brokers, reflects the fact that there are just two actual emissions trading securities being traded.

“The first are the EUA securities – European Union Allowances – permits for emission of greenhouse gases handed out to individual production entities in Europe, which can be sold by those who have cut emissions enough to allow them to unload redundant EUA units.

“The other security is the CER, or Certified Emission Reduction certificate.

“Governments in developed countries, under the Kyoto Protocol, can sponsor emission reduction projects in less developed countries (such as protection of forest areas from logging), acquiring CER units which can be sold to emitters in developed countries to offset their greenhouse gas emissions.”

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