Emissions Trading

Introduction facts

As several newspapers, magazines and webpages reported criminals have found a lag in the European Union Emission Trading Scheme. They steal certificates of a value of more than a million Euros. In consequence of this the European Commission exposes temporary the European Union Emission Trading Scheme. It happens because a group of computer hackers found a way to get access to the certificates of several companies. The article on Spiegel Online describes that the group steal the certificates of a company in the Czech Republic and sell their certificates to other companies. This is an actual example, which happens in January 2011.

I think this actual example is a reason to have a lock on the thematic of this system and to find way out of the problematic.

Emission Trading

Why do we need Emission Trading?

We see the results of the global warming every day. The climate chance is obvious for everybody. The average of temperature rises up and we get more and more extreme weather events. We have glaciers and polar bears which are melting and let rise the sea level. All those are consequences of the emission of greenhouse gases like carbon dioxide, methane, ozone and nitrous oxide. The global warming is caused by two groups, the man-made and the natural causes. Some of the natural causes are for example the methane gas from the arctic tundra and wetlands. This greenhouse gas traps heat in the atmosphere. A typical man made problem is the burning of fossil fuels of and in our transportation vehicles, houses, power plants and factories. Important fossil fuels made of organic matter are oil and coal. The burning of the fuels gives off much carbon dioxide into the earth´s atmosphere. Mining coal give off much methane into the atmosphere. An alternative problem is the population. More and more people need more and more food. To produce this food we have to establish much more agriculture. Because of that new cows and other animals have to produce additional meat for these additional people and so the demand on meat rises.

The beginning of Emission Trading

The birth of the idea of carbon credit currency came with the Kyoto Protocol. One target goal was the “stabilization of greenhouse gas concentration in the atmosphere at a love that would prevent dangerous anthropogenic interference with the climate system”.

One result of this was the “legally binding commitment for the reductions of four greenhouse gases” for all member countries.

Another important point which has been regulated in Kyoto were mechanisms like “Emissions Trading, the Clean Development Mechanism and Joint Implementation”

An introduction in the European Union Emission Trading System

How does emissions trading work in general?

Much information about the emissions trading is available on the website of the Federal Environment Ministry. I found there some interesting information about the emissions Trading process in the European Union and the several periods which are necessary to establish the emissions trading in Europe. “However, they do not specify who has to reduce how much. This creates a large degree of flexibility for achieving goals and an incentive to search for and implement the most cost-effective reduction. The permitted amount of emissions is reduced after or during each trading period. The first emissions trading period covered the years 2005 to 2007, the second period started in 2008 and continues until 2012. The third trading period begins in 2013; the provisions for this third period have by and large already been specified.” So we are at the moment in the second period and in two years will start the third period of the trading system with the next serious changes.

“In Germany, the provisions of the National Allocation Plan are implemented through Allocation Acts. In the second trading period, the allowances are no longer allocated 100 percent free of charge; around 10 percent of allowances are auctioned.”

So with the second trading period the government begins to auction the first percent of the emission allowances. But already 90 percent of the allowances are allocated free of charge to the companies. But with the start of the third period the European Union has to harmonize the different trading systems in the several member countries to get the same allocation rules in Europe. “From 2013 emissions trading will be more harmonised in Europe in order to secure uniform competitive conditions within the EU. To this end there will be an EU-wide cap and EU-wide uniform allocation rules. The majority of emission allowances will be auctioned rather than allocated free of charge. For a transitional period there will be free-of-charge allocation for industrial sectors facing tough international competition; this will be in line with stringent benchmarks. These will be based on the average of the EU-wide 10 percent best technologies in a sector.”

So the determining of the permissible amount of emissions is a very important and not without controversy, part of the system, because if there are too much permissible emissions in the market we don’t stop the climate change and if there are not enough permissible emissions we cannot sustain our industrial sectors because of the international competition with other industrial regions in the world.

The participators of the system

“Operators of 1665 installations are currently taking part in emissions trading in Germany, in particular all large combustion plants (with more than 20 megawatts of thermal output) and large installations of the energy-intensive industry such as steelworks, refineries and cement works. From 2012 air traffic will also be included in emissions trading. Further areas and greenhouse gases will be incorporated from 2013.”

It is a step by step involvement of the several emissions producers in the emission trading system. Each additional step should reduce the emission of greenhouse gases on the level which the European Union and Germany has committed in the Kyoto Protocol. “In the second emissions trading period from 2008 to 2012, installation operators must cut greenhouse gas emissions by 57 million tonnes annually. Compared with the level of emissions released by installations covered by emissions trading in the first trading period 2005 to 2007, the amount allocated was reduced by more than 7 percent. In the second trading period further types of installations were included in emissions trading, primarily crackers in the chemicals industry, processing installations in the steel industry and installations producing soot.”

This is only the German perspective on the allowances because of the, at the moment, not harmonized system in the several member states of the EU.

“Sale of surplus allowances or purchase of additional allowances”

“If a company achieves its required emission reductions through its own cost-effective CO² reduction measures it can sell surplus allowances on the market. Alternatively, it can purchase allowances on the market if implementing its own reduction measures would be more expensive. Companies covered by emissions trading are obliged to register their emissions annually and to surrender the corresponding amount of allowances to the German Emissions Trading Authority (DEHSt).”

On the one Hand should this be an incentive for companies to reduce the personal emissions more than other market participants so that they can sell their surplus allowances. But on the other hand is there the possibility that criminals find ways to take or steal the allowances and sell them on their own account. But we should not only see the disadvantages of the system, because it opens us also advantages and possibilities.

“Everyone benefits from emissions trading. It is an efficient and cost-effective instrument for avoiding greenhouse gas emissions and protecting our climate. With the revenues from emissions trading the German government has been able, since the start of 2008, to promote a wide range of climate protection measures - in industry, local authorities and for consumers.”

Introduction into the Carbon Market

The basic principle of carbon markets is that companies have a limited right to emit greenhouse gases in the atmosphere. The company can use these rights to emit itself or they sell their rights to an another company which has not enough emissions rights. In the consequence companies which have a very clean production can make additional money with the selling of their emissions rights. This is the central point where criminals see a way to make some money with the theft of emissions rights. In the literature have carbon markets the following definition in general:

„Carbon markets are primarily aimed at dealing with the problem of increasing concentrations of greenhouse gases in the atmosphere due to human activities. Carbon markets can also be attributed to technological and industry development, as well as a new area for employment growth.“

To get an impression about the size of this market I will show some figures of the market: „The carbon market was valued at $1 billion in 2004 and reached $11 billion during 2005, with $8 billion from EUETS and $3 billion from primary CDM projects. The market reached $31 billion in 2006 and $64 billion in 2007, with $50 billion from EUETS, $7 billion from the primary CDM market, $5 billion from the secondary CDM market, and $2 billion from other markets. The market reached $120 billion in 2008, which is 120 times more than the 2004 figure of $1 billion.“

As we see has the market a volume of billions a dollars and it’s a lucrative field of activity for criminal groups. To see some details about the basics of this market I will provide the following paragraph about the possibilities of Carbon credits and the emissions trading scheme.

„Carbon credits are a key component of national and international emissions trading schemes. They provide a way to reduce greenhouse effect emissions on an industrial scale by capping total annual emissions and letting the market assign a monetary value to any shortfall through trading. Credits can be exchanged between businesses or bought and sold in international markets at the prevailing market price. Credits can be used to finance carbon reduction schemes between trading partners and around the world.“

And actual is the emission trading scheme is one of the important instruments of the European Union to reduce the greenhouse gasses by 8 percent as they arranged in the Kyoto Protocol.

To show the distribution of the certificates from the governments to the companies I found the following paragraph in the book source:

„Operators of large energy production plants or energy-intensive industrial companies are assigned a predetermined number of emissions certificates by their governments. These initial certificates are free, and authorize the companies to emit a specific amount of CO2. If a company exceeds its allowance it must buy in additional certificates. When a company reduces its emissions, it can sell its excess certificates for profit. Companies face penalties when they do not acquire enough certificates to balance out the CO2 they have emitted.“

The transition to the key issues is: „Carbon credits are a key component of national and international emissions trading schemes. They provide a way to reduce greenhouse effect emissions on an industrial scale by capping total annual emissions and letting the market assign a monetary value to any shortfall through trading.“ So it’s a key business for companies to reduce their greenhouse gas emissions and to sell their carbon credits to other companies witch need carbon credits because of their high polluting production or realized production extensions.

Emissions trading process

So the result of this distribution of emission units to the companies is the trading of these units between the several countries and companies. It a complex process which is not very transparent for interested people and citizens. And that maybe a key problem of the system. „Emissions trading (ET), as set out in Article 17 of the Kyoto Protocol, allows countries that have emission units to spare – emissions permitted them but not “used” – to sell this excess capacity to countries that are over their targets. It is an administrative approach used to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants. It is sometimes called “cap and trade”. A central authority (usually a government or international body) sets a limit or cap on the amount of a pollutant that can be emitted.“

Allowance-Based Markets

And the major market of the unit it’s the European Union, because much of the greenhouse gases of the world is produced in Europe. So it makes sense to implement it first in this region and make it so to the model region which help to adopt such a system to other regions in the other continents of the world.

„The European Union Greenhouse Gas Emission Trading System (EU ETS) is the major market for greenhouse gas (GHG) emission allowances, and is the engine, perhaps even the laboratory, of the global carbon market. Its major achievement is that it helps discover the price of emitting GHGs in Europe. Several exchanges transparently disclose prices at which allowances change hands: for example, the EU emission allowance (EUA) for December 2008 delivery has traded in the €20–25 price band since May 2007.“ The book also deliver figures about the value of this market for the year 2007 and 2008. „The European emission trading market rise in terms of value during 2008 reached US$94,971.7 million; the 2007 figure was US$50,097 million.“

Is emissions allowance market usefull?

Many articles criticize the trade system in general, because of the many lags and immature elements. Especially criticize them some projects of the Clean Development Mechanism (CDM). Some of these projects don’t have proven benefits against the climate change. And so only some companies make money with the selling of the certificates, but the projects do effectively nothing against the climate change. Further actual information are available on: http://www.cdm-watch.org/

Summary and approaches

A possible problem solution

I possible solution for this problem describe the author of an article in the German version of the Financial Times. His argument is that the key problems are the not compatible systems of the several member states in the European Union. As long as every country manages the emission certificates in his national system it is much easy to abuse the system for criminal activities. The elimination of this problem comes in 2013 when the trading system will be centralized in Brussels. But this is not fast enough to eliminate the problems now.

General criticism

The central criticism points I found during my research and during the case study writing process was the not really transparent trading system. So it was only a matter of time as criminals found a way to use weaknesses in the system to make money. I think it is impossible to create a hundred percent safety system. But at the moment we make it too easy to abuse the system. All in all, we should not forget that an Emission Trading Scheme is a part of the economic market and should help reduce the climate change and to sustain our environment. So the system should not be depraved to a system to do illegal transactions. Another relevant point is that it is not easy to find this group of criminals, because of the global dimension of the internet. The group can organize their theft from every location in the world where they get access to the internet. It´s an another interesting point if only national organized police agencies can catch such global operating criminal organizations.

Outlook

This example shows us that to stop the climate change and to save your environment is an enormous challenge. In a globalized world is not possible only with local thinking. We need a global planning and a local implementation of the measures. Concrete means that concerning on the emission rights that it’s not enough to limit such a system of Europe. It is the right place to begin with and tests such a system, but we have to spread to other regions and continents of the world. It is important to watch on the economical, social and environmental effects on people, countries and living perspectives of involved citizens. For example: workers who lost their workspace, because the factory closes in Europe and get transferred to an another place and country in the world. They go in an country without any emissions regulation and lower labour costs and no participation on the factory management of the workers. In most of these Counties they don’t have established the same environmental protection as in European Countries. Furthermore the European Countries lost their purchasing power because they are from this point on only the consumer of the products and not the producer.

Lessons learned

The case helped me to understand what the main factors and arguments of emissions permission trading are.

Literature review

I think a very challenging part of the writing process is to find good and useable Sources. I had not thought that that will take so much time.

Focus

Another thing is that it is not easy to find the right topic and to focus the case study on this topic. Many projects fail because the requirements are not really worked off. Finally I am not really sure if I have get the right focus in my work. On one side you will bring many different views and aspects on the topic but on the other side do you get superficial and don’t show the profound information and show not enough details about the several arguments of the focused topic.

Topic

About the permission trading learned I that it’s not easy to implement such a system in a short time and to be sure that much of the factors has been concerned. As the theft of permissions show us, can criminals find a way to use holes in the secure of the system to find a way to steal permission and sell them on the own account. The next point is that we have implemented the scheme to reduce the climate change and to sustain our environment. And I am not sure if we get acceptable results with the actual implementation of the system. So it is reasonable to verify the basics of the system and to compare them with the requirements of such a system.

Using a wiki

And also, I get some experience about the using of a wiki system and the syntax which is needed to write articles.

References

--Corrected version after peer review: Frank 13:13, 12 March 2011 (CET)