Emissions Trading

Emission Trading Scheme: a way to reduce the climate change and the effects of the global warming

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 the European Union Emission Trading Scheme. It happens because a group of computer hackers found a way to get access to the certificates of serial 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 it.

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 melting glaciers and polar bears which are melting and let rise the sea level. All those are consequences of the greenhouse gases like carbon dioxide, methane, ozone and nitrous oxide. The global warming is cause 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 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 much more agriculture has to be established. Because of that new cows and other animals have to produce additional meat for these people, because 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 point important point which has been regulated in Kyoto was mechanisms like “Emissions Trading, the Clean Development Mechanism and Joint Implementation” Questions to investigate in this context: How works the Carbon market? It’s a global or a local market? Who are the actors of this market and how are the organized? Which size has this market today?

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 right and another company which has not enough emissions rights. At the consequence companies which have a very clean production can make additional money with their emissions right. In the literature have carbon market the following definition: „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.“

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.“

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 do not make it more transparent for interested people and citizens. And that maybe a key problem. „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 continent 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.“

Are too many emission allowances in the market?

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 they do effectively nothing against the climate change. http://www.cdm-watch.org/

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 to sustain our environment. So it should not be depraved to a system to do illegal transactions.

This is a preview version of my case study.