Carbon markets

The credibility of the carbon market relies on important infrastructures to insure the integrity and transparency of carbon trading schemes and the trustworthiness of stated emission reductions on which they are based.

National registries of carbon assets are set up by all participant countries to an emissions trading scheme. Those registries enter each member state participant’s allowances and carbon asset transactions on their individual account. In the meantime, they register verified emissions from actors under a legally binding carbon compliance regime (states, industrial utilities, utilities, etc.). This tracking system helps to avoid double counting for emissions or emission reductions and to ensure a control of transactions under the regulatory authorities. A European registry, manage in parallel by the European Commission, called the Community Independent Transaction Log (CITL), and an international one managed by the United nations, called ITL, insure coordination of all the registries. Typically, stock exchanges in Europe facilitate trades of carbon assets between participants in the EU ETS. All effective trade is entered in the correspondent registry.

The international markets created by the Kyoto Protocol rely on allocating AAUs (Assigned Amount Units) to developed countries (Annex B): 1 AAU= 1 metric tonne of CO₂. Each participant country with a compliance target (“Annex B” countries) receives a quantity of AAUs equivalent to its GHG emission reductions target outlined in the Kyoto Protocol. These countries can buy or sell AAUs between themselves to meet their compliance requirements.

For example, France has an emissions cap equivalent to 565 millions tonnes of CO₂e per year for the period between 2008 and 2012. Thus, on 1 January 2008, France received the same quantity of AAUs. After 2012, France will have to surrender an equivalent quantity of carbon units to its real emissions between 2008 and 2012.

The country will have the opportunity to use its initial allocation of AAUs, plus credits from Kyoto project-based mechanisms and credits coming from its balance in carbon sequestered through reforestation and agro-forestry.

The Clean Development Mechanism (CDM  ) enables reductions in emissions which have been achieved by projects conducted in developing countries. CDM   credits are called Certified Emission Reductions (CERs); they are generally issued in equal amounts to the avoided emissions achieved by the project compared to a baseline scenario representing an estimation of emissions in the host country in the absence of the project. These baselines and reductions are certified by an independent audit and the United Nations CDM   Executive Board (CDM   EB).

Principles to Clean Development Mechanism (CDM  )

_Source: CDC Climat.

Joint Implementation (JI  ) projects complement this mechanism. These are projects which are negotiated between two Annex B countries generate greenhouse gas Emission Reduction Units (ERU). It involves the transfer of carbon units among countries

Principles to Joint Implementation projects (JI  )

_Source: CDC Climat.

Joint Implementation (JI  ) can be as well applied to a national context through the domestic CO₂ projects. This system consists in Europe to remunerate non participant actors to the European market for CO₂ allowances (EU ETS) for voluntary emission reductions projects through carbon assets.

The main sectors concerned are transports, agriculture, building, waste, and industrial plants which would not be covered by the European market for CO₂ allowances (EU ETS) (lien vers la sous-section 5-4 suivante).

A major plank of European climate change policy is an EU-wide emissions trading scheme for GHGs  , known as the EU ETS: European Union Emissions Trading Scheme or the European CO₂ market.

It sets the CO₂ emissions caps of more than 11,000 European industrial installations which belong to those sectors which are the biggest emitters: energy production, industrial processes (cement, lime, glass, and ceramics), metallurgy (steel, iron) and paper production.

Reaching this cap results in the annual allocation of allowances divided between industrial establishments. 1 allowance  , called EUA (European Union Allowance  ) = 1 tonne of CO₂.The allocation method is detailed in each National Quota Allocation Plan (NAP) which must be validated by the European Commission.

Allocation of European allowances by sector in 2009 (millions of allowances and % of total)

_Source: CDC Climat Research, based on data from CITL.

The compliance of each establishment is verified each year: each establishment returns the number of allowances equivalent to its CO₂ emissions for the past year to the European Commission. During each compliance year of the EU ETS, each covered installation has the ability to buy or sell allowances in the EU ETS carbon market, taking in account their internal emission reduction costs versus allowances purchase price.

The permit and emission accounts are kept in a system of registries.

The EU ETS mechanism has (so far) been organised into three periods:

• 2005-2007, the Trial Phase. During Phase I, approximately 2.3 billion tonnes of CO₂ were allocated each year to the 27 Member states participating in the Scheme. Realised annual CO₂ emissions accounted for 2.1 billion tonnes of CO₂, releasing a surplus of 160 millions allowances by the end of Phase I. This surplus couldn’t have been banked to be used in phase 2, which meant that the price per allowance   fell close to zero in 2007.
• 2008-2012, the first Kyoto commitment period. 2.1 billion of allowances were allocated each year. During Phases I and II most EU ETS allowances (called EUAs) were allocated to covered installations for free, with the small remainder being auctioned to installations. The scheme allows covered installations to use credits from the project mechanisms under Kyoto Protocol, for an average quantity of 13.5% of their allocation. Despite the impact of the global financial crisis which led 2009 emissions to be 11% lower than the total allocation of allowances for that year, the opportunity to bank allowances from Phase II to Phase III has helped EUA prices to remain well above zero, unlike Phase I.
• 2013-2020: the European Climate & Energy Package, passed in March 2009, will see the emission reduction obligation strengthened considerably. Without an international agreement, the Europe-wide greenhouse gas emission reduction objective is set at –20% below 1990 levels by 2020. In the case of an agreement in the ongoing international negotiations, this objective may be increased to a –30% reduction instead. Moreover, the EU ETS will be moving to a much higher share of auctioning of allowances. Using credits from the Kyoto project-based mechanisms will also be limited.

Price curve of carbon assets usable under the European Emission Trading Scheme (EU ETS)

_Source: CDC Climat Research, based on data from BlueNext and ECX.

The establishment of other domestic carbon markets outside of the EU remains a work in progress. Governments in many countries, states and regions around the world have made clear signals of their preference for carbon markets as a central, if not exclusive, mechanism to drive their transition towards having a less carbon intensive economy. Places to have embraced carbon markets include New Zealand with the New Zealand Emissions Trading Scheme (“NZETS”) (started 2008), 11 North-eastern states of the USA (who have created the Regional Greenhouse Gas Initiative or “RGGI” for their states electricity production sectors), New South Wales in Australia (which started the “NSW GGAS” scheme in 2003 for the electricity sector), as well as California (“AB32”) and 6 other US States and 4 Canadian provinces which have been trying to create the Western Climate Initiative (“WCI”) in 2012 if no federal US Scheme gets under way in that time. At the same time, several countries have climate and energy laws with explicit plans to create large scale ETSs under construction or awaiting approval in their respective legislatures. These countries currently include: the United States, Japan, South Korea, Australia, and Taiwan. Most of these laws envision starting mandatory ETSs similar to the EU ETS by 2012 or 2013.

Voluntary carbon offsetting describes the practice by which organisations, companies and private individuals who want, on a voluntary basis and outside of the regulatory constraints, to purchase CO₂ emission credits and remove them from the market in order to offset their own emissions.

Although modest in size, the voluntary carbon market has been growing quickly in the absence of mandatory national markets in many countries. The use of quality labels issued by specially established certifiers typically are used by buyers to guarantee the environmental integrity of the projects from which the credits originate.

In 2008, the voluntary market saw 54 million tonnes of CO₂e being traded (including 7% related to forestry projects). These credits are estimated to have traded at an average price of 7.35€ per tCO₂e, which is half the price of credits from projects mechanism under the Kyoto Protocol - CDM or JI.