The EU's Emissions Trading Scheme has just gone live, as of 1 January 2005 - involving over 12 000 installations in the 25 EU states. We've talked about Carbon Markets before, but now there's a chance to watch how a large and well-regulated market plays out in the real world. Nature News reports on the first week of trading :
Each state is given a national allocation of carbon credits, with the aim of cutting emissions by around 1% a year during the project's first phase, which runs until 2007. It then farms these out to individual companies.
Traders can buy extra credits, giving them the right to exceed their emissions limit, or sell them if they are below their limit. Companies that fail to stay inside their limit face a fine of 40 for every tonne of excess carbon dioxide that they emit [during 2005].
The amount of activity on the market has grown exponentially in recent months as traders readied themselves for the European scheme. On 6 January, brokers oversaw deals involving some 600,000 tonnes of carbon dioxide emissions, says Reena Qureshi of London-based brokers CO2e.com. And this daily total looks likely to grow steadily, as more traders join the market.
Prices on the market have decreased since the end of December, however. The price of a tonne of carbon dioxide credit has fallen by about a euro, from 8.5 to 7.65...Qureshi suspects that a drop in the use of coal has caused predicted carbon-dioxide emission levels to drop, making carbon credits less valuable.
Analysts will continue to watch the market's movements closely as more traders enter the fray. With the European scheme only a few days old, it is not yet clear whether the price fall is a genuine trend or whether the market will soon bounce back.
Some background information from an EU Memo (note the cost-benefit discussion):
The Emission Trading Scheme (ETS) is a cornerstone in the fight against climate change. It is the first international trading system for CO2 emissions in the world. It covers some 12.000 installations representing close to half of Europes emissions of CO2...Starting 1 January 2005 companies will have to keep track of their emissions and produce at the end of each year a report on annual emissions that will be verified by a third party (similar to an auditor verifying the financial accounts of a company). At the same time they will have to make sure that they are in possession of a sufficient number of allowances to surrender year by year (first surrender date is end of April 2006) so not to be subject to financial sanctions.
One of the underlying principles of the European Climate Change Programme has consistently been to identify the most cost-effective measures to achieve the Kyoto targets. Recent Commission studies conclude that the targets can be achieved at an annual cost of 2.9 to 3.7 billion, which is less than 0.1 % of GDP in the EU. One of these studies concluded that without the Emissions Trading Scheme costs could reach 6.8 billion. So emission trading allows the costs of Kyoto to be reduced even further.
How these costs are distributed will depend on the decisions taken in the allocation plans and on further measures adopted to control emissions in sectors not covered by the Emissions Trading Scheme. The scheme will not jeopardise, but rather protect, the competitiveness of the EU economy, as any alternative measures would mean imposing higher than necessary costs on EU businesses. Implementing Kyoto will, however, mean not only new economic opportunities but also costs for EU businesses. This is unavoidable we cannot have something (i.e. Kyoto compliance) for nothing. Europe gets the best value for money with the Emissions Trading Scheme. If governments do not use the trading scheme to assist compliance, more costly measures will have to be imposed on other sectors. Costs have to be seen in relation to the opportunities arising for suppliers of clean, low-carbon technologies in Europe and beyond and the medium-term advantage for European industry in the transition to a low-carbon global economy.
In principle, all transactions will be recorded in a common "Community Independent Transaction Log". Compliance for each installation will be reported each year, adding an element of shaming to fines for non-compliance. If you want to see who is buying and selling credits, there will be a bit of a wait - detailed transaction information will only be available after a 5-year delay.
Emissions trading has already been successfully applied to various kinds of pollution. And not just in the developed world - a demonstration project in Taiyuan and a report on China's prototype schemes for sulphur dioxide trading are promising signs for the future. (Watch for the latter report's references to the mysterious substance "surfer dioxide"...)
Watching these markets being set up is a good lesson in the large amount of expertise, regulation, and auditing required for large-scale markets to function properly. It's easy to forget how much work goes into creating markets with honest prices, especially when the commodities being traded are intangible rights.