The EU Emission Trading Scheme
The European Union Emission Trading System (EU ETS) is Europe’s flagship policy to fight climate change and the largest carbon emissions trading program in the world. The EU ETS brings together 30 countries (the 27 EU Member States plus Iceland, Liechtenstein and Norway) and covers CO2 emissions from over 11,000 installations. These include power stations, combustion plants, oil refineries and iron and steel works, as well as factories making cement, glass, lime, bricks, ceramics, pulp, paper and board.
The EU ETS runs in phases: 2005-2007 (Phase I), 2008-2012 (Phase II, coinciding with the first commitment period of the Kyoto Protocol), 2013-2020 (Phase III), etc. There is no end date to the EU ETS. By linking to the Kyoto Protocol, the EU ETS allows companies to use international offset credits to meet part of their compliance target. These offsets are known as Certified Emission Reduction units (CERs) and Emission Reduction Units (ERUs).
The legal framework underpinning the European carbon market, Directive 2003/87/EC, grants the holder of one EU Allowance (EUA) the right to emit one tonne of CO2. Approximately 2 billion EUAs are capped annually under the EU ETS, representing about 50% of EU's total CO2 emissions. Currently, EU Member States allocate the majority of the EUAs free of charge but this will change in Phase III (2013) when auctioning becomes the main allocation method. In addition, the EU ETS will expand its current scope by including petrochemicals, ammonia and aluminium industries and two additional greenhouse gases (nitrous oxide and perfluorocarbons) in the program from 2013. Airlines will also be subject to compliance requirements beginning in 2012.
Since carbon trading took off in Europe, trading volumes and underlying asset values have grown beyond expectations. The EU ETS was valued at over €100 billion ($140 billion) in 2010, up from €7bn ($10bn) in 2005. The global carbon markets saw transactions of 8.7 billion tonnes of CO2e in 2010 where the EU ETS accounted for 80% (Source: World Bank). By any measure, carbon has grown impressively to establish itself as a new commodity that is here to stay.
GreenX lists EUA and CER futures and options contracts for trading on its platform, offering market participants a compliance and risk management tool to manage their carbon positions and liability.
