Global Emission Market

The Kyoto Protocol
The supplementary protocol to the United Nations Framework Convention on Climate Change (UNFCCC), which was signed at the 3rd World Climate Conference in Kyoto in 1997, is primarily aimed at the reduction of greenhouse gas emissions as the main cause of global warming. In the framework of the Kyoto Protocol, 160 countries and economic organizations have undertaken to comply with mandatory target values regarding the emission of greenhouse gasses. For example, the Kyoto Protocol provides for a reduction of the annual greenhouse gas emissions by the industrialized countries by on average 5.2 percent below the 1990 levels for the period from 2008 to 2012.

However, a key industrialized country such as the U.S. has not signed this document. Moreover, the strict restrictions regarding emissions are not applicable to developing countries, such as China or India.

In order to implement its aims the Kyoto Protocol provides for several flexible mechanisms:

Emissions trading
In the framework of emissions trading, the respective state issues Emission Allowances to the companies taking part in the scheme or the state auctions off such allowances. In an ideal case, every company is assigned fewer allowances than it needs for current operations without modernization measures. Hence, the companies can weigh the pros and cons of the purchase of Emission Allowances and investments into emission-reducing measures.

Clean Development Mechanism (CDM)
The project-based CDM measure is intended to help keep the costs required for compliance with the reduction targets established in the agreement as low as possible. A country which is specified in the Annex 1 to the Kyoto Protocol can buy Carbon Credits from a country which is not listed there. This creates the possibility of reducing greenhouse gas emissions where this can be achieved at the lowest price. Moreover, another desired side effect is the transfer of state-of-the-art technology to developing countries.

Joint Implementation (JI)
This project-based measure is used for the implementation of emission-reducing measures between two countries listed in the Annex 1 to the Kyoto Protocol. The investor country is granted the right to produce further emissions. As in the case of the CDM, an investment into emission-reducing measures in the host country is frequently more cost-effective than a reduction of emissions within the investor country. The host country, on the other hand, benefits from the sale of the Emission Allowances and from the transfer of technology from the investor country.

Additional information on the Kyoto Protocol can be found in the November 2007 edition of the Eurex Xpand Newsletter: http://www.eurexchange.com/download/documents/publications/e_xpand_2007105.pdf

The European Emissions Trading Scheme (EU ETS)

The EU's Emissions Trading Scheme was launched in January 2005 as part of the Kyoto Protocol on Climate Change. The EU ETS includes individually coordinated National Allocation Plans (NAP) of the EU member states and works on a cap-and-trade basis, forcing companies either to emit less carbon dioxide than their determined cap of emissions for all installations according to the NAP allows or to buy EU Emission Allowances (EUA) from elsewhere. The first trading phase of the scheme ran until the end of 2007; the second phase started in 2008 and ceases in 2012, coinciding with the Kyoto Protocol commitment period.

In 2007¹, the EU ETS has grown rapidly to a trading volume of 1.6 billion tonnes CO2 (approximate market value of EUR 28 billion), whereas one tonne CO2 equals one EU Emission Allowance (EUA). The EU ETS is regarded as the world-wide reference system for a standardized emissions trading architecture in an overall global emission market²of 2.7 billion tonnes CO2. Trading volume and trading frequency within the EU ETS is expected to further increase significantly with the beginning of the second trading period in 2008.

Based on its leading role, the EU ETS market has the potential to turn into the nucleus of a global emission trading market.

Next to EUAs, Certified Emission Reductions (CERs), which are tradable instruments generated from Clean Development Mechanism (CDM) projects, are currently emerging as the international currency in the global carbon market. After reaching a trading volume of 350 million tonnes CO2 in 2007³ in the secondary market, experts estimate that the market will reach 2.6 billion tonnes CO2 by 2012⁴, and will be worth EUR 41 billion.

The EEX/Eurex CO₂ cooperation aims to contribute to the expansion and diversification of the global emission market bearing powerful advantages for trading and clearing of emission products.

Additional information on the EU ETS can be found in the November 2007 edition of the Eurex Xpand Newsletter: http://www.eurexchange.com/download/documents/publications/e_xpand_2007105.pdf

Glossary

AAUs: Assigned Amount Units are the units used to define Emission Allowances assigned under the Kyoto Protocol. These allowances are for the man-made emissions of greenhouse gases which an industrialized country is permitted to emit over a certain commitment period. One AAU is the equivalent of a tonne of carbon dioxide.

CDM: The UN-administered Clean Development Mechanism. CDM projects are to be hosted by developing countries that have no quantitative targets.

CERs: Certified Emission Reductions are carbon credits created by CDM projects which can be used for compliance in Annex 1 countries. A number of countries and companies will make use of project based carbon credits from CDM to be in compliance with their Kyoto targets. Reducing emissions outside one's own site or country ("external abatement") can be a cost-effective alternative to internal abatement.

CO₂e: Carbon dioxide equivalent. Each of the greenhouse gases addressed by the Kyoto Protocol can be identified in terms of its climate change impact relative to that of carbon dioxide. The common unit for emission reductions is one tonne of carbon dioxide equivalent.

ERUs: Emission Reduction Units are carbon credits created by JI projects which can be used for compliance in Annex 1 countries.

EU ETS: The EU Emission Trading Scheme was launched in January 2005 as part of the Kyoto Protocol on Climate Change. As the world's first international emission trading scheme, it works on a cap-and-trade basis, forcing companies to emit less carbon dioxide than their Kyoto target allows or to buy carbon permits from elsewhere (CERs and ERUs). The first phase of the scheme runs until the end of 2007 and the second phase from 2008 to 2012, coinciding with the Kyoto Protocol commitment period.

EUA: EU Emission Allowances are issued to installations which have a cap on their emissions under the EU ETS. An installation must hold and surrender EU Emission Allowances and/or project based carbon credits equal to its monitored carbon dioxide emissions by the annual EU ETS reconciliation date. EU allowances are also the main unit which will be traded in the EU ETS. One EU Emission Allowance = 1 t CO₂e (CO₂ equivalent).

JI: Joint Implementation projects are to be undertaken in countries that have quantitative emissions targets under the Kyoto Protocol, i.e. industrialized countries (Annex 1). These countries can contribute to their greenhouse gas emission reduction targets by investing in emission reduction projects in other industrialized countries and receiving credits called ERUs.

NAP: National Allocation Plan. In the context of the EU ETS, the NAP defines the government-determined allowance limit for each installation that has a limit. The limits on emissions will apply from 2005.

¹ Point Carbon, Carbon Market Monitor January 2008: A review of 2007
²New Carbon Finance, North America and Global Carbon Market – June 2007
³ Point Carbon, CDM&JI Monitor
⁴ UNFCCC, CDM Statistics