Greenhouse Gas Emissions Trading

Understanding Registries and Carbon Trading

Under the Kyoto Protocol, the allowed emission levels are divided into ‘Assigned Amount Units’ (AAUs) for each Party, ie each participating country. If a country has spare unused emissions units, it can sell these units to countries that are likely to exceed their targets. This ability to sell unused units means that the Kyoto Protocol created a global cap and trade system, along with new commodities for emissions reductions and removals which are tracked and traded like any other commodity. Because carbon dioxide is the principal greenhouse gas, it is often referred to as the ‘carbon’ market.

 

Under the cap and trade system the level of allowable emissions by nation are limited and the 37 member parties are encouraged to invest in projects and schemes which reduce or offset emissions. Surplus unused emission allowances can be sold to other parties, which can generate revenues. The idea is that the nations which can reduce their emissions at relatively low costs will do so first: parties that would find emission reduction measures prohibitively expensive or impractical can instead buy emission allocations from other parties. The net effect across the world is that emissions are reduced at the lowest cost.

 

It is generally seen as more effective and more flexible to persuade organisations and nations to control GHG emissions through commercial incentives rather than dictate absolute limits through legislation. It also means that the reductions in overall emissions should take place in the most cost effective way. This is why a Cap and Trade system is used.

 

One flexibility of the cap and trade system at the heart of the Kyoto protocol is the principle of “common but differentiated responsibilities”. This principle puts a heavier burden of compliance on more developed nations, with an implication that industry, or money flowing from the trade of emissions units would tend to move from the developed world to lesser developed countries.

Kyoto didn’t introduce the first cap and trade system: an earlier version was established in 1990 by the Acid Rain Program within the USA which aimed to halve SO₂ emissions from 1980 levels by the year 2007.

 

The cap and trade principle has also been adopted by the European Union Emissions Trading Scheme. However, the EU ETS works at a finer level of detail than the Kyoto Protocol as the 11,000 organisations and installations covered by the EU ETS can trade with one another.  The other main difference is that the Kyoto Protocol covers all six GHGs, whereas the EU ETS currently only covers CO₂ emissions.

 

There are two different types of market and participation can occur at company or installation level in one or both of the following market types:

The Compliance Markets – for installations that are required to report on, manage and reduce their emissions as governed by either local or international law and are likely to undertake trades as a result. In addition to the Kyoto-based markets and the EU ETS, there are a number of initiatives in the USA under State Law, such as the California Global Warming Solutions Act 2006.

The Voluntary Market - those that opt to participate in a scheme or schemes for reasons that might include corporate social responsibility.

 

The voluntary markets are generally similar to the compliance markets in that they work on a unitary basis and also include registries which allow the recording of trades and verification of units. The critical difference is that there is no enforced cap on emissions so there is no level of allowed emissions and no units resultant from that allowance. Perhaps the best known registry in the voluntary sector is the VCS registry.

 

Emissions can be reduced or offset in many ways, ranging from installing more energy-efficient lighting or changing production processes to investing in a project that plants more trees. In order for these to be submitted to a registry and counted as a reduction or offset, the number of tonnes of GHGs reduced or removed from “business as usual” levels must be calculated and validated. Once units are validated and recorded, the units are given unique numbers which enable them to be identified and tracked for their lifetime.

 

Registries are the principal place where units are validated, measured, monitored, managed, reported and, in some cases, retired. The registry tracks and validates units using the unique numbers assigned which ensures that they are counted only once. This provides a level of surety in the trading process as it validates that the units being traded are genuine and haven’t been retired. In addition to this, the EU-ETS registries transfer information to the International Transaction Log (ITL) which is held by the UNFCCC Secretariat.

 

In the case of the EU ETS, all participants (ie not just countries but also individual installations) must submit information to the registry at certain points in the annual cycle for reporting purposes. In addition, they must also enter any transfers that have taken place. More information on registries, and the work SFW does to support them, is on our page about registries.

 

Aside from the levels of allowable emissions that are provided as units to countries which, if unused, can be traded, there are a number of other types of unit that can also be traded. These other types of unit are generally created via an emissions reduction scheme of some kind or through a verified project which counteracts the effects of emissions.

 

At September 2011 an EUA or EU Allowance for a tonne of CO₂ equivalent (CO₂e) traded around €10.75. Future options, a derivative for future emissions allowances, traded at higher values - the highest being €12.80 for a 2014 option.

 

SFW has a unique set of skills and experience in the technical infrastructure which supports the carbon markets. For more information about how SFW can help you fulfil your emissions management obligations, please call 01483 722219 or complete this simple form.