Trading with emission permitsA future-oriented approach to climate protection
Every year, 20 billion tons of CO2 are being emitted into the atmosphere – mainly by the industrialized countries. Ever since it became apparent that the undeniable climatic changes are closely connected with toxic emissions, the community o f nations has been looking increasingly for possibilities to reduce the emission of greenhouse gases. One interesting approach is linking legally prescribed emission amounts to financial incentives for adhering and preferably even undercutting these limits. The practical implementation of this idea resulted in a trading system for CO2 emission permits which was agreed upon by the European Union nations at the end of last year.
One of the first attempts to get a grip on the enormous amounts of greenhouse gas emissions was undertaken in Rio de Janeiro in 1992. During this global climate conference, the climate convention, which came into effect in 1994, was signed. The global community, however, felt that the results of this “Environmental Summit”, which had been awaited with such high expectations, were still rather vague.
The prerequisites for the Kyoto Protocol of 1997 were then created at the ministry level during the next five years, in Berlin in 1995 and in Geneva in 1996, where the community of states firmly accepted the reduction of greenhouse gases. An agreement on the details of the Kyoto Protocol was finally achieved in 2000 in Bonn, after the US walk-out. At the end of 2001, further important agreements were reached in Marakesh and the planning for the administrative implementation of the Kyoto Protocol were further developed.
Objective
The Kyoto Climate Convention aims at reducing the global emission of greenhouse gases to an average of 5.2% below the level of 1990 between 2008 and 2012. That is a total reduction obligation of 8% for the EU. With its Kyoto goal of 21%, Germany has to fulfil the largest share of this, however, due to the economic breakdown in the “New States” (former East Germany), it has already been able to fulfil 18,7% .
The road
The Kyoto Protocol provides three “flexible” mechanisms to achieve reduction objectives:
- The Joint Implementation (JI) allows industrialized countries to invest in other industrialized countries to achieve a CO2 reduction there. The emission credits received for this may then be applied to their own reduction objectives.
- The Clean Development Mechanism (CDM) relates to emission reductions in developing countries due to investments made by industrialized countries and which can be credited just like in the case of JI.
CO2 emission trading at EU level
During the meeting of the EU environmental ministers on December 9, 2002 it was already agreed that starting in the year 2005, companies within the EU are to be given the opportunity to start trading emission permits among each other. The EU wants to use this mechanism to fulfil its obligations arising from the Kyoto Protocol.
At the beginning, participation in this trading system is limited to industries with particularly high levels of CO2 emissions. That includes about 5,000 plants of companies producing electricity and heat from fossil fuels, mineral oil industry, coking plants, metal production and processing, production of cement, clinker, lime, glass, ceramic products, cellulose, paper and cardboard. With almost 46%, recorded plants represent almost half of the EU’s CO2 emissions.
To provide a basis for trading, each plant will be allocated a certain amount of CO2 emission permits at the start of each year. Distribution is done according to national allocation plans and will be free of charge until 2007. Starting in 2008, a growing share of permits is scheduled to be auctioned off. Companies whose plants achieve a lower CO2 emissions rate than the one prescribed for them, may sell a corresponding share of their permits to plants which have not achieved the objectives set for them. The price for permits will then be determined by supply and demand on a free market. The system provides an incentive to reduce CO2 emissions below the level set – such as by implementing new technologies – by allowing corresponding investments to be amortized by the sale of permits or by making an additional profit. Now climate protection is linked to the rules of the market.
Until now, the subject of CO2 emissions trading is virtually unknown among German companies. But companies already have the option to seize their advantages, because they may try to achieve a good starting position in emissions trading by “Early Action”. Climate protection efforts made in advance will be rewarded in full. As opposed to standard products, CO2 permits are immaterial goods. The characteristics of standard products may be verified by the buyer or impartial third parties with more or less effort. In the case of immaterial products, however, which are traded anonymously on a stock exchange, buyers need to rely on the recoverability of the object to be purchased without being able to verify it. That is why the key to success in emissions trading is credibility, which may be achieved by an independent certification by DQS, among others. A first pilot procedure with DQS participation was the so-called “Hessen Tender”, where six companies committed to reduce their CO2 emissions to below 1,3 billion tons between 2005 and 2009 (for more information, please see www.hessen-tender.de).
Important terms used in CO2 emissions trading
Allocation Table – table for the initial distribution of emission permits
Cap and Trade – plant operators are being allocated a limited amount of emission permits (Cap) which may be traded freely within the EU (Trade)
Grandfathering – a method for free-of-charge allocation of emission permits during the pilot phase (2005 to 2007)
Early Action – Allowing for advance efforts in the area of climate protection
JI/CDM – Joint Implementation / Clean Development Mechanism are credits for project-based climate protection measures in developing countries (see above)
Opt-in – option to include more greenhouse gases and activities in the emissions trading while ensuring exact recording and ecological integrity of trading
Opt-out – certain plants or business sectors may be excluded from emissions trading until 2007, provided they ensure comparable climate protection measures
Pool – option for multiple sites to pool together in order to participate in emissions trading collectively; potential sanctions will be distributed among pool participants
Sanctions – Monetary fines for non-adherence to emission objectives
Markus Weber
DIN CERTCO GmbH
Petra Lück
DQS GmbH