Carbon Permits Trading

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Carbon Permits Trading

2.1 Relevance and organization of emission trading

Greenhouse gases alike water vapor, carbon dioxide, ozone and methane produced by power plants, transportation and factories are considered as the main driver for climate change with devastating impact on nature. Most recent efforts of global players ‘going green’ by offering carbon neutral products are quite unlikely able to stop global warming (John Gapper, 2006 and Heide Bachram, 2004). Hence, its again the governments responsibility to foster emission reductions by means of tagging a price to emission. U.N.’s famous Kyoto Protocol is an agreement on environment and sustainable development which was defined to support and monitor governments’ effort to reduce emissions (UNFCCC). In order to do so, governments can subside alternatives, impose standards and processes and the trading of emission allowances (Matthew Dalton, 2007). The most advanced trade market is the Emissions Trading Scheme (EU ETS) of the European Union which is the main object of the following chapters.

2.2. Commercial opportunities of emission markets

2.2.1. Commercial gains from permit surpluses

‘Cap-and-trade' markets like the ETS are set up to reduce the amount of greenhouse gases, in particular carbon dioxide, by steadily reducing the upper limit of emission (cap) of the participating countries (The Economist, 2007). Companies, at the moment mainly in energy-intensive industries, are given emission allowances (EUAs ) based on a historical emission level reduced by a country specific reduction, see table in the appendix (European Union, 2007). The cap is considered to be an incentive for companies to improve their production processes, foster the usage of alternative energy to ...

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... bears risk for investors. The market is speculative since the ‘learning curve’ of emission trading is still at low level and emission data appears to be not sufficient to provide enough certainty. Allocation rules appear to be quite unpredictable which certainly not build trust in regulators and authorities. Changing the rules soon can influence price levels and accidentally increase attractiveness of substitutes.

Companies which consider emission trading as additional cost and regulatory burden may fear to lack behind international competitors. However, since natural resources steadily become shorter in supply and consumer’s awareness for global warming raise, firms may even benefit from a first mover advantage and unique selling prospective. Recent examples include the CSR and ‘green product’ hype many industries experience in developed countries at the moment.

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