European Union Emissions Trading Scheme (EU ETS)
Since January 1st 2008 the EU ETS is in its Phase II, which commits to an overall GHG emissions reduction by 8% below 1990 levels by the end of Phase II in December 2012. Outlined by each EU member government National Allocation Plan (NAP), affected companies are issued EU Allowances (EUAs). EUAs (which are fungible equivalents of Kyoto Protocol’s AAUs), can be combined with other tradeable credits of the Kyoto flexible mechanisms (CERs and ERUs) for meeting compliance targets via legislation known as the Linking Directive. The Linking Directive allows CERs and ERUs of the Kyoto system to be used in the EU ETS. Phase II of EU ETS restricts the number of CERs and ERUs that can be used for EU ETS compliance and defines additional requirements related to technology types and project vintage.
The European Union Emissions Trading Scheme (EU ETS) is the largest cap-and-trade emissions trading program in the world. About 2 billion allowances are issued among approximately 15,000 affected companies in the energy and industrial sectors in all 25 EU member countries. In 2007, the EU ETS had a trading volume of 1.6 Gt, at a value of about €28 billion. This represents a volume growth of 62% and a value growth of 55% from 2006. The EU ETS now holds 62% of the physical global carbon market and 70% of the financial market.1
There are financial penalties if companies fail to comply with committed targets at the end of each period: The penalties are €40/tonne and €100/tonne for Phase I and II respectively, plus the cost to purchase the EUA shortfall.
In addition to spot-market trading of EUAs, financial markets offer brokered-OTC and exchange-based transactions such as futures and options, and brokered-OTC structured transactions and swaps for market players to speculate and/or hedge their portfolio against delivery risk.
- Source: Point Carbon