Greenhouse Gas Trading Growing More Popular
By Cat Lazaroff
WASHINGTON, DC, March 20, 2002 (ENS) - Emissions trading has become the policy of choice for addressing climate change in nations around the globe, finds a new report from the Pew Center on Global Climate Change. The report concludes that, while the greenhouse gas emissions market remains fragmented, trading activity has increased around the world over the last five years.
Among the forces bringing trading in greenhouse gas credits to center stage are progress in the international climate talks, new carbon trading systems in Europe, and private sector trading initiatives in the United States and elsewhere. Ongoing negotiations of the Kyoto climate protocol, which will impose limitations on greenhouse gas emissions, have prompted many nations - although not the United States - to take preemptive steps to secure their places in the coming emissions market.
"Despite the United States' inaction, it is abundantly clear that we are beginning to see the outlines of a genuine greenhouse gas market," said Eileen Claussen, president of the Pew Center on Global Climate Change. "Governments and businesses around the world understand that emissions trading is essential if we're going to address this issue in the most cost effective way possible."
Under the 1997 Kyoto Protocol, 38 industrialized nations are committed to cut their greenhouse gas emissions to an average of 5.2 percent below 1990 levels by the period 2008-2012.
Trading of emissions credits, earned by companies that exceed mandated emissions cuts, is one of the mechanisms promoted by the protocol for combating global warming.
But the Kyoto Protocol will not take effect until it is ratified by 55 percent of the nations emitting at least 55 percent of six greenhouse gases. While the European Union voted this month to ratify the protocol, the United States and other industrialized nations have expressed concerns about the costs of compliance with the treaty, and have so far refused to ratify the treaty.
The Pew Center report, "The Emerging International Greenhouse Gas Market," notes that some nations are moving ahead with emissions trading in anticipation of new international requirements. The report concludes that in the absence of a ratified international agreement, the new market is evolving in a fragmented way.
Most trades involving a commodity defined not by governments but by the trade’s participants and known as verified emissions reductions (VERs). Governments may allow them to be applied against future emissions reduction requirements, but there are no guarantees.
The authors estimate that "approximately 65 greenhouse gas trades for quantities above 1,000 metric tons of carbon dioxide equivalent (CO2e) have occurred worldwide since 1996." This figure includes trades of actual emissions reductions as well as financial derivatives based on reductions.
Prices for VERs have ranged between $.60 and $3.50 per metric ton of CO2e.
Regional, national and subnational trading programs are operating under different rules, which could inhibit the formation of a unified market and increase the costs of trading, the authors warn. For example, emissions trading systems now in place or being developed in Denmark and the United Kingdom allow for trading of different gases, cover different economic sectors, and use different mixes of allowance and credit based trading.
"To date, they have not developed rules governing interchange and mutual recognition of their tradable units with each other, which could impede or preclude beneficial cross border transactions," the report notes.
"The challenge now is to forge links between these emerging regimes in order to ensure that trading systems are compatible," Claussen said. "We are already beginning to see interest in the U.S. Congress, and private sector efforts to build a trading system are even farther along. The need for certainty, consistency, and a level playing field will encourage a merging of trading regimes."
The report's conclusions are based on a review of greenhouse gas transactions to date, including case studies of two transactions between four utilities involving verified emissions reductions credits. Such VER trades carry only the possibility, not a guarantee, that governments will allow them to be applied against future emissions reduction requirements, the report notes.
The first case study reviews a purchase of VER credits by TransAlta, a Canadian electric utility, from HEW, a German utility. HEW generated reductions by displacing some of its fossil fuel based generation with electricity generated by wind.
The second case study looks at a purchase of VERs by Ontario Power Generation, a Canadian utility, from U.S. Gen, a subsidiary of the U.S. based PG&E National Energy Group. U.S. Gen created reductions by capturing and destroying methane produced at a landfill.
The authors of the report say that while these companies benefited from the trades, the lack of clear trading rules has increased transaction costs and been a significant impediment to the development of a more robust greenhouse gas trading market.
The report also evaluates the potential evolution of the greenhouse gas (GHG) market, particularly in light of recent developments in climate change policy in the United States and internationally. Several governments have moved forward in designing domestic trading systems for climate changing gases while international trading rules remain under development.
At the national level, the United Kingdom and Denmark have established domestic emissions trading programs, and some trading in these programs has already begun. The European Union (EU) and other countries are now developing domestic trading policies as well.
In the United States, the state of Massachusetts has launched a plan that will require reductions of carbon dioxide (CO2) emissions from power plants and will allow sources to trade emissions credits to meet the program's requirements.
The Chicago Climate Exchange is the first U.S. voluntary pilot program for trading of greenhouse gases. Established through a grant from Chicago based Joyce Foundation to the Kellogg Graduate School of Management at Northwestern University, it is being administered by Environmental Financial Products, LLC. Energy companies such as BP, Alliant, and Calpine are involved as are Dupont, Ford, the City of Chicago and Mexico City.
"The development of these and other trading programs demonstrates that emissions trading has gained acceptance as a preferred policy instrument in the world's efforts to reduce GHG emissions," the Pew report notes.
The European Union and other countries are moving rapidly towards ratification of the protocol with the intention of completing ratification in time for the World Summit on Sustainable Development set for Johannesburg South Africa August 26 to September 4.
Still, the Pew authors conclude, "These programs will boost GHG trading activity and motivate more rapid emissions abatement than if governments had waited for the international community to conclude negotiation of the Kyoto Protocol."
The report is available online at: http://www.pewclimate.org/projects/trading.cfm
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