Market for CO2 emission trading heats up

By Anna McLauchlin

Date: 14/10/04

THREE months to go until the official launch of the European Emissions Trading Scheme and already the market for emissions allowances is hotting up.

For a year-and-a-half, companies have been allowed to trade 'forward', meaning they will promise to deliver a certain amount of allowances at a certain price on a certain day, based on their carbon dioxide (CO2) emission expectations. The real - or 'spot' market as it is known - will not begin until March 2005. Since Russia decided to ratify the Kyoto Protocol on climate change, at the end of September, the market has exploded.

"In September we saw record breaking volumes traded - over one million tonnes," says Henrik Hasselknippe, senior analyst at Point Carbon, an Oslo-based carbon research group. "And [by 9 October] we had already hit 665,000 tonnes."

But the market is still in its very early stages. In April of this year Belgium's Fortis Bank became the first bank in the world to begin carbon trading for clients, which include smaller companies covered by the EU emissions trading scheme like cement or ceramic manufacturers, which cannot afford to set up their own trading desks.

Claire Byers, environmental product manager at Fortis, says the main clients at the moment are from north-western Europe like the Netherlands, the UK and Germany, where emissions programmes are most advanced. "Southern countries like Spain, Italy and France just aren't entering the market at the moment," she told European Voice.

Companies are free to trade carbon dioxide 'allowances' - one allowance is equivalent to one tonne of CO2 - based on allocations distributed by governments under their National Allocation Plans (NAPs). The idea is that governments share out a reduced number of CO2 emissions among their companies. If the company manages to use less than its share, it can sell the surplus on the market.

Firms that exceed their quota will have to buy extra allowances, currently trading at between €8-9 per tonne of CO2.

But the majority of NAPs have yet to be approved by the European Commission and until then companies have to guess how much CO2 they will be allowed to use and what they expect to trade.

The Commission has already approved eight plans - for Denmark, Ireland, the Netherlands, Slovenia, Sweden, the UK, Austria and Germany. It will adopt another eight or so on 20 October and hopes to complete the process by December.

Part of the problem is the fact that NAPs have been dribbling in since the Commission's original 31 March deadline and 31 July for the new member states. Some were only delivered in the summer and Poland's, for example, was received in mid-September but has yet to be translated. Malta, Cyprus, Hungary and the Czech Republic have yet to deliver their plans at all.

Nevertheless the scheme will start on 1 January as planned.

"Trading will definitely start in January," confirmed a Commission official. "It will be a slower start than planned but all countries have had time enough to get their plans in. If there is any kind of imbalance it is not the fault of the system."

Point Carbon expects the market to be fully active by 2007, as the slow start could lead to shaky markets. "There are a lot of emissions in parts of central Europe where companies are not yet trading. And their allocations are quite generous so they will add a lot to the supply side when they come on the market," says Hasselknippe.

But this is not the only issue, he explains. "Allocation is only one part of the equation. Imagine if we have an extremely cold winter in the north of Europe and an extremely hot summer in the Mediterranean. That will lead to huge power consumption, so even if you have a generous allocation you may still have to buy."

Three months before the official launch of the European Emissions Trading Scheme in January 2005 the market for emissions allowances was hotting up, article reports. For a year-and-a-half, companies had been allowed to trade 'forward', meaning they would promise to deliver a certain amount of allowances at a certain price on a certain day, based on their carbon dioxide (CO2) emission expectations. The real - or 'spot' market as it is known - would not begin until March 2005. Since Russia had decided to ratify the Kyoto Protocol on climate change, at the end of September 2004, the market exploded.