| Author: |
Pavel Sychrovský, PricewaterhouseCoopers |
| Publication: |
Czech Business Weekly |
| Date: |
22.8.2005 |
Avoiding global climate change has become one of the most important challenges we all face. Individuals and businesses are experiencing material damage; insurance companies must then cover them financially. The rising concentration of greenhouse gases in the atmosphere is considered to be the major contributor to climate change. And the most effective way to change market habits and behavior is through economic instruments. Emissions trading is undoubtedly the way to go.
Earlier this year, the Kyoto Protocol became effective after being signed by Russia . The protocol binds signatory countries to lower greenhouse gas emissions by 5.2 percent on average between 2008-12 compared to 1990 levels. The protocol sets out three ways of meeting the reduction targets through the international transfer of Kyoto units (called AAUs). These three ways, also known as flexible mechanisms, are emissions trading, joint implementation and the clean development mechanism. Each flexible mechanism has its own rules, credits of trading - carbon currency - and market expectations.
Emissions trading is a marketbased instrument that gives businesses the flexibility to select a cost-effective solution to achieve their own environmental targets. Under the European Union Emission Trading Scheme, or EU ETS, businesses are provided with quantitatively capped and tradable emissions credits called allowances (EUAs). One “allowance“ is an allowance to emit one ton of carbon dioxide equivalents (CO2e) during a specified period.
The plan became effective on Jan. 1, but today only about half of the EU members are active participants. Nevertheless, over 90 million allowances have been traded so far this year under the plan, representing some 70 percent of the volume of carbon credits traded globally. The financial value of this amount, over R 1.38 billion (Kč 40.52 billion), is even more impressive.
The emissions trading plan now has a real impact on EU businessrelated investment strategies. Compliance and financial managers will have to consider the price of an allowance against the abatement costs. In the long term, the connection of the EU ETS with other carbon markets scattered around the globe will increase the plan's effectiveness.
Allowances are freely tradable and anyone can buy or sell them. It has therefore become a very interesting investment instrument, even for individuals.
Joint Implementation (JI) is a projectbased mechanism that allows emissions reduction targets to be met through joint projects between “Kyotocapped“ countries. Investors such as governments, companies or funds participate in a host country project and, in return for the investment provided, they receive Emission Reduction Units (ERUs).
The clean development mechanism (CDM) is focused on emissions reduction projects in developing countries. CDM projects generate Certified Emission Reductions units (CERs) that can be used for Kyoto-target compliance and, as of the beginning of this year, also in the EU ETS. CDM projects are designed to meet two main objectives: to address the sustainable development needs of the host country and to take advantage of the opportunities available for the investor to meet its reduction commitment.
However, there is still a big gap between the value of emissions credits and credits from JI and CDM project prices. In general, the price differential is caused by the uncertainty connected to JI/CDM projects and the actual delivery of ERU/CER units. Once these units are actually issued and their delivery is guaranteed, the price differential should decrease.
Emissions trading is more flexible and, I believe, it has a stellar future in the fight against climate changes.
Pavel Sychrovský is a member of the Transactions team of PricewaterhouseCoopers in the Czech Republic and his duties include emissions trading services. He is a registered verifier of emission reports under EU ETS in Slovakia.
