The goal and purpose of this paper is to describe the necessity and functionality of emission trading. Furthermore, it illustrates the basic procedure of emission trading and explains its general parts, in order to be able to evaluate the efficiency of emission trading and emphasize its critical aspects.
Firstly, this paper explains the basic principles of emission trading, initially special terms and definitions. Then chapter two continues to clarify why emission trading exists and why its importance constantly rises. After that, chapter three deals with important boundary conditions. Chapter four contains the functionality of emission trading and its corresponding procedures. The term paper ends up with a brief conclusion, including a little forecast for the near future.
Table of Contents
I Table of figures
II List of Abbreviations
1 Introduction
1.1 Purpose of the Paper
1.2 Composition and Structure of the Paper
2 Basics of Emission Trading
2.1 Disambiguation
2.2 History of Emission Trading
2.3 Purpose of Emission Trading
2.3.1 Greenhouse Effect
2.3.2 Kyoto-Protocol
2.4 Emission Trading in Germany
3 Boundary Conditions of Emission Trading
3.1 Different Markets
3.2 Protagonists in Emission Trading
4 Functionality of Emission Trading
4.1 General Information
4.2 Emission Trading Registers
5 Result and Conclusion
5.1 Criticism on Emission Trading
5.2 Forecast
List of References
I Table of figures
Figure 1 Trades and Allowability of Emission Certificates
Figure 2 Comparison of important greenhouse gases
Figure 3 Greenhouse gas emissions worldwide
Figure 4 KP and the three flexible mechanisms
Figure 5 Climate policies, e.g Germany
Figure 6 Emission trading markets
Figure 7 Project-based trading activities of the years 2007-
Figure 8 Different types of people involved in emission trading
Figure 9 Different trading platforms
Figure 10 General example of emission trading
Figure 11 Two types of accounts
II List of Abbreviations
Abbildung in dieser Leseprobe nicht enthalten
1 Introduction
1.1 Purpose of the Paper
The goal and purpose of this paper is to describe the necessity and functionality of emission trading. Furthermore, it illustrates the basic procedure of emission trading and explains its general parts, in order to be able to evaluate the efficiency of emission trading and emphasize its critical aspects.
1.2 Composition and Structure of the Paper
Firstly, this paper explains the basic principles of emission trading, initially special terms and definitions. Then chapter two continues to clarify why emission trading exists and why its importance constantly rises. After that, chapter three deals with important boundary conditions. Chapter four contains the functionality of emission trading and its corresponding procedures.
The term paper ends up with a brief conclusion, including a little forecast for the near future.
2 Basics of Emission Trading
2.1 Disambiguation
Emission itself defines any type of material or substances, which have negative consequences for the environment1. This means pollution in every case. Trading consists of a free market with supply and demand. The German ministry of the environment defines it as a market-based approach to achieve and fulfill Kyoto-aims. This approach enables states, to minimize their emissions of greenhouse gas more than it is required and to use achieved surpluses of reduction by trading them.2 Author Michael Lucht (2005) describes it as a decentralized process, performed through private enterprises3.
2.2 History of Emission Trading
Emission Trading was introduced within the European Union the first January of the year 20054. This introduction was a milestone in the history of business, because it was the first time the pollution became an economical factor, which has significant influences and consequences to the behavior of all enterprises.5 Because henceforward too high amounts of produced emissions and old-fashioned technique and machinery provoke additional costs.
2.3 Purpose of Emission Trading
The basic idea behind emission certificates of the Kyoto-protocol (KP)-emission trading system is the possibility to take them into account considering the obligation of reducing the participant’s emissions. For this reason, the two emission trading markets are summarized under the term compliance market. Furthermore, a voluntary market which has no connection with the KP and his obligations was established. The participants in this market act on voluntary basis; their concept is to reduce emissions uncoupled of specific obligations for example throughout support of climate projects. From these projects, certificates are created through saved emissions by a baseline and credit system.
If an independent third party verifies this emission saving corresponding to the guidelines for Clean Development Mechanisms (CDM) - projects, a so called “Verified Emission Reduction” (VER) is generated. Without the control it is simply called “Emission Reduction” (ER). The differences to KP - project mechanisms are that climate projects in the voluntary market have no international verification standard and no central acceptance procedure. When Verified Emission Reductions or Emission Reductions are created, they are tradable on the voluntary market. These markets are not subject to public regulations; therefore, the value of Verified Emission Reductions in regard to emission reduction is depending on the applied guidelines of the verifying firms.
For the voluntary compensation of greenhouse gas, it is basically possible to buy emission certificates on the compliance market, to delete them. Indeed, Verified Emission Reductions are in comparison more in vogue, because of their lower price. The price difference could be explained through the smaller transaction costs of VERs, caused by an easier generation procedure or missing verification-process.
Another reason is that Verified Emission Reductions are not in direct competition with the certificates on the compliance market, since they can only be used for voluntary compensation and are excluded from the compliance market6.
The following figure shows the different existing certificates which can be imputed on the reduction aim regarding the European Union Emission Trading System (EU-ETS) or Kyoto-protocol (KP). It also defines the fungibility of the certificates, that means if they are tradable or not.
Figure 1 Trades and Allowability of Emission Certificates
Abbildung in dieser Leseprobe nicht enthalten
Source: Own illustration, content based on Piemonte, Tommy (2010) p.73
2.3.1 Greenhouse Effect
The following figure points out, how high the part of carbon dioxide of the greenhouse gas effect is:
Figure 2 Comparison of important greenhouse gases7
Abbildung in dieser Leseprobe nicht enthalten
Source: Own illustration, content based on Piemonte, Tommy (2010) p.4
Today climate scientists are sure, that the greenhouse effect is causing the climate change and the increasing temperature8. The greenhouse effect caused by greenhouse gases effected in the atmosphere itself is not climate damaging. Quite the contrary, without the naturally existing greenhouse effect there would be a global surface temperature of -18° on earth. This is because greenhouse gases reflect a significant part of the warmness emitted by the earth, which leads to an increasing temperature. The ultimate climate problem caused by greenhouse gases is generated by the dramatically increase of the concentration of greenhouse gases ever since the beginning of industrialization9. This growth of greenhouse gas - (GHG) emissions, provoked by humans, reinforces the natural greenhouse effect in a way with an additional increase of temperature, which still has dramatically consequences.
There are different forms of greenhouse gases (see figure 1), which could be divided into concentration or storage period in the atmosphere. Especially the greenhouse gas carbon dioxide, which is generated when burning fossil fuel, is classified as primarily responsible for the increasing temperature worldwide.
In order to have a general basis for measurements and comparisons concerning the effects of greenhouse gases for global warming, it has become international standard to convert greenhouse gases over their warming potential into CO2 - equivalents10. The next figure gives an overview how much emissions are generated by which country worldwide.
Figure 3 Greenhouse gas emissions worldwide
Abbildung in dieser Leseprobe nicht enthalten
Source: Own illustration, content based on Natur (2012)
2.3.2 Kyoto-Protocol
Emission trading should help the states who signed the Kyoto-protocol (KP) to achieve the fixed climate protection aims. Reason for setting up this protocol was the climate change caused by mankind and the dramatically strong rising energy demand of an increasing world population11. Emission trading is an emission-based instrument, named and described in the 17th article of the Kyoto-protocol12.
There it is said that trading with emission certificates deals with a Cap and Trade system. The system is based on the amount of emissions determined in the Kyoto-protocol. The central aspects of the KP are presented in the following figure:
Figure 4 KP and the three flexible mechanisms
Abbildung in dieser Leseprobe nicht enthalten
Source: cf. Lueg, Barbara (2009) p.212
The purpose of emission trading is based on the legally binding formulations in the aims of the KP. One aim is to reduce the emissions of Carbon dioxide, methane, nitrous oxide and a few more by 5,2 % in comparison to the year 1990 within the timeframe of the years 2008-201213. The EU established a common reduction aim of 8%14.
2.4 Emission Trading in Germany
Germany was willing to play an innovative role and conducted to realize a reduction of 21%. Thereupon representatives of the biggest German organizations formulated the aim with the content to reduce their part of emissions by 35%15. In Germany the implementation of emission trading is regulated through four different laws16:
- Greenhouse-emission-trading-law
- Allocation-law
- Allocation-regulation
- Project-mechanism-law
The first law contains regulations for trade and authorization to deal with greenhouse emissions is the main law of the national realization / implementation in Germany of the emission trading guideline. This law determines every activity which emits notably greenhouse gases. The law also serves as conjunction of emission trading and the common project realization (JI). The second law defines national aims of emission trading during the allocation period 2008- 2012 on the macro level, which was established in the KP.
On the micro level it constitutes allocation, disbursement and disposal of the single enterprises. The allocation regulation is a supplement to the last one. It conduces to more detailed appointment and calculation of emission rights. At the same time requests and supporting documents are regulated in the allocation procedure. The last law deals with project-specific climate projects and is the foundation for the accomplishment17.
The following figure concludes generally the approach of climate policies in Germany. The principle aim is sustainability, which is also influenced by secondary objectives.
Figure 5 Climate policies, e.g Germany
Abbildung in dieser Leseprobe nicht enthalten
Source: cf. Nolte, Andrea et al (2008) p.40
[...]
1 cf. Lueg, Barbara (2009) p.31
2 cf. Welsch, Mathias (2011) p.4
3 cf. Lucht, Michael et al (2005) p.120
4 cf. Avram, Robin (2005) p.3
5 cf. Avram, Robin (2005) p.3
6 cf. Piemonte, Tommy (2010) p.73 f
7 ppm=parts per million
8 cf. Piemonte, Tommy (2010) p.3
9 cf. Piemonte, Tommy (2010) p.3
10 cf. Piemonte, Tommy (2010) p.3f
11 cf. Nolte, Andrea et al (2008) p.38
12 cf. Lueg, Barbara (2009) p.214
13 cf. Reiß, Stefan (2009) p.3
14 cf. Müller, Florian (2008) p.4
15 cf. Reiß, Stefan (2009) p.3
16 cf. Erling, Uwe M. (2008) p.21
17 cf. Erling, Uwe M. (2008) p.21