The CO2 Market

Background

The European Union Emission Trading System (EU ETS), perfected by the European Union in order to reduce its greenhouse gas emissions, was put in place in 2005 and is based on mechanisms defined by the Kyoto protocol:

  • A ceiling is fixed for CO2 emissions from European industrial sites covered by the protocol (around 12,000 sites in 2010) belonging to the main polluting sectors, which includes energy production
  • Organisations with emissions below this defined ceiling are entitled to sell their emission rights to those organisations having difficulty keeping their emissions below the ceiling. These organisations can also purchase emission rights from emission reduction projects implemented as part of CDM projects (clean development mechanism) or JI (joint implementation).

In 2008, the EU made a commitment to lower its greenhouse gas emissions by 20% in comparison with its emission levels in 1990 (objective of the European climate and energy package). At EU-ETS level, it is anticipated that the emissions ceiling will fall in a linear fashion by 1.74% per annum by 2020: the number of emissions quotas available in 2020 will therefore be 21% less than the number of emissions quotas available in 2005.

January, 1st 2013 is the start of the 3rd Phase of the EU ETS (2013-2020), during which 50% of quotas will be auctioned (versus less than 4% of quotas in Phase 2). A common auction platform should be put in place in view of anticipated auctions in 2012 for phase 3.

Definitions

In 2012, countries participating in the EU ETS are the 27 European Union member states, as well as Iceland, Liechtenstein and Norway.

Products for which transactions are covered by CRE monitoring are:

  • European emissions quotas (European Union Allowance, EUA) : 1 quota = 1 ton of CO2
  • Kyoto emission units: certified emission reductions (CERs) generated from the clean development mechanism projects and emission reduction units (ERUs) generated by JI projects (1 unit = 1 ton of CO2).
  • European aviation allowances (EUAAs): they can only be used for compliance by aviation companies (1 quota = 1 ton of CO2).

These products are traded on exchange platforms or by mutual agreement (with or without brokerage). In 2012, the main trading platforms are:

  • Bluenext (BNX) : Euronext and the Caisse des Dépôts in Paris. Leader in spot trades of EU ETS quotas
  • ECX: European Climate Exchange (London). Leader in future contract trades for EU ETS quotas
  • EEX: European Energy Exchange (Leipzig)
  • GreenX : The Green Exchange (Europe, United States). Trades of future contracts including EUAA of EU ETS quotas.

Transactions may be spot transactions (purchased for delivery several days after agreement) or derivative products for future supply (future product, e.g. Dec12 = supply in December 2012)

The main market players are:

  • The energy producers, representing the major share of traded volumes
  • Other industrial companies, who manage their compliance with the ceiling regulations governing their emissions
  • Financial actors

Cf. Table 10 « Classification of participants in the CO2 market», page 63 of the  Monitoring Report of 2010-2011 .

Figures

2011 volumes

In 2011, the global ceiling for all countries participating in the EU ETS is around 2 billion tonnes of CO2.

For 2011, a total 5.6 billion tonnes of CO2 EUAs (around €75 billion) and 1.3 billion tonnes of CO2 CERs (around €12 billion) were traded on the ECX, BNX and EEX platforms, which handle almost all transactions made on the stock exchanges (notably over 95% for the ECX alone, or €83 billion).

Over 95% of trades made on the stock exchanges are future transactions, almost all are performed via ECX in 2011. The volumes traded on Bluenext represent around €720 million in 2011 and these are spot transactions only.

Sources : BNX, ECX, EEX

2011 prices

The average spot price for EUAs is €12.98 (€9.68 for CERs) and the price decreased strongly during the last quarter down to €7. The average future contract price for EUAs in 2011 is €13.84 for Dec 12 (€14.78 for Dec 13) and the average future contract price for CERs is €9.84 for Dec 12 (€10.69 for Dec 13).

Sources : BNX, ECX

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