How did the trading of permits to emit carbon dioxide come about?

The trading of carbon permits originates from the Kyoto Protocol, an international agreement to fight climate change through reducing greenhouse gases in the atmosphere. The Protocol allows developed, mainly OECD, countries with compliance obligations (requirements to cut their emissions of greenhouse gases – mainly carbon dioxide -- below 1991 levels by 5 percent or more) to purchase carbon emission permits from projects in developing countries. These permits are generate by projects to improve energy efficiency, grow forests sequestering carbon,, reduce industrial carbon emissions etc in developing countries such as China, India, Nigeria, and Brazil.

To meet the obligations of the European Union under the Kyoto Protocol, a European Trading System has also been developed which promotes industries to exchange permits or allowances for carbon emissions. Australia has a similar system just approved. New Zealand has a viable carbon market and Japan is now developing a bilateral scheme.. California, the world’s 12th largest emitter, has developed its own system in coordination with the Western Climate Initiative. For California only four protocols for offsets have been approved. Without a supply of offsets, the cost of compliance could be politically unacceptable. Offsets are critical to all established and emerging carbon markets.

 

What is the intended effect of carbon emissions trading?

Because greenhouse gases disburse freely in the global atmosphere, it does not matter which country reduces their greenhouse gas emissions. This global nature of greenhouse gases creates the conditions for world trade in permits. Since the cost of reducing these emissions in OECD countries is much higher (up to $250 per ton of carbon) compared to in developing countries (less than $10 per ton of carbon, the natural conditions for trade are created, just like for any commodity. By having trade of carbon permits, the costs of meeting global targets on reducing greenhouse gases in the atmosphere is minimized.

 

What is happening with respect to new emerging markets in regards to carbon renewable energy?

Important emerging markets are also developing their own schemes., the most important of which in terms of global impact is China. What this means is that a new price – that of carbon emissions – will pervade in China changing the economics of investments, presenting new opportunities, and increasing risks. Also in India, South Korea, and throughout Latin America new markets are emerging with direct and indirect regulations on carbon emissions and incentives on renewable energy. Increasingly, the global market for commodities and capital will have new incentives and a carbon price that will profoundly influence investment decisions.

 

What is Real Options analysis about?

The Real Options approach is a method of hedging risk through investments and project design (including in contractual terms). While inancial markets have used financial options and hedges extensively, investment analysis has been generally stuck in using static cost benefit and financial analysis where no value is placed on the opportunity to expand or even exit a project. Building in these options in
investment decisions and designs considerably reduces risk and presents future possible returns not fully know at the time of investment. The value of these real options increases with uncertainty . Neglecting real options in investments in the volatile environmental and energy markets is frankly foolish.

 

How can I obtain further information?

There is an abundance of information available but some of the best websites are:

http://www.IETA.org

http://www.pointcarbon.com

The United Nations has a useful website:

http://unfccc.int/2860.php

It can be obtained at www.hm-treasury.gov.uk/independent_reviews/