There is a range of gases which undermine the ozone layer and this is regarded as a prime cause of climate change. Of these ‘greenhouse gases’, carbon dioxide is by far the most common. There are other greenhouse gases, for example methane which is less common but far more harmful.8
A carbon credit is a license to emit a tonne of CO2 or an amount of another greenhouse gas which causes the same adverse effect on the ozone layer.
All over the world, environmental projects, often on a small-scale, are leading to reduced emissions. They include replacing fossil fuel with renewables, methane capture as well as re-forestation to absorb more CO2. Carbon credits are then issued for each tonne of CO2 emissions, or equivalent, avoided and they can then be sold producing additional funding for the project. The purchasing company can then use them to offset its own carbon emissions.
To ensure these background economic projects are of merit and that the carbon credits awarded represent genuinely reduced emissions, the system requires an authorised body to assess the scheme and measures its greenhouse gas reduction before it issues the credits.
This system of offsetting excessive emissions produced by one country or organisation by using reductions in emissions achieved elsewhere and using carbon credits as the medium of exchange is referred to as the Clean Development Mechanism. 9
*United Nations Framework Convention on Climate Change
Held under the auspices of the United Nations,10 the climate change conference of 1997 at Kyoto produced the most significant international emissions-related agreement to date.11 Signatory countries are legally required to contain and reduce emissions. As a part of their drive to meet these obligations, participating countries issue an allowance of carbon credits to their heaviest polluting companies which are mainly in fossil fuel powered generation or heavy industry. If they emit less than their allowance, they can sell any excess to a firm that has emitted too much. Firms that exceed their limit are legally obliged to buy more credits which add to their costs, so there is an incentive to curtail emissions.12
There are many types of carbon credit, each suited to a particular type of market and function. Some are eligible for trading on voluntary market by corporates who have no legal obligation to meet emission restriction. Others are a vital part of a system which ensures compliance with legislation. Certified Emission Reductions, CERs, are eligible for compliance trading.
The EC is a major participant in the Kyoto scheme. Regulated corporations controlled by allocations of emission allowances account for around half of EU CO2 emissions. The European Union Emissions Trading System (EU ETS) is the market where these allowances are traded and is the largest in the world. The main carbon credit or allowance is the EUA, European Union Emission Allowance but13 more general CERs are permitted too to be used for a portion of emissions.
The dynamic CER markets are affected by a mixture of international government and EC policy and market forces.
Historically this market has encountered price movements attributable to problems in defining which environmental projects’ carbon credits are eligible and in assessing appropriate allocations. Over supply has led to currently suppressed prices and it is considered that this presents a market opportunity.
GE Commodities has a deep understanding of these products and the markets where they are traded and these are the keys to successful trading. They provide us with a competitive edge when it comes to taking advantage of particular market opportunities as they arise.
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