Introduction
I would like to discuss about carbon credit trading. Often people focus on the trading as environmental point, but in this report I will look at an economical part, whether people organize profitable business model or not. This report will base on primary idea of emission trading before 2000, and compare it to recent new article, which talks about the trading as a practical method.
In spite of fundamental issues, the carbon emission trading has been carried out by European Unions and Chicago climate exchange. Then, it is one of the first growing and controversial market in the world. (The Economist, 2006).
Permits trading market
European climate exchange was established to follow the Kyoto protocol reductions limit. It is a cap trading. European Union set the maximum pollution limit on some industries such as power station and cement producers, and those participants trade reminders between real pollution and the permits. If they pollute less than their permits they have extra gain, but if they pollute more than the permits they have to buy the credit at the market, or European Union fine them. This fine system drives companies to the market and keeps it working. (LatinFinance, 2005). Because many companies try to buy carbon credits not to pay fine, they keep their trade price higher. Then, they will start reducing the overall carbon emission by tightening the permits. (Vencat, 2006). “The level of carbon credit allocated to each country will also be cut further after 2008” (Goff, 2006), to meet the initial emission target in 1991.
However, the European exchange is to reduce domestic emissions so they do not allow the offsetting by planting trees. (The Economist, 2006). Because the natural environment in Europe has developed well, they do not have incentives to plant extra trees. National parks are already well-protected area and central authority has spare fund to conserve nature without private sectors. Additionally, if they allow people to credit carbon dioxide exhausted by trees, it would cause an oversupply of the credit. That is because there are huge areas of forests on the earth. Then the oversupply of the credit triggers fall of credit price at the market that motivate polluters. When they do not have to pay high price, they tend to rely on offsetting by the credit rather than actually reducing their emissions. Furthermore, the credit by plans vacuums money from other industries that they should invest to new facilities or innovate new technologies. When the market encouraged a company not to develop reduction method, its primary purpose could not become true.
On the other hand, the United States has not signed the Kyoto protocol, so they have not promised any green house gas reduction to international society. Chicago climate exchange is organized a group of volunteer companies, which are interested in sustainable management. This market applied more flexible management systems. Japan was an economically second largest country, host country of Kyoto forum, and signed the protocol, but they have not organize the market. They are preparing to set up a permits trading market at Nagoya, but they are more likely to choose a regulation and subsidy based methods to meet the goal of green house gas reduction. In United States, some people prefer command-and-control system of green house gas emission reductions. (Oil & Gas Journal, 2001).
Market value
Whether the emission trade can prevent the global warming or not, that was a primary purpose of the trading, the scale of the market became bigger and bigger without it. (Euromoney, 2006). Volume of the credit trading was $10 billion in 2005, and it is going to reach $30 billion in 2006. By contrast, the trade value of sum of all wheat crops in United States was $7.1 billion in 2005. (Heather, 2006). The emission permits was started trading last 15 years, but the volume of the trade was already larger than United States food production, which has longer history as an industry. (Energy & Environment Management, 2002). In May 2006, the quantity of right to emit one tonne of carbon was 53 million, compare to 1 million units in 2005, and one analyst expected that between 2008 and 2012, the market will deal with 10 billion unites. Then the price of permits which is 16.50 euros in 2006, is going to be about 19.50 euros for 2008. (Goff, 2006). However, the trading system is not prepared well yet. In the case of another major financial market, operators are likely to release market domestic information quarterly, monthly, or even daily. On the other hand, at the European climate exchange, they released once a year. (Heather, 2006). It cause some troubles.
One day, at European climate exchange, a credit of a metric tone for 30 euros falls to 8.50 euros in a day. (Zwick, 2006), and when accidentally a European emission date was released 3 days earlier than planed, “price plummeted to 8.60 euros ($11) a metric ton, down from a high of 31 euros in mid-April” (Heather, 2006). Those show us un-sustainability of the carbon trading. Those problems damage a reputation of the market, and discourage participants being honest. If they can buy the permits cheaper than they have expected, they tend to look at market rather than work hard to reduce their emissions. According to The Economists (2006), 374m tonnes of carbon credit worth $2.7 billion. Then, 800 million tons of carbons, which worth more than 17 billion were traded on the European emission trading. (Vencat, 2006).
I would like to discuss about carbon credit trading. Often people focus on the trading as environmental point, but in this report I will look at an economical part, whether people organize profitable business model or not. This report will base on primary idea of emission trading before 2000, and compare it to recent new article, which talks about the trading as a practical method.
In spite of fundamental issues, the carbon emission trading has been carried out by European Unions and Chicago climate exchange. Then, it is one of the first growing and controversial market in the world. (The Economist, 2006).
Permits trading market
European climate exchange was established to follow the Kyoto protocol reductions limit. It is a cap trading. European Union set the maximum pollution limit on some industries such as power station and cement producers, and those participants trade reminders between real pollution and the permits. If they pollute less than their permits they have extra gain, but if they pollute more than the permits they have to buy the credit at the market, or European Union fine them. This fine system drives companies to the market and keeps it working. (LatinFinance, 2005). Because many companies try to buy carbon credits not to pay fine, they keep their trade price higher. Then, they will start reducing the overall carbon emission by tightening the permits. (Vencat, 2006). “The level of carbon credit allocated to each country will also be cut further after 2008” (Goff, 2006), to meet the initial emission target in 1991.
However, the European exchange is to reduce domestic emissions so they do not allow the offsetting by planting trees. (The Economist, 2006). Because the natural environment in Europe has developed well, they do not have incentives to plant extra trees. National parks are already well-protected area and central authority has spare fund to conserve nature without private sectors. Additionally, if they allow people to credit carbon dioxide exhausted by trees, it would cause an oversupply of the credit. That is because there are huge areas of forests on the earth. Then the oversupply of the credit triggers fall of credit price at the market that motivate polluters. When they do not have to pay high price, they tend to rely on offsetting by the credit rather than actually reducing their emissions. Furthermore, the credit by plans vacuums money from other industries that they should invest to new facilities or innovate new technologies. When the market encouraged a company not to develop reduction method, its primary purpose could not become true.
On the other hand, the United States has not signed the Kyoto protocol, so they have not promised any green house gas reduction to international society. Chicago climate exchange is organized a group of volunteer companies, which are interested in sustainable management. This market applied more flexible management systems. Japan was an economically second largest country, host country of Kyoto forum, and signed the protocol, but they have not organize the market. They are preparing to set up a permits trading market at Nagoya, but they are more likely to choose a regulation and subsidy based methods to meet the goal of green house gas reduction. In United States, some people prefer command-and-control system of green house gas emission reductions. (Oil & Gas Journal, 2001).
Market value
Whether the emission trade can prevent the global warming or not, that was a primary purpose of the trading, the scale of the market became bigger and bigger without it. (Euromoney, 2006). Volume of the credit trading was $10 billion in 2005, and it is going to reach $30 billion in 2006. By contrast, the trade value of sum of all wheat crops in United States was $7.1 billion in 2005. (Heather, 2006). The emission permits was started trading last 15 years, but the volume of the trade was already larger than United States food production, which has longer history as an industry. (Energy & Environment Management, 2002). In May 2006, the quantity of right to emit one tonne of carbon was 53 million, compare to 1 million units in 2005, and one analyst expected that between 2008 and 2012, the market will deal with 10 billion unites. Then the price of permits which is 16.50 euros in 2006, is going to be about 19.50 euros for 2008. (Goff, 2006). However, the trading system is not prepared well yet. In the case of another major financial market, operators are likely to release market domestic information quarterly, monthly, or even daily. On the other hand, at the European climate exchange, they released once a year. (Heather, 2006). It cause some troubles.
One day, at European climate exchange, a credit of a metric tone for 30 euros falls to 8.50 euros in a day. (Zwick, 2006), and when accidentally a European emission date was released 3 days earlier than planed, “price plummeted to 8.60 euros ($11) a metric ton, down from a high of 31 euros in mid-April” (Heather, 2006). Those show us un-sustainability of the carbon trading. Those problems damage a reputation of the market, and discourage participants being honest. If they can buy the permits cheaper than they have expected, they tend to look at market rather than work hard to reduce their emissions. According to The Economists (2006), 374m tonnes of carbon credit worth $2.7 billion. Then, 800 million tons of carbons, which worth more than 17 billion were traded on the European emission trading. (Vencat, 2006).