Education

Emissions trading gives companies the flexibility to meet emission targets according to their own strategy by offering the most cost-effective way for energy-intensive industries to meet their obligation to reduce emissions. The underlying commodity traded at ECX are European Union Allowances (EUAs) as issued under the EU Emissions Trading Scheme (EU ETS), where one EUA represents the right to emit one tonne of carbon dioxide (CO2) and secondary Certified Emission Reductions (CERs) , as issued under the Clean Development Mechanism of the Kyoto Protocol. One CER also represents the right to emit one tonne of carbon dioxide (CO2).

Emissions trading is one of the prime examples of using a market-based mechanism to achieve an environmental goal. The rationale behind emission trading is to ensure that the required overall emission reductions take place where the cost of the reduction is lowest, thus lowering the overall costs of combating climate change. It does not impose a particular type of technology or set rigid limitations on how much can be emitted.

The ‘cap-and-trade’ approach, being used in the EU ETS, sets an overall cap or maximum amount of emissions per compliance period. Companies are given allowances which represent their target or ‘cap’ for a compliance period. At the end of the period they must surrender sufficient allowances to reconcile against their total emissions during the period. If this is below their cap they have allowances to sell; if not, they must purchase allowances from companies which have exceeded their emissions reductions targets. Each allowance permits the holder to emit one tonne of CO2. If an operator does not hold sufficient allowances to meet its total emissions at the compliance date, a penalty of €40 for Phase I 2005-2007 (rising to €100 in the Phase II 2008-2012) per excess tonne will apply.