The EU Emissions Trading Scheme (ETS) commenced on 1 January 2005, creating the world's first multi-country emissions trading system and the largest scheme ever implemented. The EU ETS runs in phases: 2005-2007 (Phase I), 2008-2012 (Phase II, coinciding with the first commitment period of the Kyoto Protocol), 2013-2020 (Phase III) etc. There is no end date to the EU ETS.
The legal framework underpinning the European carbon market, Directive 2003/87/EC, grants the holder of one EU Allowance (EUA) the right to emit one tonne of CO2. The amount of EUAs allocated to each emitter in the scheme are set out in National Allocation Plans prepared by the Member States and approved by the European Commission. Five sectors are covered by the Directive: Power and Heat Generation, Oil Refineries, Metals, Pulp & Paper, and, Energy Intensive Industry. France and the Netherlands, unilaterally extended the scope of EU ETS in Phase II to include installations emitting nitrous oxide (N2O).
The scheme includes roughly 12,000 energy and industrial plants across EU’s 27 Member States and applies to companies of all types – not just utilities and industrials who are naturally covered by the regulation, but also many of the world’s major financial installations who play a crucial role as liquidity providers and intermediates. These include investment banks, hedge funds, trading houses and brokerages.
Under the EU ETS Registry Regulation 2216/2004/EC, each Member State establishes a national registry that links to the others and to the Community Independent Transaction Log (CITL). Each national registry connects to the backbone which in turn ensures a secure, compatible and smooth integration of all systems under one European umbrella. The sum of all registries together with the CITL operate as the Registries System. Allowances are issued to registry accounts established for each affected facility. Registry accounts can be established by any person or business. In order to make or take delivery of EUAs on ECX, one will need to open an account in one of the National Registries. There is, however, no requirement to open a registry account if one merely wishes to trade but has no intention of going to physical delivery.
Since carbon trading took off in Europe, trading volumes and underlying asset value have grown beyond expectations. Global carbon markets were worth $64 billion (€47 billion) in 2007, up from more than $31 billion in 2006. The market saw transactions for 2.9 billion tonnes of CO2e where the EU ETS accounted for 70 per cent of the volume and over 78 per cent of the value (Source: World Bank). By any measure, carbon trading has grown impressively to establish itself as a new commodity to count on.
ECX volumes are experiencing tremendous growth. 2008 volumes increased by 171% year on year with transactions in the global carbon market amounting to $118 billion (Source: New Carbon Finance).
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