The European Union Emissions Trading Scheme (EU ETS)

Introduction

On July 2, 2003, the European Council formally adopted the Emissions Trading Directive. The Directive laid out the framework for the European Emissions Trading Scheme (the 'European ETS'), aimed at reducing Greenhouse Gas emissions generated through certain industries in Europe, which together account for 45% of all of Europe's emissions.

Starting from January 1, 2005, around 15,000 companies from sectors covered by the scheme in the EU-15 and 10 Accession countries were required to limit their CO2 emissions to pre-defined levels, aimed at putting country on course to meeting its targets under the Kyoto Protocol. In the first phase, the EU ETS includes CO2 emissions from energy activities (combustion installations with a rated thermal input exceeding 20MW, mineral oil refineries, coke ovens), production and processing of ferrous metals, mineral industry (cement clinker, glass and ceramic bricks) and pulp, paper and board activities.

The scheme runs for 8 years, and is split into two periods, the first running from 2005 until 2007, and the second from 2008 to 2012 (to match the first Kyoto commitment period). Allowances in Phase 1 and Phase 2 are not interchangeable, and can only be used for compliance in their allocated Phase. In Phase 1, only emissions of CO2 are covered by the scheme, with the potential to expand this to the other 5 greenhouse gases (GHG) from 2008.

The scheme works on a 'Cap & Trade' Basis; Governments put a 'Cap' on the amount of CO2 a company can emit, and if the company produces less than the cap, it can sell the surplus. Governments across the 'EU 25' member states are required to set emissions limitations for all obligated installations in their country. Each installation will then be allocated 'European Union Allowances' (EUAs) equal to that cap for the particular Phase in question, with one EUA equal to one tonne of Carbon Dioxide equivalent. Initially the EUAs will be allocated without cost to the company. The allocation of EUAs to each installation will be outlined in each country's National Allocation Plan.

If a company fails to surrender sufficient EUAs to its Government at end of each yearly reconciliation period, it faces a fine of €40/tonne in Phase 1 and €100/tonne in Phase 2, in addition to having to purchase the equivalent shortfall for retirement the following year.

For further details on the scheme, please refer to the UK Government's Department of Environment, Food and Rural Affairs (DEFRA) or the European Commission.

TFS GreenScreen

TFS was the first inter-dealer broker to launch an electronic emissions trading platform following the launch of the EU ETS. It is called the 'TFS GreenScreen' and is used by utilities, oil companies and financial institutions worldwide. This useful tool provides user access to the EU Allowance market alongside other commodity markets such as coal and power. A well-functioning hybrid broking model strengthens transparency, disclosure and price discovery - critical issues to adding value within the environmental markets.

Since its inception, TFS has been at the forefront of the EU Emissions Trading Scheme (ETS), not only in broking EU Allowances traded within the scheme but also in developing a thriving, sophisticated market through our work with government and the industry. Our London-based team of experienced energy market brokers is dedicated to providing comprehensive support to our clients, including complex hedging structures, clearing services and market data retrieval to meet the growing needs of our extensive client base.

Linking Directive - CDM and JI in the EU ETS

Companies in the European Union Emissions Trading Scheme are able to use CERs to meet their commitments in Phase 1 of the scheme (2005-2007) as well as in Phase 2 (2008-2012) via legislation known as the Linking Directive.

This has increased demand for CERs significantly, at least in the short term, as there is no upper limit to the volume of CERs that can be used in Phase 1 of the EU ETS, although this will not be the case for Phase 2.

The Linking Directive allows CERs and ERUs, units of the Kyoto system, to be used in the EU ETS, with some additional requirements. For example, project credits from hydropower projects rated at more than 20MW are only acceptable if the project follows strict guidelines set by the World Commission on Dams. You can read the Linking Directive official document.

Please contact us for more specific information regarding current market insights into project credits and the EU ETS.

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