Seems strange to go to a website on carbon credits and for the first heading to be Climate Change.

Its simple – man made greenhouse gas emissions are causing lasting, possibly irrevocable and certainly damaging changes to our climate.
Carbon Credits are one of the ways including sustainable development, clean technologies, renewable energy, technology transfer, and above all personal responsibility that scientists, environmentalists, economists and our governments have agreed to employ in the battle against climate change.
So…
What are carbon credits?

Carbon credits fully fungible (trade-able) financial instruments, and are measured in tons of carbon dioxide equivalent (tons CO2e).  There are four types:

  • • EUAs – European Union Allowances are issued freely by the EU for several years at one go, for use within the Emission Trading Scheme (EU ETS).  The ETS second phase began Jan 1 2008 and ends Dec 31 2012.  All second phase EUA must be used within that period.
  • • CERs – Certified Emission Reductions are issued by the UNFCCC for demonstrable reductions of greenhouse gas emissions in Clean Development Mechanism (CDM) Projects under Article 12 of the Kyoto Protocol.
  • • ERUs – Emission Reduction Units are credits created under Article 6 of the Kyoto Protocol, Joint Implementation (JI).
  • • VERs – Verified Emission Reductions are issued by independent bodies for demonstrable reductions of greenhouse gas emissions in projects that, for what ever reason, fall outside of the CDM.  Their standards may be just as strict (such as with the Voluntary Carbon Standard (VCS) Gold Standard), or not as stringent.  However the market will generally reflect a poorer price for a VER that has been issued to a low or difficult to verify standard.

Carbon Credits can be traded privately, over the counter (OTC through a broker), or on the spot markets like any stock.  The largest spot market for carbon credits is the European Climate Exchange (ECX), followed by the Chicago Climate Exchange (CCX) in the US.

VERs may not be used for ETS or Kyoto compliance.  However many companies in the US have been using VERs to offset their own emissions in expectance of a cap and trade system to be introduced by President Obama.  The interchangeability of credits between the existing markets and the coming US compliance markets have huge repercussions for the value of the existing credits.
Let’s look at the compliance market(s) first…

THE EU ETS

The European Union Emission Trading Scheme came into effect on January 1, 2005, (under EU directive 2003/87/EC) based upon the previous UK Emission Trading Scheme.  It is the largest emission trading scheme in the world and represented 28 billion euros of the 40 billion euros traded in Carbon Credits in 2007.
The EU ETS is a ‘cap and trade’ system similar to the Kyoto Protocol of the United Nations Framework Convention on Climate Change (the UNFCCC).  Through the ‘linking directive’ their respective credits are now interchangeable.
[‘cap and trade’ is very simple.  Here is an example of one that works on a weekly basis:-

Imagine that you are only allowed to buy 5 items a week and on Monday you buy 5 apples.  You eat 3 of your apples by Thursday and have 2 left for the rest of the week.  Now you would like an orange.  Although they sell them at the shop, you cannot buy 1 because you reached your ‘cap’ on Monday when you bought 5 apples, however, you can trade 1 of your apples with someone who has an orange leaving you with 1 apple and 1 orange.  The whole system starts again on Monday.The ETS cap and trade system puts and cap on the amount of emissions that both a country and various entites within it may emit.  At present there are 10,000 registered entities within the scheme, with aviation set to join in 2013.  Different countries have different quotas within the EU but overall the EU has committed to reducing its greenhouse gas emissions to at least 20% below 1990 levels by 2020, and is ready to scale up this reduction to as much as 30% under a new global climate change agreement when other developed countries make comparable efforts. It has also set itself the target of increasing the share of renewables in energy use to 20% by 2020.

 

The ETS operates in phases, with current 2nd phase expiring on the 31st of December 2012.  On this date all 2nd Phase EUAs will also expire.
CERs, ERUs, and the UNFCCC
All the nations of the world met in Kyoto in 1997 to define the parameters, sign and later ratify the protocol that later bore the name of the city and became synonymous with struggle to reduce man made greenhouse gas emissions.

The Kyoto Protocol stated that, given the overwhelming scientific evidence that man-made greenhouse gas emissions were causing irrevocable and dangerous changes to the climate of the entire planet, the entire planet must reduce its greenhouse gas emissions and find cleaner, renewable and more sustainable methods of generating and maintaining power, infrastructure and transport.

The assembled parties agreed that, the richer countries, most of whom had been burning fossil fuels for longer, would be called Annex-I countries, and the less wealthy countries would be called non-Annex-I countries.

Non-Annex-I countries have not had the economic benefits, and the benefits to infrastructure, that all the years of burning fossil fuels have bestowed upon the Annex-I countries.

Nonetheless nearly all the countries of the world (with exception of the USA which we will come to) agreed on the need to reduce greenhouse gas emissions according to the articles in the Kyoto Protocol.

It was agreed that Annex-I countries would be set greenhouse gas reduction targets which they must meet or be penalised.
It was also agreed that an incentive system for non-Annex-I countries to reduce green house gas emissions be put in place.  These are called Certified Emissions Reduction credits, or CERs, in the case of projects implemented under the Clean Development Mechanism (CDM Kyoto Article 12), and Emission Reduction Units, ERUs, in the case of Joint implementation projects (JI Kyoto Article 6).
Kyoto differs from the EU ETS in so far as its credits are measured in tons of CO2e  – the protocol itself also includes five other greenhouse gases.
The Kyoto Protocol runs until the end of 2012.  It looks as though the UNFCCC will decide upon the form of, and changes to its successor, The Copenhagen Protocol at the UN Climate Change Conference in Copenhagen from December 7th – 19th, 2009.
Form more information, please contact the person who showed this webpage.