Eversheds comments on carbon trading

Michael Woods, partner in the clean energy and sustainability team at international law firm Eversheds, comments on the risks associated with carbon trading.

Carbon trading is a new approach to environmental regulation which attempts to harness the flexibility of the markets and the commercial opportunities that their involvement will bring to tackle an environmental problem. Inherent in this approach is the risk that a new market will bring.

It is still too early to judge whether this approach is delivering the C02 reduction results that are required.

The consensus is that Phase I of the EU ETS was focused on setting up the scheme and was more of a learning experience. Obviously the focus for Phase II will be to see whether reductions are generated by the Scheme, but one year in, it is probably too early to say.

The Commission has revisited the scheme and last year agreed a number of amendments, including a move towards auctioning of credits rather than distributing them for free. This will take effect from 2013.

A predictable global carbon price is vital as it allows businesses to take long term commercial decisions on investments on, amongst other things, alternative energy projects.

Whether the selling of allowances by auction will result in a more predictable carbon price will depend on how wide the various exemptions to these provisions turn out to be.

Getting the balance between allowance distribution and sales right, so that the markets can function effectively without leaning too heavily on industrial companies in the EU who are also struggling in the midst of the current economic conditions resulting in carbon leakage, will also be key.

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