World Bank announces first ever study of global emission trade

International companies have struck about US$100 million worth of emissions trading deals, involving roughly 55 million tonnes of carbon dioxide equivalent emissions reductions, the new study says.

The study, commissioned by the World Bank and prepared by brokerage firm, Natsource, says that, to date, no previous record of greenhouse gas emissions trades has been assembled, nor any systematic analysis of the trades conducted. The study, which is confidential, although has its Executive Summary published, says that at least 60 inter-company transactions are known to have occurred since the market emerged in 1996-97. However, since market participants are not required to report transactions, the actual size of the market is probably greater.

The study says most deals have involved Verified Emission Reductions (VERs), which are audited by a third party such as engineering or accountancy firm but which carry only a possibility of future recognition as trading ‘credits’. Therefore, buyer interest is shifting to government-issued emissions permits, since they are regarded as a superior instrument for hedging regulatory risk, as they carry government recognition in at least one jurisdiction. Examples include Emissions Reductions Units (ERUs) such as those recently published by the Dutch government (see related story) and allowances from domestic markets in the UK and Denmark.

The study is also optimistic about the future of trading. “As more domestic emissions trading markets emerge, along with other opportunities for trading government-recognised emissions permits, the market’s growth looks set to continue despite continuing uncertainty surrounding international climate change policy,” it says.

Until now, the study says, almost all trades have involved reductions of carbon dioxide and methane, because of their important contribution to climate change and because monitoring methodologies for other green house gases are not perceived as adequately accurate.

Nominal prices for VERs have ranged between $0.60 and $3.00 per tonne of CO2 equivalent since trading started, the study says, with those standing a high probability of earning government certification fetching a higher price than those unlikely to do so. Seller creditworthiness appears to be a strong determinant of price for VER sales for future delivery, being, in part, a proxy for quality of the emissions reductions, since many sellers provide some degree of guarantee that the VERs will be acceptable by regulatory authorities.

Prices for permits such as ERUs and UK allowances are substantially higher, the study says, reflecting permits’ superior hedging value. Dutch ERUs have traded from $4.40 – $7.99, European ERUs have indicative bids of $7 – $12, while UK permits have a mid-market bid offer of $8.46.

Between a quarter and a half of transactions to date have involved financial derivatives such as call options based on future emissions reductions, which offer buyers a cheap means of hedging reductions, with many involving streams of reductions generated over several years.

The European Commission is now working on a draft directive for an emissions trading scheme aiming to harmonise national schemes and leading to international trading and a single price for carbon. The UK’s own emissions trading scheme (see related story) should be finalised in early August and is expected to begin next year.

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