Emissions trading
With the implementation of the flexible mechanisms under the Kyoto Protocol - namely emissions trading, the clean development mechanism (CDM) and joint implementation (JI) - the United Nations has put in place the framework for countries to reduce greenhouse gas emissions in a cost-effective manner. Trading in emissions certificates allows our customers to meet their obligations under the European emissions trading system and is thus an instrument for risk hedging.
Reducing emissions of the greenhouse gas CO 2 is imperative for curtailing the negative impact of climate change.
Three main instruments can be used to achieve this environmental policy goal: sanctions, levies and certificates.
From an environmental and economic perspective, certificates are most preferable since they are the only means of managing the use of natural resources through the market, and thereby achieving optimal allocation. Once the political decision is made in favour of a certificate-based solution, the total amount of permissible pollutants, which will be less than current emissions, is set, divided up and then allocated in the form of individual emissions rights - certificates - to the (mostly industrial) environmental " consumers".
The certificates can be either auctioned or distributed free of charge. They can change hands freely thanks to clearly established ownership rights, i.e. they can be traded by market participants, meaning the solution to environmental problems will be based on a free-market economy.
The number of emissions rights on offer and in demand will depend on the consumer's specific marginal abatement costs as compared with the price of the emissions certificates. In cases where the specific marginal abatement costs lie above the certificate price, the polluter will seek to obtain emissions certificates on the market. If the specific marginal abatement costs are lower than the certificate price, the polluter will reduce its emissions, freeing up emissions certificates which it can then sell on the market. This means that the certificate market will determine emissions rights supply and demand through prices. Ideally, this will balance out the marginal abatement costs for all polluters, which will then reveal the marginal abatement costs on the market.
The set goal of reducing the amount of pollutants (environmental effectiveness) will thereby be achieved at a minimum of costs (economic efficiency). As the certificate solution is the only means of pairing environmental effectiveness with economic efficiency, it is seen by many as the silver bullet in environmental policy.
