The Emissions Markets

The carbon emissions market has developed following the recognition of the detrimental impact of climate change, and the acceptance of human industrial and commercial activity as the major cause of global warming. It is recognised as the best way to mitigate the social and economic costs of emitting green house gases.

Under the terms of The Kyoto Protocol, which was negotiated in 1997 as an amendment to the UN Framework Convention On Climate Change (UNFCCC), nearly 200 countries worldwide committed themselves to reduce emissions of greenhouse gases. With the EU signing up as a single entity it has made a commitment to make an overall 8% reduction on 1990 carbon emissions levels during the Kyoto Protocol commitment period - 2008 to 2012.

There are an abundance of carbon credits available and their price is relatively low. However, with the second phase of the Kyoto Protocol commitment period, now in full force, and a reduced amount of credits available, prices are set to rise significantly. Furthermore, when the USA eventually commits itself to a cap and trade federal system, with the general consensus being this will take place within the next 36 months, a further positive market-price driver for all types of carbon credits on the main international trading platforms will almost certainly be created.

The European Climate Exchange (ECX) is currently the world's largest emissions market with London leading the way in terms of market share and volume. The ECX currently trades two types of carbon credits - EU allowances (EUAs) and Certified Emission Reductions (CERs). Trading on ECX began in April 2005, when futures contracts were launched on European carbon dioxide emissions which are known as EU Allowances, with options on EUAs following in October 2006. Futures and Options on CERs were introduced in 2008, further cementing ECX,s position as the industry benchmark for carbon trading globally. In 2009, two new spot - like contracts were added, the EUA and the CER Daily Futures contracts.

ECX volumes are experiencing tremendous growth. The carbon markets total value for 2008 was estimated at 92 billion Euros, more than double the 40 billion it was worth in 2007. In 2009 it was estimated to be worth 140 billion US dollars.

The Chicago Climate Exchange (CCX) operates North Americas only cap and trade system for all six greenhouse gases with international affiliates worldwide. CCX members are leaders in greenhouse gas management and represent all sectors of the global economy, as well as public sector innovators. Reductions achieved through CCX are the only reductions made in North America through a legally binding compliance regime, providing independent third party verification by the Financial Industry Regulatory Authority.

CCX emitting members make a voluntary but legally binding commitment to meet annual GHG emissions reduction targets. Those who reduce below the targets have surplus allowances to sell or bank, those who emit above the targets comply by purchasing CCX Carbon Financial Instrument Contracts. These contracts represent 100 metric tons of Co2 equivalent. CFI contracts are comprised of Exchange Allowances and Exchange Offsets. Exchange Allowances are issued to emitting members in accordance with their emissions baseline, and the CCX Emissions Reduction Schedule. Exchange Offsets are generated by qualifying offset projects.

Outside of the CCX, like all US carbon schemes, there is a voluntary reduction marketplace consisting of corporations, state and local governments. Most domestic GHG transactions are done on a direct procurement basis by companies via corporate social responsibility (CSR) programs, or by governmental agencies in conjunction with state or local government offset programs. Companies are now looking to gain first-movers advantage with their carbon strategies by participating in the Voluntary Market.

Clients who enter VER transactions have the added advantage of developing valuable transactional experience in the carbon marketplace prior to the formation of any formalised regulatory regimes in the US and may potentially gain when early credits are recognised under future federal carbon legislation.

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