Carbon Capital Markets

Establishing a clear policy in the fight against emissions


Courtesy of Carbon Capital Markets

Is a lack of liquidity and its similarity to commodities a stumbling block for carbon emissions to develop as an asset class? Political pressure may prevail in the long-term, writes Paula Garrido.

As part of the global fight against climate change, companies operating in countries that have ratified the Kyoto Protocol are now committed to reducing their emissions of carbon dioxide (CO2) linked to global warming. In order to meet this requirement, many nations across the world have put regulatory frameworks to help governments and corporations to face this challenge.

The European Union Emissions Trading Scheme (EU ETS) started operating in January 2005 and represents the world’s first multi-country emissions trading system. The EU ETS follows a ‘cap-and-trade’ approach, where member states are given limited EU Emissions Allowances (EUAs) for a pre-determined compliance period for them to allocate to individual sectors and companies across their different industries. Each EUA permits those who hold it to emit one ton of CO2. If at the end of the compliance period a company’s total emissions are below its cap, EUAs can be sold to those who are close to exceeding their carbon credit allowances.

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