Emissions trading – a new market with new market mechanisms
2006-02-07
Jussi Nykänen, GSN
EU Emissions Trading Scheme (EU ETS) was kicked off last year. The scheme covers some 11 500 industrial plants and about 45% of the CO2 emissions in the EU25. In addition to energy installations above 20 MW also facilities of the metal, mineral and forest industry are included in the scheme. Member States will allocate annually emission allowances that can be freely traded on the market, to the companies included in the EU ETS. Each year companies have to surrender equal number of emission allowances to their previous years CO2 emissions to the authorities.
Trading within EU ETS has taken off rapidly. The first trades with EU emission allowances were done already in early 2003 and trading volumes rose to significant levels as the year progressed. In January 2005, when the scheme officially started, the price-level was € 8.3 per allowance (ton of CO2) and dropped over the following weeks to under € 7. At the end of January prices started to climb steadily and this increase accelerated in February. The bullish market continued until early July when the prices peaked at their all time highest € 30.00. Currently (February 9th) allowances are traded at € 25-26. The main price drivers are currently other energy commodities such as electricity and fuel markets as well as the weather patterns. In addition, the interest on the buying side seems to be higher than on the selling side. Eastern European companies that are expected to be net sellers of allowances have entered the market quite slowly, partly due to delays of the emission allowance registry system in some of the countries. The price of emission reductions, a sum of many
As noted, during the first part of the year 2005 the price for one emission right rose from about seven (7) euros to thirty (30). Reasons for this rapid price-hike and volatile price movements have been sought from fuel markets, economic trends, weather conditions and the situation in the new EU member states.
One thing all these “reasons” have in common is that they all try to oversimplify; they try to find one reason that influences the market price. In practice the situation is much more complicated and there is no single reason.
The fuel prices impact the prices of emission allowances. When gas gets cheaper in relation to coal, the use of gas gets more profitable. This in turn lowers the emissions from power production, reduces the need for emission allowances and therefore brings the price down. The fluctuations in allowance prices cannot be explained by changes in fuel prices alone. Some temporary correlation can be found, but it is hard to say whether emission allowance prices follow fuel prices or whether it is the other way around.
A correlation can be found between electricity and emission allowance prices. This is natural as a company that produces electricity has to cover its emissions with emission allowances. This increases the production costs. Emission allowances have in fact become one of the major factors, besides the water level in the Northern reservoirs, which influence electricity prices in the Nordic market.
The price of emission allowances are naturally also dependent on how emissions develop in Europe. The extreme weather conditions have been sought as one reason for the price development. However, one has to be very careful with regard to this issue. For example a heat wave in Southern Europe can easily be compensated by a good water level in Northern Europe.
Why then, have the prices for emission allowances risen to levels no-one could have predicted a year ago? The main reasons can be found in the nature of the market. The market has been opened gradually. The first ones that became active were Northern and Western European energy companies and in a smaller scale energy intensive industry and the Southern European energy companies. The seller companies in the new Member States have not yet begun selling up to their full potential, which has created an imbalance between supply and demand. This has increased the prices in the past.
Another factor that is most probably affecting the price is that the most active companies come from sectors in which the price of emission allowances can easily be transferred to the price of their own products. For such companies, a high price is not as big a problem as for companies that due to fierce international competition cannot pass on the price of emission allowances to the price of their products.
Also changes in national allocation plans and schedules in implementation of national registries have caused rapid price fluctuations. Changes made in the middle of the trading period make it much more difficult for companies to operate on the market. Some of the costs on the market are e.g. a direct result of the challenges some new Member States have had in starting up emissions trading. In order for the market to be reliable and predictable it is imperative that the rules and regulations of the market are not changed during the trading period or even close to its beginning.
As we can see, the price development is clearly a sum of many not so easily predictable factors and companies have a difficult time getting a clear and reliable picture without the help of experts. In addition to the market fundamentals, the most difficult thing to predict is the actions on the authorities’ side.
In the future the price will also be affected by the possible linkage of the EU ETS to other emissions trading schemes as well as by the price of emission reduction credits that come from outside the EU. Currently the price of emission allowances and reductions differ greatly from each other, which of course affects the development of respective prices.
The Kyoto JI/CDM project mechanisms makes the market global
With regard to climate change, it is of little importance where on the globe emissions are reduced. Because of this it is most cost effective to take the measures where the results are the best with regard to costs. The Kyoto Protocol defines two flexible project mechanisms that are intended to bring cost effectiveness into emission reduction activities; Joint Implementation (JI) and the Clean Development Mechanism (CDM). The so-called linking directive makes it possible to use emission reduction credits from JI / CDM projects within the EU ETS in parallel to EU emission allowances. The main idea behind these project mechanisms is that emission reductions generated by these projects can be used in another country. E.g. the emission reductions produced in a Lithuanian bio energy project can, after they have been verified, be sold as emission reduction credits or rights to an EU country or company.
In 2003 almost 80 million equivalent-tonnes of carbon dioxide were traded as emission reductions. In 2004 trading with emission reductions rose up to 107 million tonnes. The figure for 2005 is about 150 million tonnes. Prices for emission reductions from JI projects have recently been around 4-8 euros per tonne and from CDM projects between 4 and 12 euros per tonne. Thus for a company that does not have enough EU allowances to cover their emissions, it is substantially cheaper to invest in JI- or CDM –projects.
GreenStream Network Ltd, the major player in the Baltic Sea Region
Since 2001 GreenStream Network Ltd. (GSN) has expanded its business steadily and become the leading company in the green certificate and emissions trading markets in the Baltic Sea area. In 2002 the company opened an office in Oslo and next year in Stockholm. In 2004 GSN established an office in Germany and last year new offices were opened in Vilnius and Paris. GSN is currently looking for further possibilities to grow in Northern Europe along with the developing environmental commodity markets.
During its four year existence GSN has brokered over 20 TWh’s of renewable energy certificates and millions of EU emissions allowances. In 2004 and 2005 GSN was voted as the best broker of green certificates in Europe by the readers of Environmental Finance. GSN has provided advisory services to more than 100 organizations on issues related to the markets and business impacts of emissions and certificate trading and has been involved in developing some 30 JI and CDM projects as well as three JI / CDM Funds. GSN offers a wide range of brokerage, portfolio management and advisory services as well as project development services related to emissions trading and renewable energy.
Combined Heat and Power Plant in Vilnius to produce
heat and electricity on February 7th 2006,
while ambient temperature was -20 oC.
GreenStream Network
Expert in emissions trading and green certificate markets
GreenStream Network Ltd. (GSN) is a Northern European company specialising in services related to emissions trading, renewable energy certificates and other environmental commodities. GSN's principal clients are corporations from the energy, pulp and paper, metal and construction material industries, as well as financial sector and public organisations. GSN has offices in Hamburg, Helsinki, Oslo, Paris, Stockholm and Vilnius.
GSN's Intermediary Services
GSN offers services for companies that are looking for opportunities in the environmental markets, i.e. who are aiming in selling or buying EU emission allowances, green certificates or emission reductions from JI/CDM projects. The intermediary services cover for example finding a counterparty, assistance in contract negotiations, opening and operation of the allowance accounts, option to use Powernext Carbon exchange as well as other services depending on the client’s needs.
GSN’s Advisory and Financing Services
GSN provides advisory services for companies whose business is affected by emissions and certificates trading and companies acting on the markets. We help companies in preparing for emissions and green certificate trading schemes (capacity building, trading strategy preparation, investment analysis) and in optimising their actions once they have entered the market (provision of market information, business opportunity studies and strategy updates). We also offer a full range of services for JI and CDM project preparation and implementation.
Contacts in Lithuania, Vilnius
Andrius Tamošiūnas, tel. +370 618 86 957, e-mail: andrius.tamosiunas@greenstream.net
Reijo Nikkinen, tel. +370 699 27 050 / +358 400 813 315, e-mail: reijo.nikkinen@greenstream.net
Web site: www.greenstream.net