The European Union’s Emission Trading System (ETS) for carbon dioxide has grown rapidly since its launch amid political arguments and bureaucratic turmoil on Jan. 1, 2005, raising expectations for similar schemes elsewhere.
During its first year, the ETS traded a total of 363 million tonnes of CO2 with prices reaching €30/tonne. ETS volumes have risen each month so far this year, said Peter C. Fusaro, principal with Energy Hedge Fund Center LLC in New York. The European Commission will issue a progress report in June.
The EU requires 12,000 emitters of greenhouse gases (GHG) to reduce their emissions in the next 3 years.
“Emissions trading looks like the oil markets 27-28 years ago,” Fusaro said. “The energy value chain is now overlaid with an environmental value chain. Financial products for the environment are a natural evolutionary development of markets.” Michael Moore, director of markets for CO2-Global (US) LLC in Houston, noted that the US has a commodity CO2 market, but no CO2 emissions market. The EU ETS has a CO2 emissions market but no commodity market. “There were many assertions that the trading platform in Europe would never take off, and yet it did,” Moore said. “There hasn’t been anybody that has blatantly shut down and walked away from it. The European public buys into it.”
Regional markets
Although there is no CO2 emissions-trading in the US, regional emissions trading markets started in 1995 for sulfur oxides and in 1999 for nitrogen oxides. The Chicago Climate Exchange (CCX), launched in 2004 as a voluntary effort of more than 60 companies, handles over-the-counter trading of industrial pollution allowances issued by the US Environmental Protection Agency.
Fusaro believes the US could implement CO2 emissions trading in 2 years. He expects the federal government to get involved, noting that some states are developing GHG regulations.
“That’s a problem because you can’t have so many different rules. You need uniformity,” Fusaro said. “The same thing happened on SOx and NOx.... Industry is crying for this.”
The move is toward a GHG regulatory regime, he said.
“What is really happening is that corporate America is getting a lot of pain with so much regulatory uncertainty at the federal level,” Fusaro said. “Multinational companies have to comply with Kyoto in 160 nations.”
US Senate Energy and Natural Resources Committee Chairman Pete V. Domenici (R-NM) and Sen. Jeff Bingaman (D-NM), the committee’s ranking minority member, have circulated a white paper seeking comments on a mandatory market-based GHG regulatory system.
In December 2005, governors from seven Northeast states agreed to a bipartisan plan to reduce CO2 emissions from power plants. The Regional Greenhouse Gas Initiative (RGGI) accord is set to take effect in 2009.
RGGI seeks to reduce CO2 emissions from regional power plants by 10% below current levels by 2019.
Participants are Connecticut, Delaware, Maine, New Hampshire, New Jersey, New York, and Vermont.
Elsewhere, the California Climate Action Registry will start in 2009.
CO2-Global’s Moore said, “The states’ programs are a hodgepodge, kind of like a quilt.”
The future
Fusaro expects national CO2 emissions trading to start in the US. “The question is whether we can just get the rules in place so that there is regulatory certainty,” he said. It would be logistically possible to launch emissions trading within 3 months, he estimated.
US-based multinational oil and gas majors already participate in the ETS. Their existing trading expertise would enable them to set up CO2 emissions trading desks in the US.
“What they don’t want to do is make an investment and then be told that it’s not going to be compliant with a federal regime,” Fusaro said of the majors. Moore acknowledged many people believe the US will have CO2 emissions trading.
“A lot of US multinationals already are trading greenhouse gas in Europe, so all they need to do is cookie-cutter into the US,” Moore said. “Meanwhile, a US firm that doesn’t have multinational operations is at ground zero. Firms that know how to do this might be eager to implement trading in the US, knowing some competitors might not be as far along.”
Currently, the US has guidelines for voluntary reporting of GHG emissions established by Section 1605(b) of the Energy Policy Act of 1992.
Fusaro said the US still has a lot of issues to work out before implementing mandatory GHG reporting. For instance, companies that worked to reduce emissions are concerned about not getting credit for early action.
He envisions the US having its own bilateral or multilateral treaties, probably with the EU, Japan, China, and India.
“We are going to have our own regime. The US is not going to be a signatory on Kyoto,” Fusaro said. “We are not going to use 1990 as the base case. It’s obvious we are probably going to use 2000 as our base year for greenhouse reductions. America is 25% of greenhouse gas emissions. We have a very big footprint.”
