The CO2 market

Source : ECX, Reuters, SG Commodity Research

European Union Allowances (EUA) transactions on the European Climate Exchange (ECX)


Since 2005, the EU ETS is a market in rapid growth

  • - Massive increase in volumes since the inception of the market in 2005 (multiplied by almost 20 between 2005 and 2009)
  • - 6.3 billion tonnes CO2 exchanged in 2009 (market value of 88.7 billion Euros)
  • - In 2009 on average about 22 million tonnes were traded per day on exchanges
  • - Phase II (2008-2012) now equal to 95% of volumes


National Allocation Plans (NAP)

Under the Emissions Trading Directive which established the ETS, governments are required to draw up national allocation plans (NAPs) for each trading period. NAPs fix the total amount of CO2 that can be emitted by all the installations in their country covered by the scheme as well as the number of emission allowances allocated to each individual installation.

An installation that emits more CO2 than it has allowances for would need to buy additional allowances in the market, while one that emits less has the possibility to sell its surplus allowances.

Drawing on the lessons learnt from first phase (2005-2007) national allocation plans, the Commission adopted further guidance for the second trading phase from 2008 to 2012.




Phase III of the EU ETS

Phase III of the EU ETS starting in 2013 is characterised by amendments to scheme that aim at strengthening the system. There will be two means for allocating allowances to compliance entities. The majority of participants, mostly utilities, will have to purchase allowances through auctions. These auctions will be held either on a centralised auctioning platform or, for those countries wanting to undertake their own auctions, on platform selected by those Member States. Companies of certain sectors, which are deemed to be affected by international competition, will receive free allocation for producing products exposed to a significant risk of carbon leakage if their performance is among that of the top 10% of most efficient installations. A second set of rules which may change in the third trading phase relates to the volume and types of international credits allowed for compliance. Currently only credits from forestry and nuclear projects are excluded from the EU ETS. However, the revised EU directive envisages that the eligibility of credit types for compliance in phase III will be reviewed and that as a consequence certain types could be excluded for compliance purposes. If such qualitative restrictions are to be introduced, they will need to be announced 6 month before they apply. Also, the volume of offsets can potentially be reviewed. In case the EU decides to step up its emissions reduction commitment from currently -20% by 2020 compared to 1990 levels to –30%, there is the option for increasing the use of international credits by 50% of the additional reduction effort required by EU ETS sectors, which would significantly boost the demand for such credits.