The Global Carbon Markets Recap

Refreshing…

After two rather dense and maybe long articles, I thought it would be nice to recap the basics of what I have been discussing. I will attempt to keep things as simple as possible.

In a timeline, it goes as:

1992: United Nations Framework Convention on Climate Change (UNFCCC) is signed during the Earth Summit in Rio. What you need to know: almost all countries are signatories; countries have common but differentiated responsibilities, i.e., some countries (advanced economies and economies in transition - former USSR) have greenhouse gas (GHG) emission reductions targets, whereas all other countries do not have such targets. Countries with targets are listed in the Annex I to the Convention.

1997: during the third conference of the parties to the UNFCCC in Kyoto, Japan, a protocol is agreed upon. What you need to know: in the Kyoto Protocol, each Annex I country is assigned emission reduction targets, with 1990 as the emissions baseline year; those targets should be reached by year 2012 and would mean a reduction of, on average, 5.2% of GHG emissions; though there are several gases that contribute to the greenhouse effect, only 6 are covered in the Protocol; three flexibility mechanisms are created in the Protocol - Emissions Trading, Joint Implementation, and the Clean Development Mechanism (CDM); the mechanisms were created with the minimization of the overall cost of achieving the reductions in mind - since the benefit of the reduction is global, it doesn't matter if reductions are achieved in Mali or in Switzerland; of the three mechanisms, the CDM is the one most talked about, and thus more institutionalized; finally, the Protocol would enter into force only after at least 55 countries had ratified it and at least 55% of the 1990 GHG emissions were represented in ratifications (in practical terms that means the Protocol, after having being ratified by at least 55 countries, would enter into force only if either Russia or the United States ratified it.)

2001: CDM's rulebook is agreed upon during the seventh conference of the parties, in Marrakech, Morocco. What you need to know: the book is the soul of the CDM, so if you want to become a specialist in the mechanism, go for it. I have to say that it has been, and is still being, considerable appended by rules and decisions that derive from the learning-by-doing approach of this market.

2005: In February, the Kyoto Protocol enters into force, following Russia's ratification at the end of 2004. What you need to know: the CDM market had been under development much before the Protocol's ratification. Everyone was working believed the Protocol would enter into force one way or the other, sooner or later. And even in the case that it never entered into force, the climate change discussion had climbed so high that no one wondered the market would simply stop its development.

2005: The European Union Emissions Trading Scheme is created. What you need to know: the EU ETS represents a major breakthrough in the international carbon market, as it establishes emission reduction targets, fines for non-compliance and maybe more important, allows for emissions trading in exchanges (the EU ETS is one of the so-called cap-and-trade schemes). In the EU ETS, the carbon asset is transparently priced and the trading mechanism gives participants (companies, investment managers and the like) the possibility to hedge or speculate on carbon. A ton of CO2-equivalent, as a carbon credit is technically called, thus becomes a real asset, or liability.

If you want to know more… A Langone colleague and I are starting a discussion group on this very interesting topic. In case you want to know more, please send your contact information to carbonstern@gmail.com.