Emissions trading

The significant and rapidly advancing global climate change observed over the past two to three decades appears to be directly linked to the worldwide increase in greenhouse gas concentrations in our atmosphere (IPCC Report). Accordingly, there is an urgent need to mitigate the emission of the most important greenhouse gases (carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulphur hexafluoride) to counter global warming. Trading of emission rights is one of the key instruments enshrined in the Kyoto Protocol.

The emission of greenhouse gases represents a consumption of natural resources and can be expressed as a monetary value. The goal of emission trading is to carry out emission reductions – and therefore climate protection – where this can be done at the lowest costs. An emitter of climate-impacting greenhouse gases is required to possess entitlements within the emissions trading scheme, a limited amount of which are allocated the beginning of each year. If the actual emission exceeds the amount of the entitlements, the emitter may reduce emission by installing new technologies or by acquiring additional entitlements. Such additional entitlements always originate from reduction measures taken elsewhere (by other emitters). Since the impact of greenhouse gases is spread out over a large area, it does not matter in principle where they are reduced – important is only that they are reduced. The entire system therefore facilitates action with an ecological impact while maintaining the highest possible degree of economic efficiency.

Article 17 of the Kyoto Protocol emphasizes that emissions trading should constitute an element supplemental to direct measures for the reduction of greenhouse gases. This aims to prevent countries from relying exclusively on selling their reduction commitments through emissions trading with other participations.

The European Union (EU) joined the Kyoto Protocol as a community and places a special responsibility on major emitters of CO₂ (Annex I Directive). On average, the target is to reduce the greenhouse gas CO₂ by 8% relative to 1990 by 2012. Within the European burden sharing for achievement of the reduction target, the individual targets may deviate considerably from each other, however. As an EEA State, Liechtenstein is introducing the European Emissions Trading Scheme (ETS) as of 2008, but does not participate in EU burden sharing; it requires the enterprises concerned to reduce greenhouse gases by 8% relative to 1990 levels, as specified by the Kyoto Protocol at the level of international law.

If an enterprise does not meet its reporting obligation, a penalty of €100,00/ton is imposed; in addition, the unmet mitigation commitment must be subsequently fulfilled. Using an example, Figure 1 schematically shows the process of emissions trading between two enterprises, both of which must jointly reduce their CO₂ emissions by 10%. For Enterprise A, the investment costs for emission reduction are significantly lower than for Enterprise B, so that it makes more economic sense to reduce 20% of the emissions (=2000 t) than to purchase additional emission rights. Enterprise A sells its unused emission rights to Enterprise B, which has not implemented its own emission reductions. Together, they have achieved the climate protection target of 10%.

Figure 1: principle of emissions trading