Carbon Market / Carbon Credit & Carbon Market

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The concept of the carbon market originally came from the concept of using a market mechanism to drive a decrease in greenhouse gas emissions (GHG) where carbon credits are appointed as the goods in terms of the buyer and seller. According to economic theory, such a market mechanism lowers investment costs for GHG emission reductions.

The buying and selling of carbon credits can take place in two distinct areas: 1) the compliance market; 2) the voluntary market.

1. Compliance market (Mandatory market/Regulated market)

There are different approaches to reaching the standards set by the Kyoto Protocol. These include:

1.1 Joint Implementation (JI): this project is designed to assist industrialized Annex I countries in meeting their targets through investment and development of projects in Annex B countries. The Kyoto Protocol identifies 12 Annex B countries, also known as ‘economies in transition’: Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Russia, Slovakia, Slovenia and the Ukraine. As the Annex B host country also has a target under the Kyoto Protocol (unlike CDM host countries), a Joint Implementation project must reduce emissions against a 'business as usual' baselines in order to free up Emission Reduction Units (ERU) to sell. One ERU represents one ton of carbon dioxide equivalent.

1.2 Clean Development Mechanism (CDM): CDM has similarities with JI but the country that implements the project must not be in an Annex I or Annex B country; it must be in a developing country. Also, the amount of GHG reductions must be stated. The GHG which can be deducted from the project is called a Certified Emission Reduction (CER).

1.3 Emissions Trading (ET): This mechanism helps to generate the selling and buying of GHG emissions for Annex I countries. Since different countries who account as Annex I members all have commitments to decrease their GHG emissions at different levels, this allowance is referred to as AAU, Assigned Amount Units, which come into force in the year 2008 and end in the year 2012.

Countries that cannot decrease their GHG emissions according to their commitment can use the ET mechanism by buying credits in the form of CERs or ERUs. Countries or group members may also develop projects that lead to the reduction of GHG emissions locally. The buying of CERs and ERUs through the ET mechanism can cover their exceeding GHG credits.

The first carbon market, the European Union Emission Trading Scheme (EU ETS), was established in the EU in January 2005 by the encouragement of Germany and the UK to fulfill the Kyoto Protocol mechanism during the periods 2008-2012. A “cap” on greenhouse gases was assigned to each Member State under the condition that each Member not exceed its permitted limitation. The circumstances are as such: if an EU Member State exceeds these limitations, it must pay for the extra units. In contrast, Member States who fall short of their GHG limitations can sell the rest of their quotas among EU Members. The EU ETS allocates emission allowances for GHG for five different sectors, including: oil and natural gas, electricity production, paper and pulp production, cement and glass, and the steel sector. The EU ETS is known as a “cap and trade” system, one of the flexible mechanisms permitted under the Kyoto Protocol for selling and buying GHG emissions.

2. Voluntary Market: This market sells GHG emissions in the form of Verified Emission Reductions (VERs) which can be derived from CDM/JI projects that do not necessarily need to receive the LoA from the Host Country DNA where the project took place. The projects are not required to be registered under the UNFCCC; consequently, the price for VERs is typically lower than the price for CERs.

The voluntary market can be divided into two markets: Chicago Climate Exchange (CCX) and Over-the-Counter (OTC).

3. Location of carbon markets (especially CERs): The selling and buying of CERs normally takes place over-the-counter (OTC), and the remaining 25 percent takes place in compliance markets, such as NordPool, ECX, BlueNext and Climex.

NordPool is a trading platform where CERs have been traded since 2007. This market is situated in the Nordic countries (Finland, Sweden, Denmark, and Norway).

European Climate Exchange (ECX) is a trading platform situated in the UK. It started buying Futures CERs in May 2008.

BlueNext market, situated in France, opened in 2007. It started trading CER Futures in 2008.

Climex market, located in the Netherlands, opened in 2003 but started trading CER spot contracts in 2008.

Carbon market in Thailand

In Thailand, there is still no carbon market related to the selling and buying of carbon credits, but there are OTC trades taking place, in which developers of CDM projects and countries within the Annex I are trading credits through delegates, financial funds, and brokers.