Finance question #8871b

[fivemack]

This is the classic question that occurs whenever you read about mildly exotic financial instruments: how do I go about buying them?

I'd like to buy, through the European ETS, permission to emit fifty tons of CO2 in 2008-9. I have no intention of emitting fifty tons of CO2 this year - it's about five times the UK's per-capita annual CO2 output, the equivalent of ten round-the-world flights or fifteen years of my electricity usage - but as far as I have read a carbon-trading scheme only works in a green fashion if there are people prepared to buy CO2-emission permits and then not emit the CO2.

Lots of sites give a vague figure as to how much an ETS ton of CO2 costs, lots of sites say that there's a secondary market in the things; www.pointcarbon.com has a graph at the side of the page suggesting that the fifty tons of CO2 would cost me about a thousand pounds (EUR23.40/ton), and will graciously permit me to see more data for the trifling sum of twelve hundred Euros, but I can't find anywhere that will take a cheque for a thousand pounds, inscribe me on the EU Carbon Registry at www.emissionsregistry.gov.uk, and give me the certificates.

Comments

[pseudomonas.livejournal.com]

Where does the money go? I mean, who generates the permits, and at what price do they sell them initially? Does the price increase as demand increases?

[beingjdc.livejournal.com]

I don't know, but I bet jiggery_pokery does.

These people might, too. http://www.smartestenergy.com/

[jiggery-pokery.livejournal.com]

I may not know this accurately, which could be embarrassing. :-) That said, I don't find anything immediately egregious in the Wikipedia summary (http://en.wikipedia.org/wiki/European_Union_Emission_Trading_Scheme).

Note particularly that Like the Kyoto trading scheme, the EU scheme allows a regulated operator to use carbon credits in the form of Emission Reduction Units (ERU) to comply with its obligations. A Kyoto Certified Emission Reduction unit (CER), produced by a carbon project that has been certified by the UNFCCC's Clean Development Mechanism Executive Board or the Joint Implementation project's host country, respectively, is accepted by the EU as equivalent.

Thus if you want to emit more than you have been allocated, you can either
(a) purchase EU Allowance Units, if you can find them, or
(b) help fund a carbon project in order to earn CER units, which is accepted as equivalent
(or (c) emit in excess of your allowance, submit insufficient permits and take the financial penalty, which I believe may be €100/t.)

Consider the effect of one's purchase and retirement of 50 EUAs. If the global level of emissions does not change as a result of this then 50 CER units will have had to be created from somewhere. Accordingly, fivemack, why not consider helping to fund a carbon project instead? An individual may not be permitted to buy EUAs (which I hadn't heard, but am prepared to believe) but surely if you funded, say, 50/547 of a small hydroelectric project in Honduras (http://cdm.unfccc.int/Projects/DB/DNV-CUK1134654191.67/iProcess/DNV-CUK1151325047.34/view) then you would effectively generate 50 CERs yourself as well as reducing emissions in Honduras.

Now the CER market currently trades at a considerable discount to the EUA market (http://www.carbonpositive.net/viewarticle.aspx?articleID=137) and I don't currently properly understand why this should be so. This page (http://www.carbonpositive.net/viewarticle.aspx?articleID=37) suggests that "Until the Kyoto Protocol comes into force in 2008, no-one can know how much a CER will be worth in the long-term. Because of this uncertainty, they can be pre-purchased now for much less than their expected long-term value." (This page (http://www.carbonpositive.net/searchnewsarticles.aspx?menu=1&s=1&categoryID=5&subcategoryID=8&results=10) has links to a number of simple explanations.)

I don't know how an individual might generate CERs, or at least contribute to funding projects that might do so and thus decrease global emissions. This may be a rather easier problem to solve than buying EUAs, though.

[(Anonymous)]

They've just mentioned this company, Carbon Clear (http://www.carbon-clear.com/) on Radio 4's PM programme.

[ceb.livejournal.com]

When Ian and I looked a couple of years ago, individuals were not allowed to buy them.

[pavanne.livejournal.com]

You can't buy them as an individual, because it's not a liquid market. You'd have to want enough of them to be worth brokering a deal with someone who's going to not emit on your behalf (eg by upgrading the efficiency of a cement plant in China, that kind of thing). The brokerage costs are going to be big. I know this because it's worth the brokers buying services like Point Carbon and, ahem, my employer's sister company, New Carbon Finance.

I shall ask my NCF colleagues on Monday. But my gut feeling is that you are best off buying from a voluntary offset provider which says it sources credits under the EU-ETS.

My other feeling is that this is not a cost-effective use of your laudable charitable urges. Phase I of the EU ETS is in substantial oversupply if you count the 'hot air' credits from the former USSR. Japan - which, to be fair, accepted stringent targets and already leads the world in efficiency - will end up buying some of this hot air, so all you are doing is pushing up the prices Japan will pay Russia. I'm not sure this is terribly useful. At very least you might want to buy Phase II credits, where the market is expected to be in undersupply and there won't be (I think) any hot air. Or you could probably find a more useful way to spend a thousand pounds to reduce emissions, even if it's a bit more contreversial, eg buying rainforest to protect it (new imperialism etc).