Natsource Transaction Services in the EU ETS

EU ETS Background

The European Union Emissions Trading Scheme (EU ETS) officially started on January 1, 2005.  Companies with regulated installations located in countries participating in the program must limit their greenhouse gas (GHG) emissions to allocated levels in two periods, 2005 to 2007 and 2008 to 2012.  European industry now has a clear signal that emissions have a value and will impact their business.

Natsource have been active in emissions markets for over 10 years and have several years experience working with industrial clients affected by the UK ETS and have applied this expertise to our services in the EU ETS. As such our services are specifically designed to help industrial companies make the trading process as simple as possible. Natsource's staff work closely with clients to provide them with a comprehensive understanding of the market, develop an appropriate strategy and step-by-step assistance at ALL stages.

EU ETS Overview

Phase 1 of the EU ETS covers direct emissions from the following sectors: 

• Energy sector:  combustion (over 20 MW thermal, aggregated for all on-site activities), excluding waste combustion; oil refineries; coke ovens;
• Metals sector:  ores; pig iron and steel (over 2.5 tonnes (metric tons) per hour);
• Minerals sector:  cement (over 500 tonnes per day); lime (over 50 tonnes per day); glass (over 20 tonnes per day); ceramics (over 75 tonnes per day); and,
• Other sectors:  pulp; paper (over 20 tonnes per day). 

Because the 20 Megawatt limit is calculated by aggregating all on-site combustion activities, the program will regulate over 12,000 installations.  There is the potential that the EU Trading Directive will include 27 countries if European Economic Area countries and Switzerland agree to participate.

Key elements of the program include:

• Only emissions of carbon dioxide (CO2) will be regulated in the program’s first phase.  The program may be expanded to cover the other five gases covered by the Kyoto Protocol beginning in 2008.
• Only those sectors listed above are covered in the first phase.  The program may be expanded to cover the chemicals, transport and aluminium sectors beginning in 2008.
• Up to 5% of allowances can be auctioned in the first phase, and up to 10% in the second phase.  However, it is up to each Member States (MS) to determine how to allocate.
• Financial penalties for non-compliance are included in the program.  Penalties of € 40 per tonne for non-compliance will be imposed in the program’s first phase, increasing to € 100 per tonne in the 2nd phase.  Installations will also be required to make up for any emissions overage in subsequent calendar years.

2005 Compliance Results

On the 15th May, the European Commission (EC) announced Verified emissions data from 21 of the 25 member states in the European Union (except Cyprus, Luxembourg, Malta and Poland).  This data shows that in 2005 the trading sectors emitted 63.3 million tonnes less than they were allocated for that year.

Analysis by Point Carbon shows that across the EU ETS there is an estimated total surplus of 97.2m allowances. Further breakdown shows power companies were net buyers of over 35m allowances, whereas all other industry sectors had a net surplus.

Therefore the industrial sector across the EU has the greatest potential to be a natural seller of EU allowances.

Market Characteristics
The EU Allowance (EUA) market is driven by a forward traded market involving large trading companies, such as utilities, oil companies and banks. These companies form what is termed a “wholesale” market and have spent time and effort to put in place contracts and agree credit lines to allow them to freely trade with each other on a daily basis. This wholesale allowance market has been trading for since 2004 and currently 1-3 million EUAs trade on a daily basis. The depth of the market has been increasing but is still limited— typical volumes per trade are 10,000-50,000. The price of EUAs can be extremely volatile with significant intra-day price movements.

The 1 Dec 07 Contract drives the benchmark EUA price for Phase 1. This price is influenced by energy fundamentals (such as changes in coal, gas and power prices), weather changes and verification results. The 1 Dec 08 contract is the benchmark for Phase 2 EUAs and it driven by the same factor as phase 1 but also effected by decisions relating to NAPS and flows of International Project Credits (CERs and ERUs).

For industrial companies affected by the EU ETS, the credit and contractual obligations of this wholesale forward market will either prevent them accessing the market prices or could create an excessive administrative burden for companies who do not expect to trade more than a few times a year.  We would suggest industrial companies should examine the trading opportunities through the spot market (immediate settlement), which reduces credit issues and allows more flexible trading structures. 

Natsource's Transaction Services specialises in assisting and working with industrial companies (see http://www.natsource.com/markets/index.asp?s=206). We will guide companies step by step through the trading process to assist companies access ALL market opportunities but reduce the administrative burden of trading.

The Linking Directive

The European Parliament voted on April 20, 2004 to adopt the EU Linking Directive as an amendment to the EU ETS.  The directive allows certified emissions reductions (CERs) created by Clean Development Mechanism (CDM) projects and emission reduction units (ERUs) created by Joint Implementation (JI) projects to be used for compliance with emissions limitations beginning in 2005. See section on Kyoto Markets for more infomation.

More Information

For any questions on the EU ETS and information about how Natsource can assist your company's entry into the EU Emissions Trading Market please contact a member of the Natsource Team on Tel. + 44 (0) 20 8439 9515, e-mail. london@natsource.com