Environmental Engineering Reference
In-Depth Information
the huge potential for the growth of CO
2
emis-
sions and associated pollutants in non-Annex
B countries of the Kyoto Protocol, this chapter
critically analyses to what extent the link between
the EU ETS and the CDM will contribute to cut
CO
2
emissions by 2020. As reviewed by Lecocq
and Ambrosi (2007), the CDM is controversial.
By contrast, this chapter does not consider some
viewpoints that oppose or demand more reforms
for the CDM. Instead, we adopt a financial market
approach and detail the characteristic of emission
assets stemming from the CDM.
According to the article 12 of the Kyoto
Protocol, projects under the Clean Development
Mechanism consist in achieving greenhouse gases
emissions reduction in non-Annex B countries.
After validation, the United Nations Framework
Convention on Climate Change (UNFCCC)
delivers credits that may be used by Annex B
countries for use towards their compliance po-
sition. Certified Emissions Reductions (CERs)
from CDM projects are credits flowing into the
global compliance market generated through
emission reductions. EUAs (EU Allowances)
are the tradable units under the EU ETS. Albeit
being determined on distinct emissions markets,
CERs and EUAs may be exchanged based on their
representative trading unit. One CER is equal to
one ton of CO
2
-equivalent emissions reduction,
while one EUA is equal to one ton of CO
2
emitted
in the atmosphere.
Besides, the EU
Linking Directive
2
allows the
import of CERs into the EU ETS up to 13.4% of
their compliance needs on average. The import
limit is equal to 1.7 billion tonnes of offsets being
allowed into the EU ETS from 2008-2020, that
is, an absolute maximum of 50% of the depollut-
ing effort fixed by the scheme will be achievable
through the CDM. Overall, our results shed light
on the importance of the link between the EU ETS
and the CDM to foster investments in infrastruc-
ture technology in developing countries, thereby
facilitating the transition to a low-carbon future.
The remainder of the chapter is organized as
follows. First, we provide background information
on the price development of EUAs and CERs.
Then, we detail the idiosyncratic risks affecting
each emissions market, be it in terms of regula-
tory uncertainty or economic factors. Based on a
careful analysis of the EUA and CER price paths,
we assess common risk factors by focusing more
particularly on the role played by the CER import
limit within the EU ETS. A brief summary con-
cludes the chapter.
BACKGROUND
In this section, we comment first on the price
developments of EUAs and CERs.
Primary CERs (pCERs, which are generated
from the project in the developing country) have
a delivery risk, while secondary CERs (sCERs,
which have been sold on the secondary credits
market) are already generated and issued by the
CDM Executive Board, and are hence risk-free.
The risks attached to primary CERs are linked to
the United Nations' “International Transaction
Log” (ITL) connection, the import limit, and the
performance for operating projects, to which we
may add a high volume of registered projects, as
well as registration and methodological risks for
proposed projects. The risks attached to secondary
CERs are the ITL connection, the import limit, and
eligibility criteria to be met for transfer of a CER
from one EU registry to another. In the exchange
contract (sCER), the seller agrees to pay EUAs
or cash in case of non-delivery.
The CER and EUA price series in Figure 1
shows that we are in presence of correlated emis-
sions markets. The CER-EUA spread presented
at the bottom of Figure 1 represents arbitrage
opportunities for traders who are able to identify
pricing anomalies between the quoted spread price
and the two emissions markets.
3
The EUA spread
over the secondary CER widened to nearly €10 in
