History of Emissions Trading

The theory behind carbon trading is simple. It does not matter where a tonne of CO2 is reduced. What simply matters is that it is reduced at the lowest possible cost. This means that if it cost $40 USD to reduce a tonne of CO2 in Germany (say for energy efficiency measures for a German power plant emitter) and $10 to reduce a tonne of CO2 in Kenya, Africa (say for a waste to energy project) then it is fine for the German power company to continue business as usual, instead of investing in energy efficiency measures to reduce GHG emissions, while at the same time investing in the waste to energy project in Kenya and earning carbon credits which can then later be used for compliance in the EU Emissions Trading Scheme.

Carbon Trading started in 1997 when some 180 countries signed the Kyoto Protocol. The Protocol called for countries to reduce their greenhouse gas emissions between 2008 – 2012 to 5% below 1990 levels, a target that was unfortunately never met. The United States pulled out of the Kyoto Protocol in 2001 and other countries also followed later. As part of its strategy to meet the 5% global greenhouse gas emissions reduction target, the Kyoto Protocol created four types of carbon credits where each carbon credit represents one tonne of CO2-equivalent. These were:

    Assigned amount units (AAU) issued by an Annex I Developed Country Party;

    A Removal Unit (RMU) issued by an Annex I Party on the basis of land use, land-use change and forestry (LULUCF) activities;

    An Emission Reduction Unit (ERU) generated by a joint implementation project under Article 6 of the Kyoto Protocol.

    A Certified Emission Reduction (CER) generated from a clean development mechanism project activity under Article 12 of the Kyoto Protocol.

Transfers and acquisitions of these units have been tracked and recorded through the registry systems under the Kyoto Protocol. The largest emissions trading market in the world is the EU Emissions Trading Scheme, established in 2005 whereby some 12,000+ power stations and manufacturing plants trade carbon credits (EU Allowances or EUAs) in order to meet their emission reduction targets.

When New Zealand introduced its domestic emissions trading scheme in 2008, the New Zealand Government created the New Zealand Emissions Unit register (https://www.eur.govt.nz whereby New Zealand companies and individuals could trade New Zealand Units (NZUs), the domestic carbon credits unit.

Carbon Credits from the New Zealand Emissions Unit Register could also be traded internationally from 2008 – 2015 from the New Zealand Emissions Unit Register and in 2008 Carbon Market Solutions Ltd became the first New Zealand company to import CERs into New Zealand. Then in 2009, Carbon Market Solutions Ltd became the first company to sell AAUs internationally when we brokered a sale of 500,000 AAUs from a New Zealand forestry company to the Norwegian Government. This opened up a period from 2009 – 2015 where New Zealand companies were involved in international carbon trading, both the buying and selling of units.

From 2013 onwards when the EU banned the purchase of CERs and ERUs by participants in the scheme unless they were from projects in least developed countries (LDCs), the demand for international carbon credits (and in particular CERs) declined significantly. In New Zealand, with the exception of a two year period from 2013-2015 when the door for international carbon credits (i.e -CERs) from CDM projects was closed but it was open in New Zealand the carbon market has been closed to international trading from 2015 onwards.

During the period up until 2015 when the ban took place, many New Zealand companies took advantage of the very low prices of international units in order to sell New Zealand Units and buy cheaper international units. However, the lack of access by New Zealand companies to cheap international carbon credits has been a significant factor in causing the price of New Zealand Units to rise to $25+ over the period from 2016 onwards.

Article 6 of the Paris Accord calls for carbon trading to be carried out on a voluntary basis. This means that from 2020, or shortly thereafter, we expect international carbon trading to return.

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