The compliance market
Measures have been implemented at the global, regional and national level to reduce carbon emissions and try to mitigate the impact of climate change. Some of these measures, such as the European Union’s Emissions Trading Scheme (EU ETS), are mandated by law, resulting in the development and growth of the compliance market.
Our experience in the compliance market
We were an early-mover in formal climate change reduction mechanisms and were involved in several market-leading initiatives. We were a pioneer in developing projects under the Activities Implemented Jointly (AIJ) pilot programme - the predecessor of the CDM - in the late 1990s.
Since then, we continue to lead in the emissions trading markets, offering a wide range of services:
- Sourcing and trading Certified Emissions Reductions (CERs) and Emissions Reductions Units (ERUs) to optimise our own and our client's compliance positions in the European Union Emissions Trading Scheme (EU ETS) and other regulated carbon markets
- Outright forward and spot European Union Allowance (EUA) and CER trading at fixed and floating prices
- EUA – CER swaps. Companies included in the EU ETS can benefit from substituting part of their allocated EUAs for CERs, due to the positive price difference between these credits. Various swap structures are possible such as cash neutral swaps, rolling the swap in time periods, allowing the customers to lock in specific margin targets, etc.
- Sourcing special customer requests for CERs, such as swapping “green” CERs generated by renewable energy projects for CERs generated by projects involving the reduction of industrial gases and providing CERs to customers with specific requests on project type and location
Our track record
- We led the way in European Union Allowance (EU ETS) trading, being the first in the market to conduct an EUA spot-trade in 2005
- We have developed advanced risk-management techniques to reduce exposure to EUA price-volatility
- We have built up a large and diversified portfolio of over 70 Clean Development Mechanism (CDM) and Joint Implementation (JI) projects, with a focus on renewable energy and energy efficiency
- We are innovators in the CDM market. For example, we purchased credits from the first registered Gold Standard CDM project in China
The EU Emission Trading Scheme (EU ETS)
The EU ETS was introduced in 2005 to allow European countries collectively to meet their commitments to cut CO2 emissions under the Kyoto Protocol. The EU ETS is a cap-and-trade system whereby governments set emission limits and allocate emission allowances, which can be traded between participants. A single EUA unit is essentially a tonne of C02 equivalents (t CO2e). Under the scheme, national governments submit a National Allocation Plan (NAP), which allocates emission allowances to power generating companies and other participating industrial sectors. In order to be compliant, companies need to exchange allowances against actual verified emissions. To achieve compliance companies have the following options:
- reduce actual emissions through internal abatement
- trade EUAs in the market by buying from companies with lower abatement costs or selling to companies with higher abatement costs
- purchase international emissions credits generated by CDM and JI projects
CDM and JI
CDM and JI are UN regulated systems for project based emission reductions in countries that ratified the Kyoto Protocol. The CDM allows investors in CO2 abatement projects to accrue tradable emission credits, by financing clean technologies in developing countries. JI projects are similar to CDM projects, but are located in countries with a reduction target under the Kyoto Protocol.
Our portfolio includes projects in China, Brazil, Costa Rica, Peru, Panama, Vietnam and India. We are involved in over 40 projects in wind, biomass, small-scale hydro and energy-efficiency in China alone. We use the carbon credits generated by these projects for compliance of our own power plants and to serve other compliance buyers in the EU.
Contact us if you are interested in a compliance project or would like to trade emissions credits: carbon[at]rwe.com