1. Introduction
The Kyoto Protocol introduced an international emissions trading system. The system has evolved into separate market fragments with different price ranges.
The most established market under the Kyoto Protocol is the Clean Development Mechanism, which rewards projects to reduce emissions in developing countries with project credits which can be sold to entities in developed countries. These credits, CERs, are priced according to a variety of factors including risk, contractual issues and the fundamentals of demand and supply.
The European Union created in 2005 a regional emissions trading scheme, known as the EU ETS. The credits in this scheme represent the highest price for carbon, currently at over €20 (NZ$40) per tonne of carbon dioxide. The EU ETS accepts project credits from certain types of projects. As European companies provide demand for CERs, there is a limited correlation between the two.
Most of the other mechanisms have yet to evolve to a significant extent.
A new financial services industry has emerged to help companies manage the new risk associated with the greenhouse gases for which they are held responsible.
The New Zealand Emissions Trading Group commissioned this report to examine the relationships between the pricing in the two most significant markets, the EU ETS and the CDM, and the options and services available to companies seeking to manage their exposure to price risk in the international markets.
