Commodity Derivatives: Markets and Applications

10

Emissions Trading

For most of the Earth’s history the planet has been either very cold, by our standards or very hot. . . Ice-core studies show that in some places dramatic changes happened remarkably swiftly: temperatures rose by as much as 20°C in a decade.

Quote from The Economist ¹

SYNOPSIS The purpose of this chapter is to outline the chief aspects of the climate change debate and to document the features of the emissions trading markets.

 

Emission trading has linkages to previous chapters on power although it can be read on a standalone basis. Much has been written about climate change, some of it very technical, some of it highly politicised. The aim of the chapter, however, is to present the principle issues in a non-technical manner in order to provide a context for the description of emissions trading.

There is a short description on the science of climate change in the first section, which includes a description of the carbon cycle. From this the possible consequences of global warming are presented and, to provide balance, some of the arguments against climate change are outlined.

Climate change will be forever associated with the Kyoto Protocol but the lead up to this point and subsequent developments are vital to the understanding of how the market works. A description of the Kyoto mechanisms is presented, which develops into a discussion of which factors influence the price of emissions.

Europe is home to the largest emissions market in the world, and so the ...