Financial consequences of the European Trading System (ETS)

Will the ETS start in 2005? During the initial trading period (2005-2007) CO2 emission rights will be granted each year to large companies in various sectors via the European Union Allowance (EUA). Each credit corresponds to one tonne of CO2.
From 2005 to 2007, businesses must compensate for their actual emissions by depositing an equivalent number of credits. Companies that emit more CO2 than the number of credits they have exceed their quota and will be fined 40 euros for each credit in excess. So it is important for large businesses to reduce emissions and hence avoid fines.
In some sectors, this is not easy. In others, it is easy to effect considerable reductions by technical means. The EU wants to avoid a situation where «difficult cases» are faced with very costly solutions (and end up moving to other countries). It also wants to ensure that businesses which can easily reduce their emissions do not sit back and do nothing.
With the trading system, businesses can sell their rights to others. Companies that have difficulty reducing their emissions can avoid fines by buying rights from other companies. And if a company can reduce its emissions with a minimal amount of investment, it will do so willingly. It can then do without some of its quota and earn money by selling the excess credits.
Each year between 2005 and 2007, governments will measure the emissions of the businesses concerned. They will then have until 30 April each year to deposit the number of credits required with the authority. When a company does not supply the number of credits required, it will be fined 40 euros per tonne in excess of the quota. This is not cheap and paying the fine does not relieve the company of the requirement to supply the necessary credits. The following year, the authority will ask for the missing credits and if it still cannot meet the requirement another fine will be levied. Not supplying the credits can end up costing a lot of money. Evidently, many businesses will set out to look for those selling emission rights. And the greater the demand, the higher the price. Already the price has reached between 8 and 14 euros per credit.
What does such a credit look like? It's a non-material good, which is recorded centrally in each country. Just as you can hold shares in a bank account, each company will be able to hold and deal in rights in the national registers of EU countries.
Credits have limited validity. With a few exceptions, they expire on 30 April 2008. So businesses must plan well in advance (that is now!) how many credits they will need. For buying and selling rights, companies can contact each other directly, with all the attendant risks. Banks will also get involved in trading rights; buying or selling via a bank will be considerably less risky.
Source: European Environmental Press EEP, 23 December 2004