Wednesday, 27 February 2008

Emission rights

The main objective with emission rights is obviously to reduce green house gas emissions. This is as we all now an important objective. Also the emissions right are traded as a financial instrument. Except for the fact that skillful traders can make money on this; it has another interesting implication.

The emissions right and their costs gives companies and states incentives to make reductions of emissions where they are most cost efficient, in simpler words the reduction are carried out where they are the cheapest. For example if you can invest in X tons of carbondioxide reduction in China, you will not buy an emission right that costs more.

Currently European companies are making significatn proporttions of their emission reductions in development countries. These kind of investment gives them a type of emission right that is an alternative to regular emission rights.

Currently, a new period of emission right is beginning. In the previous period there was an abundance of emissions rights, meaning the value of them and the incentives for decreasal of emissions was low. For this period the number of emission rights have decreased, forcing a decreasel of emission from companies in countries bound by the Kyoto agreement. However, to make this a powerful tool there are three major players that need to sign the agreement USA, China and India. When these three have joined, the real decrease will come. For USA it looks hopeful if a democrat regime is elected. China and India will probably not sign the agreement anytime soon, my opinion is that they will focus on growth and let the environment come second (or not at all).

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