For most participants, complying with the targets and milestones will mean making improvements in energy efficiency at their facilities. The CCLAs however, potentially allow the option for participants to buy in improvements in efficiency from sources outside the firm. This is known as emissions trading.
The rules defining emissions trading in the context of the CCLAs have yet to be defined. The following text describes the latest thinking. These views are by no means fully agreed.
Outline of Emissions Trading
The concept of being able to trade your obligation is straightforward. If you find that it is likely to cost more than you had anticipated meeting your milestone, you can buy surplus reductions in energy consumption from those which have exceeded their milestones. Initially, sellers will most likely be other firms participating in CCLAs, both within the MPMA Climate Change Levy Discount Scheme and other sector agreements, although over time you may be able to buy from a wider variety of sources. Conversely, if you have reduced energy consumption by more than your milestone level, you may wish to consider selling the excess.
It is anticipated that over time a market will develop, with brokers and trading systems to allow easy and cheap transfer of obligations from those who are finding it easier to meet their targets to those with greater difficulty in meeting their targets. Whilst simple conceptually, there are a number of important details. These are described below.
The Tradable Currency Will Be Tonnes of CO2
For a tradable system to work there needs to be a single currency. For those in CCLAs this will be tonnes of CO2. Hence if you have energy based targets and milestones you will need to convert these to tonnes of CO2 before you can buy or sell. The process for doing this is simple and transparent. (See Information Sheet 12).
If your target is in relative terms (i.e. energy consumed or CO2 emitted per tonne of production) and you want to trade, then you will need to convert the difference between your actual performance and your milestone / target into absolute tonnes of CO2.
Scope of Trading
Trading will be allowed between all sectors involved in the CCLAs and:
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UK firms outside the CCLAs but which have accepted a voluntary cap on emissions;
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Emission reductions created from specific projects outside the CCLAs and firms with emission caps;
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International emission reduction projects – the administrative mechanisms for these international tools are currently being developed.
Authorisation of Trades
It is likely that before a trade can be undertaken it will need to be authorised by some form of regulating organisation, such as the UK Emissions Trading Authority or the MPMA Climate Change Levy Discount Scheme itself. Authorisation will aim to ensure that there is a balance of trades between sectors with absolute and relative targets and that total emissions do not increase.
The MPMA Climate Change Levy Discount Scheme will ensure that any trades referred to it will be authorised. The best procedure is to contact the Scheme Administration if you wish to look at trading as a means of meeting your targets or perhaps selling a surplus.
Restrictions on Trading
The CCLAs have been based on the principle of allowing companies maximum flexibility in improving their use of energy, for example through the use of energy efficiency targets measured relative to production rather than absolute targets. However, the government has signalled its intention to encourage business to adopt more absolute caps on carbon dioxide emissions. To do this it is proposing a number of restrictions on the trading and use of relative targets. The following are under consideration:
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The unit sector (i.e. those with targets measured relative to production) will not be allowed to "bank" surplus performance credits. This means that if you have a relative target and you over-comply in one milestone period, you will not be allowed to carry forward this excess for use in the next period. If however, you have an absolute target (either energy or CO2) you will be able to use this surplus against targets in future years.
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The unit sector will not be allowed to buy international credits, such as JI or CDM credits in order to meet the CCLA target. Those with absolute targets (either energy or CO2) will be allowed access to international markets.
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As currently proposed those in the unit sector will face restrictions on the quantity of permits that can be sold to the absolute sector. They are limited to the total number of permits that have been sold from the absolute to the unit sector. It is proposed that by 2007 no permits would be allowed to be sold from the unit sector to the absolute sector.
These are only proposals at this time. They will be clarified in due course.
When Should I Trade?
Your decision on whether or not to trade will mainly depend on:
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the costs you expect to incur in meeting your milestone targets;
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the price of CO2 permits on the market; and
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the time and effort involved in making a trade.
If you expect that the costs of meeting your targets will be high, then it may be worthwhile investigating the option of buying CO2 permits. Alternatively, if you have complied with your target, then you might want to consider selling any surplus. Before making a trade however, you should consider the effect on your ability to meet future milestones. For example, if you buy permits to meet a shortfall in milestone period 1 you will have further to go to meet your milestone in the next period. You may therefore want to buy permits again in this next period. Buying permits at each milestone, might "lock you into" having to acquire permits until 2010.
How Do I Make A Trade?
As mentioned above, contacting the MPMA Scheme Administrator will probably be your first call. The Scheme Administrator will advise you on your options, and if appropriate put you in contact with a broker. The Scheme Administrator will not act as a broker itself, although it may indicate to you any possible buyers and sellers if known.