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Alternative Market Briefing

Carbon and emissions trading in Europe, Part One - How the Europeans do it

Wednesday, June 24, 2009

Benedicte Gravrand, Opalesque London:

As public awareness of climate change issues is growing and market-based solutions are increasingly seen as the key to delivering pragmatic change, the trading business is booming.

The London-based European Climate Exchange (ECX) is seeing increased interest in emissions trading from the investment management and hedge fund community. Indeed, volumes on ECX are experiencing tremendous growth.

ECX, a marketplace for trading carbon dioxide (CO2) emissions in Europe and internationally, currently trades two types of carbon credits: European Union emissions allowances (EUAs), which are created and allocated; and Kyoto Certified Emission Reductions (CERs - aka 'carbon credits'), which are earned from actual emissions reduction projects and which are issued by the UN.

Trading on ECX began in April 2005 with EUAs, and futures and options on CERs were introduced in 2008.

Capping and trading in pollutants Emissions trading, also known as cap-and-trade, is used to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants, whereas a central authority sets a limit, or 'cap,' on the amount of a pollutant that can be emitted and issues emission permits to companies. Companies that need to increase their emission allowance must buy credits from those whi......................

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