Sidebar: Cap and Trade
nyse magazine asked BlueNext officials to describe the elements of a successful cap-and-trade system, based on their experiences under the European system.
Element One: Know Your Numbers.
“It’s very important to know the numbers for a cap-and-trade mechanism to work properly. If you would like to fix a cap, you need to have very precise information regarding the effective emissions of each factory. Because only when you know the amount of these emissions can you cap them and reduce them under a schedule. For example, currently in the U.S., the U.S. Environmental Protection Agency is computing all the data regarding the level of emissions of all large emitters, and that will be very useful in establishing a base and then setting the reduction ambition of any cap-and-trade scheme. It’s crucial to know the emissions figures, and then fix the cap and the reduction amount with a schedule.”
Element Two: Keep It Flexible.
“A cap-and-trade mechanism needs to have some flexibility built in. For example, it’s a good idea to offer international offsets. In Europe, given the authorization of CERs, companies can compensate up to 15 percent of their commitment by buying international offsets. To avoid any huge volatility, you need to have opportunity to buy on the market or to invest in other countries. Corporates need have sufficient choices to decrease their level of emissions at the lowest possible cost.”
Element Three: Establish Credibility and Transparency in the Market.
“It’s also very important to bring credibility and transparency to the market. Exchanges provide reliable price discovery and transparency. So if you would like to have credibility and transparency, you really need an exchange-based mechanism. The key role of BlueNext is price discovery, enabling market participants to see the price of carbon. Access to this pricing data plays an important role not only in the secondary markets for financing primary market projects but also for financiers to have some assurance that their investments in carbon projects have a future value above and beyond whatever revenue the project generates, because of what it can sell through carbon credits.
“In stable, liquid markets, prices are generally less volatile and spreads are tighter. The volatility of the price of carbon is very similar to that of other commodities such as oil, natural gas and coal. The carbon markets are very young, but the maturity and the professionalism of the major market participants are quite good.”
Element Four: Permit the Banking of Credit From Phase to Phase.
“Another key element is the banking of credit. When you have credit during a phase, like we have from 2008 to 2012 in Europe today, it’s very important to have the capacity to roll these credits to the next phase. If you have credits on your account at the end of 2012, they will not be lost; they will banked from Phase I to Phase II. Earlier, there had been no guarantee that the credits bought in Phase I would have be valid in Phase II, so the market value of the credits dropped to zero, and so did the price of carbon.”
Responses based on interviews with BlueNext’s Serge Harry, Philippe Chauvancy and David Rapin
