Global climate change could have a very profound impact on our lives. Activities like burning fuels in the transport sector and in power generators release greenhouse gases and thereby cause a rise in worldwide temperature, the so called “greenhouse effect”. The greenhouse effect occurs when greenhouse gases accumulate in the atmosphere acting like a blanket and trapping heat from the sun that would otherwise escape back into outer space.

The UK, like all member states of the European Community (EC), is a party to the UN Convention on Climate Change (UNFCCC) which entered into force in 1994, and a member to the 1997 Kyoto Protocol that outlines the legally binding commitments and sketches the basic rules to be accomplished by each member.

The ultimate objective of the UNFCCC, as set out in its Article 2, is to “achieve stabilisation of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system. Such a level should be achieved within a time frame sufficient to allow ecosystems to adapt naturally to climate change, to ensure that food production is not threatened and to enable economic development to proceed in a sustainable manner.”

The UN Convention concerns all greenhouse gases which are not covered by the 1987 Montreal Protocol to the UN Convention on Protecting the Ozone Layer. The Kyoto Protocol thus focuses on carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydro fluorocarbons (HFC5), per fluorocarbons (PFC5) and sulphur hexafluoride (SF6).

The Protocol commits all signatories to reducing emissions of greenhouse gases by specific amounts by the period 2008-2012. The European Union (EU) as a whole intends to reduce greenhouse gas emissions by 8% in 2008-2012 as compared to 1990 levels. This target was shared out between the member states in compliance with the “burden sharing agreement” set out in Article 4. The UK’s commitment under the Kyoto Protocol is to reduce its greenhouse gas emissions by 12.5% below 1990 levels. In addition to its international commitments, the UK has a domestic goal to reduce carbon dioxide emissions in 2010 by 20% compared to 1990.

Joint Implementation (JI) and Clean Development Mechanism (CDM), together with international Emissions Trading (ET), are innovative instruments established by the Convention. These instruments enable parties to assist their Kyoto targets by taking advantage of possibilities to reduce greenhouse gas emissions in other countries at lower costs than at home. The rational is that, from a global point of view, greenhouse gas emissions contribute to climate change regardless of where they occur, and climate change can be addressed by reductions in greenhouse gas emissions no matter where they take place. This explains why emissions trading is a useful tool in achieving the targets.

The idea of emissions trading, provided in Article 17 of the Kyoto Protocol, is to provide incentives to reduce emissions and to encourage the use of environmentally friendly technologies. It is a market-based policy instrument different from traditional regulatory policies such as taxation. Using a ‘cap and trade’ mechanism, participants take on emissions reduction targets requiring them to reduce their emissions to a clear limit. Each participant is given emission allowances equalling the cap. Because it does not matter geographically where emissions reductions take place within the scheme, participants in the scheme have three choices: They can meet their cap by reducing their own emissions, reduce their emissions below their cap and sell or bank the excess allowances, or let their emissions remain above their cap and buy allowances from other participants. The result will be that the total quantity of emissions across the scheme will have been reduced to the sum of the capped level.

The most successful example of emissions trading is in the United States (US). The experience from the US acid rain programme has shown that a ‘cap and trade’ emissions trading scheme sets up competition between companies to develop the most cost-effective pollution reduction system and also created competition among manufacturers of pollution reducing devices. A competitive marketplace stimulates innovation, rewards efficiency, and speeds the pace of development.

Governments across the world have now been working on implementing their commitments under the UN Convention and the Kyoto Protocol and on developing a framework for a domestic emissions trading scheme. The Convention requires parties to submit their findings as so called National Communications to the Convention’s Conference.

Thus, Germany has presented some elements of a design framework and a pilot project on emissions trading has been initiated in the Hessian federal state of Germany. Denmark too is running an emissions trading scheme to get prepared for the start of the Kyoto Protocol in 2008.

The emissions trading scheme launched by the UK, set up as UK Emissions Trading Scheme, is the world’s first economy-wide greenhouse gas emissions trading scheme. It was launched in August 2001 and is now running in a pilot project open to companies in the energy, manufacturing and transport industry. The 2003 report on the in-depth review of the Third National Communication of the UK and Northern Ireland stated that the UK has put in place a diverse and innovative spectrum of measures to promote capacity-building on climate change, and that the communication’s projections indicate that the UK is likely to meet its Kyoto target.

34 organisations, having successfully bid at an auction that took place in March 2002 to legally bind themselves and take on emission reduction targets until 2006, are voluntarily participating in this scheme, being supported by the UK Government with 215 millions between 2002 and 2006. Further 6,000 companies have entered into Climate Change Agreements with the Government in order to achieve certain emission targets. Successful candidates of the scheme will receive an 80% discount from the Climate Change Levy, a tax instrument that applies to energy consumption in industry, commerce and the public non-residential sector. However, certain sectors such as renewable sources of electricity are exempt from this levy.

While the UK Emissions Trading Scheme has been launched as a voluntary scheme in order to prepare for the 2008 Kyoto commitment, the EU has agreed upon a mandatory emissions trading scheme to prepare for the international trading under the Kyoto Protocol. The EU believes that the Community will greatly benefit from this experience of greenhouse gas emissions trading. The scheme, which is set out in the EU Emissions Trading Directive 2000/60/EC, is due to start on 1 st January 2005 and will last until the end of 2007. Subsequent periods under the Kyoto Protocol commitment will then last five years. In anticipation of the EU’s first mandatory trading phase, operators must ensure that they acquire permits for their installations by 31 st March 2004!

The EU scheme being implemented by the UK will cover around 45% of UK greenhouse gas emissions. Participation of British installations will be mandatory for power generators, combustion plants, and certain entities in the metal and mineral industries as well as in the paper sector.

Companies, favouring emissions trading in preference to taxes or command and control regulations, have been operating their own pilot emissions trading in the meantime. BP Amoco, for instance, has been gathering experience with 12 former BP Business Units since September 1998. Shell International launched the Shell Tradable Emissions Permits System (STEPS). The BG Group supports the UK Emission Trading Scheme having provided extensive resources towards its development.

Emissions trading will force companies to find out what options they have to reduce their gas emissions. When a market will have established, they will compare with other entities, asking why some of them are finding lower cost options. Integrating new technologies to business processes to help reduce emissions and therefore costs, will be a welcome result of the scheme.

There are still questions which will have to be solved until the start of the global-wide transformation of the Kyoto Protocol. Unresolved questions remain, with regard to international harmonization of national emissions trading schemes. The US, for instance, potentially a very large net purchaser, has not ratified the Kyoto Protocol. British companies with branches in non-Kyoto countries that are nevertheless possible to having their own emissions reduction schemes such as high environmental taxes, should get legal advice on potential implications.

Summa sum arum, greenhouse gas emissions trading and the legislative provisions which accompany the domestic implementation of the Kyoto Protocol’s commitments should be of interest to energy, natural resources and other industry sectors, which are affected by the climate change programme. There are potential risks to profitability, but there are also potential business opportunities. BG, for instance, stated that it would seek to use the Clean Development Mechanism to facilitate emission saving investments in developing countries where the group operates. Thus, while greenhouse gas emissions will be reduced global-wide, the Climate Change Programme, at the same time, opens many lucrative investment opportunities attractive for both entities in developing and non-developing countries.

Besides attractive investment, project financing and further opportunities introduced by the Convention’s mechanisms, the trading with emissions will open many new markets. Emission brokers, companies offering sustainable energy technology and policy, consultancy and law firms are not the only ones profiting from the global Climate Change Programme. Time Magazine, in 1998, called the global environment “the greatest business opportunity of the 21 st century”.