What are emission rights? This is how companies are encouraged to reduce CO2

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The general principle is that who pollutes, pays. But it is not always possible to determine who is the cause of a certain contamination. An alternative is the emissions trading.

It is a market instrument, through which an economic incentive is created that seeks a benefit for the environment: that a group of factories collectively reduce emissions of polluting gases into the atmosphere.

What is CO2 emissions trading

Emissions trading uses market prices, rather than taxes, to try to change the way companies behave with the environment environment that surrounds them, by offering incentives to those that reduce their polluting production and penalizing those that do not.

To this end, the European Union launched on January 1, 2005 the most ambitious CO2 market to date (Directive 2003/87 / EC, transposed into the Spanish legal system by Law 1/2005).

Covers, in the 27 Member States, CO2 emissions from thermal power plants, cogeneration, other combustion facilities with a thermal power greater than 20 MW (boilers, engines, compressors…), refineries, coke plants, iron and steel, cement, ceramics, glass and paper mills.

The EU emissions trading scheme affects more than 10,000 production facilities globally; and more than 2 billion tons of CO2, which represents around 45% of total greenhouse gas emissions in the European Union.

The basic elements of an emissions trading scheme are seven:

  1. Issuance authorization. Permission granted to a factory to emit gases into the atmosphere. It cannot be bought or sold.
  2. The right of emission. A factory can release a certain amount of gases into the atmosphere. It is transferable, that is, it can be bought and sold.
  3. Emissions ceiling. It is the total volume of emission rights that are put into circulation. It determines the environmental objective, and gives economic value to the allowance by creating scarcity.
  4. Assignment of rights. Mechanism by which emission rights are distributed among the affected facilities.
  5. Compliance. The facilities must deliver an amount of emission rights equivalent to the actual emissions produced. No individual emission limits are established, but there is a global one and the obligation to cover emissions with rights.
  6. Emissions monitoring. Factories must keep track of their emissions, so that the amount of allowances they must deliver can be set.
  7. Registration of rights. It keeps the accounts of the emission rights in circulation: how many there are and to whom it belongs.

An incentive to be more efficient

The system is apparently simple: factories, which are the main polluters, receive emission rights, or they have to buy them.

They trade them with other issuers on the market, giving them an incentive to find more efficient ways to operate and leaving them spare permits that they can sell to other less efficient producers.

As the most efficient producers can transfer the savings in the form of lower prices, consumers will be more likely to buy from them, adding an additional incentive for companies to be more environmentally friendly.

Reduce emissions or buy emission rights?
If the Government sells emission permits (per ton of CO2) for € 100, a company will have to pay this additional cost for each ton of CO2 it releases into the atmosphere. But you can also choose to save € 100 by reducing your emissions by one ton.

The logic of the income statement of a company (for something to the losses are called red numbers, so that they attract powerfully attention) makes the company try not to pay the extra € 100 up front.

However, this may lead to the company to waste future earnings By ignoring potential opportunities to save or earn money. And this is what happened to European manufacturers at the beginning of this decade.

In fact, a study shows that around 30% of the companies did not consider the permits as financial assets, and the majority were not listed on the subsidies market of the European Union. That is to say, they did not take advantage of the opportunity to trade in emissions rights.

The power of the consumer

But all this, does it affect the final consumer? Well, the truth is that a lot.

Although the consumer does not pay any direct costs under the emissions permitting system, it is affected by the indirect impact through increases in the prices of goods and the energy it consumes and that they can be supplied by inefficient providers.

If a power plant has to buy additional permits to offset its pollution, that extra cost is likely to be passed on to the power companies that buy its power, who in turn pass it on in the form of higher electricity bills.

In fact, it is estimated that between 20 and 100% of the permit costs emissions were passed on by the companies to electricity consumers.

Are there alternatives? If the consumer sees how their electricity bills increase due to the charges of inefficient and more polluting suppliers, they can choose to change their energy supplier, or even their own alternatives so as not to depend on the power generation companies themselves.

Households can also use their power as consumers to choose companies that use renewable energy, that does not produce emissions. In fact, in the UK, half of the 10 cheapest tariffs use green energy sources. These suppliers, by definition, will not be affected by emissions trading.

All this makes the power company is interested in being as efficient as possible, which will mean that it tries to reduce its emissions into the atmosphere as much as possible.

Or get the most out of emissions trading.

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