The Market

In ratifying the Kyoto Protocol the EU affirmed its’ will to reduce Co2 emissions by 8% until 2012, the baseline being 1990. The European Union took the necessary measures with directive n°2003-87, founding a European mechanism allowing the free market exchange of CO2 emissions allowances. This market consists of a first trading phase between 2005 and 2007, followed by a second phase between 2008 and 2012, which in turn coincides with the end of the Kyoto Protocol.

The Mechanism to which the Industrial entities are subjected to the European directive.

As an owner of the installations subjected to the obligations related to the European directive, you receive your allowance of CO2 quotas from your country’s governing body. You are obliged to redeem the number of quotas that correspond to the amount of CO2 you have emitted over the year. This redemption takes place on the 30th of April the following year. These quotas, once redeemed, are cancelled.

With this in mind, two possibilities open up to you.

1) Your emissions surpass your allocated amount. You must therefore either approach a broker in order to buy the extra quotas you require on the market, or use a portion of the following year’s allowance to fill the gap.

2) Your allocated amount surpasses your emissions. You must therefore either approach a broker to sell the surplus allowances on the market, or keep the surplus in case you are left short of allowances the year after. You may not however take your phase 1 allowances with you into Phase 2. Therefore all phase 1 surplus allowances must be sold before the end of the first trading phase.

Fixed Penalties for failure to redeem.

Every holder that does not redeem an amount of quotas corresponding to his yearly emissions in a prompt and timely fashion, will be subject to a fixed penalty of €100 per tonne of Carbon Dioxide unredeemed. The holder is then further obliged to buy the amount of unredeemed quotas on the market and then redeem them to the governing body.