Trading in carbon dioxide instruments such as the European Union’s EU Emission Allowance and Certified Emission Reductions has grown significantly
Trading in carbon dioxide instruments such as the European Union’s EU Emission Allowance and Certified Emission Reductions has grown significantly over the past five years and prompted the development of OTC and exchange-traded carbon derivative products, according to a new study published by international derivatives exchange Eurex.
The report, CO2 – The New Asset Class for Institutional Investors, argues that exchange-traded carbon derivative products offer significant benefit for institutional investors and are set to become an important new asset class.
The authors say EUAs and CERs have little or no correlation to the traditional asset classes of bonds and equities, which offers increased portfolio diversification and potentially increased returns.
The European Union Emission Trading Scheme was launched in January 2005 as part of the EU’s response to Kyoto Protocol on climate change. Over the past two and a half years the scheme has grown rapidly to a trading volume of 1.6 billion tonnes of carbon dioxide, with an approximate market value of EUR28bn.
The report says European scheme is regarded internationally as the benchmark for a standardised emissions trading system for a global emissions market totalling 2.7 billion tonnes of carbon dioxide.
Trading volume and frequency within the EU system is expected to increase significantly this year when member states can auction up to 10 percent of their carbon emission allowances credits in the second phase of the ‘cap and trade’ scheme which runs until 2012. This scheme enables polluters to buy credits to offset emissions beyond the limits established by EU regulators, while institutions that do not require all their allotted credits can sell their surplus.
The other main type of carbon instrument, Certified Emission Reductions, are tradable instruments generated from clean development mechanism projects and the report says, are emerging as the international currency in the global carbon market. Having reached a secondary market trading volume of 350 million tonnes of carbon dioxide in 2007, the market is forecast to reach 2.6 billion tonnes, worth EUR41bn, by 2012.