Carbon Emissions

In order for countries and industries within the European Union to fulfill their target emissions output quotas related to the Kyoto Protocol, regulatory agencies have introduced the trading of Greenhouse Gas emissions credits as a mechanism to meet their obligations. Encouraging a private sector marketplace to address climate change mitigates political intervention and ensures that emission reductions are executed at the most efficient cost. The U.S. has begun similar trading within its own operational emissions programs and this is expected to grow tremendously with the U.S. Senate considering legislation to institute a federal trade program.

Currently there are three tradable emissions rights within the European Union: CER, ERU and EUA. Of the three the EUA is the highest volume contract and represents one metric ton of Carbon Dioxide. Private industries and market participants are able to transact the underlying credits as well as derivatives such as options and futures in the OTC market or an exchange with brokers, dealers, and various financial institutions. In the U.S., the Chicago Climate Exchange trades credits as CFI which represent 100 metric tons of Carbon Dioxide, and the Regional Greenhouse Gas Initiative trades allowances in units of one metric ton. Options and futures are available for both units.

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