While a debate exists as to whether climate change has been caused by human beings or by other processes, the fact is that the world’s climate is changing. Many scientists cite pollution as a major contributing factor. In addition, many governments and companies are coming under pressure from citizens and consumers to cut pollution for another reason: there is a growing awareness of the health problems and reduced quality of life suffered by communities situated in areas that are impacted by high levels of pollution.
As a result of this, a number of initiatives have been undertaken by governments and businesses with the aim of cutting pollution. Some of these programs, such as efforts to reduce carbon emissions, have been implemented in such a way to allow the trading of commodities connected to them. In a short time these newly traded environmental commodities have grown to become a popular and lucrative option for commodity brokers trading on the world’s exchanges, and as concern for the environment continues to grow these opportunities can only increase. The commodities traded at present include carbon emissions, white certificates and renewable energy certificates.
There are two approaches to carbon emissions trading: cap and trade, and carbon offsets. The first, cap and trade, works by a ceiling being put on carbon emissions allowable in participating jurisdictions by participating companies. This results in a finite amount of possible carbon emissions, the rights to which can be traded. Companies can profit by obtaining the right to emit then not doing so, selling the emissions certificate on the commodity market. Likewise, companies involved in highly polluting industries can purchase certificates to allow them to legally pollute to a greater extent than they would otherwise be able to. In addition, certificates may be ‘retired’: environmental groups and others can purchase certificates and then retire them, meaning pollution is taken out of the system and the price of remaining certificates rises, ceteris paribus, due to the increased scarcity of supply.
The carbon offsets method of trading allows the inclusion of companies that are not under an emissions cap. Rather, a ceiling for acceptable emissions is established: if a company pollutes at a level under this ceiling it is eligible to create credits, which may be traded as a commodity.
Renewable energy certificates, also known as renewable energy credits or green tags, are a new commodity based on the production of green energy. These certificates, only awarded in the United States at present, are given to companies as proof that electricity in units of one MWh (megawatt hour) or more have been produced by renewable means. Since these certificates can be traded, this means that companies that have not produced renewable energy can claim to have done so by purchasing renewable energy credits.
White certificates, also known as energy savings certificates or energy efficiency credits, work in a similar manner to renewable energy certificates, but dealing with gains in energy efficiency rather than the production of renewable energy.
Exchanges that trade in environmental commodities include the Australian Securities Exchange (ASX), the Chicago Climate Exchange (CCX) in the United States, BM&F Bovespa (BOVESPA) in Brazil, CLIMEX in the Netherlands, the European Energy Exchange (EEX) in Germany, Energy Exchange Austria (EXAA), and Multi Commodity Exchange (MCX) in India.
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