Hsbc Case - Carbon Trading

from HSBC

Carbon Trading

Let us first try to understand some of the terms related with Carbon trading:

1) Emissions Trading:

Market based approach to control pollution by giving economic incentives to reduce the emissions.

2) Carbon Trading:

A form of emissions trading that targets carbon dioxide. It currently forms the bulk of emissions trading.

3) EU ETS : European Union Emission Trading System

An EU wide 'cap and trade' system for trading carbon allowances, to meet targets set by Kyoto protocol.

4) Cap and Trade system:

The Cap: A central authority sets a cap on the amount of a pollutant that can be emitted by firms in the form of Emission permits (or Carbon Credits). Firms are required to hold emission permits equivalent to their emissions. The permits set a cap on the amount of emissions of the firm.

(Carbon credit units are expressed in terms of 1 metric ton of CO2 equivalent emission)

The Trade: The companies, who emit less than their allowance, can sell their extra permits to companies that are not able to make reductions. This creates a system that guarantees a set level of overall reductions. In effect, the buyer is paying a charge for polluting, while the seller is being rewarded for having reduced emissions.

5) Kyoto Protocol:

Under the Protocol, members of the convention with industrialized economies (Annex I members) receive specific reduction targets. The Protocol commits Annex I members to cut their emissions 5.2% percent below 1990 levels between 2008 and 2012.

6) Assigned Amount Unit :

Units allocated to National Governments of (Annex 1 Party) during each commitment period of the Kyoto Protocol. Each country is permitted to emit greenhouse gases equivalent to its Assigned Amount.

7) Clean Development Mechanism :

CDM allows Annex I industrialized countries to pay for emissions reduction projects in poorer countries that do not have emissions targets. By funding projects, Annex I countries earn certified emissions reduction (CER) credits to add to their own allowances.

8) Joint Implementation:

JI allows Annex I parties to fund projects in other Annex I countries.

Currently there are six exchanges trading in carbon allowances: the Chicago Climate Exchange, European Climate Exchange, NASDAQ OMX Commodities Europe, PowerNext, Commodity Exchange