The carbon emission market has developed following the recognition of the detrimental impact of climate change, and the acceptance of human industrial and commercial activity as the major cause of global warming.
It is recognised as the best way to mitigate the social and economic costs of emitting green house gases.
Under the terms of The Kyoto Protocol, which was negotiated in 1997 as an amendment to the UN Framework Convention On Climate Change ( UNFCCC), nearly 200 countries worldwide committed themselves to reduce emissions of greenhouse gases. With the EU signing up as a single entity, it has made a commitment to make an overall 8% reduction on 1990 carbon emissions levels during the second phase of the Kyoto Protocol commitment period now in 2012.
There are an abundance of carbon credits available and their price is relatively low. However, with the second phase of the Kyoto Protocol commitment period now in full force and a reduced amount of credits available, prices are set to rise significantly. Furthermore, when the USA eventually commits itself to a cap and trade federal system, with the general consensus being this will take place within the next 36 months, a further positive market-price driver for all types of carbon credits on the main international trading platforms will almost certainly be created.
The European Climate Exchange (ECX) is currently the world's largest emissions market with London leading the way in terms of market share and volume. The ECX currently trades two types of carbon credits - EU allowances (EUAs) and Certified Emission Reduction (CERs). Trading on ECX began in April 2005, when futures contracts were launched on European carbon dioxide emissions which are known as EU Allowances, with options on EUAs following in October 2006. Futures and Options on CERs were introduced in 2008, further cementing ECX's position as the industry benchmark for carbon trading globally. In 2009, two new spot – like contracts were added, the EUA and the CER Daily Futures contracts.
Credits from these transactions are referred to as Verified Emission Reductions (VERs).
Clients who enter VER transactions have the added advantage of developing valuable transactional experience in the carbon marketplace prior to the formation of any formalised regulatory regimes in the US and may potentially gain when early credits are recognised under future federal carbon legislation.