The emissions trading market: risks and challenges

24 October 2008

In March 2008, the FSA’s Commodities Group published a report, ‘The emissions trading market: risks and challenges’ as a follow up to its 2007 paper, ‘Growth in commodity investment: risks and challenges for commodity market participants. The report discusses the emissions trading market’s main areas of risk, how to mitigate them, and the role of the FSA in the market, writes Pinsent & Masons.

The emissions trading market has developed as a result of political initiatives, such as the Kyoto Protocol, to combat climate change. It focuses on the trading of carbon dioxide (or carbon dioxide equivalents) and is run on a ‘cap and trade’ basis, which means that each year the government or relevant body of each participating country sets a cap on the amount of CO2 certain energy intensive businesses and industries in that country are allowed to emit that year. It then auctions a number of allowances (1 allowance = one tonne of CO2) to those businesses and industries or it issues them for free. If a business does not use up its share of allowances within the year, it can either keep them for the following year or sell them on the market. If a business exceeds its share of allowances, it has to buy more or pay a fine.

The FSA does not regulate the underlying emissions market. Its responsibilities instead relate to the emissions derivatives market. However, the FSA still has an interest in the underlying market as any risks that spill over into the derivatives market will potentially affect it.

To read the rest of the article, click here.

Pinsent Masons is an international law firm with over 290 partners and more than 1000 lawyers who provide a full range of corporate and commercial services. The firm ranks amongst the top 100 global law firms. With head-quarters in the City of London, Pinsent Masons’ operation spans the UK, Continental Europe, the Middle-East and Asia Pacific. In the UK, the firm also has offices in Birmingham, Leeds, Manchester, Edinburgh, Glasgow and Bristol. Internationally, Pinsent Masons is based in Shanghai, Beijing, Hong Kong, and Dubai. Through the Pinsent Masons Luther Group (PMLG), the firm is allied to independent law firms in Germany, France, Austria, Hungary, Turkey and the Baltic States. For more information go to www.pinsentmasons.com.

Tags: carbon, commodities, emissions, FSA, trading

This story was published on Friday, October 24th, 2008 at 9:33 am and is filed under knowledge. You can follow any responses to article entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

Leave a Reply