The New Billion Euro Business

Under the new EU scheme, power stations, refineries and heavy industry across Europe will be given limits on how much carbon dioxide they can emit. In Germany alone, around 1,700 companies will be bound by the scheme, with the aim of reducing their current 505 million tons of carbon dioxide a year to 495 million tons.

Participating companies need to hold sufficient carbon dioxide allowances. Those that produce too much have to pay stiff fines, or buy spare allowances -- either directly from a company that has managed to reduce its emissions, or from middlemen, brokers, or trade platforms that will function like a sort of energy exchange market.

Lucrative market

The Leipzig-based company EEX (European Energy Exchange) has already conducted research in 13 European countries to get an idea of how large the trade in emissions allowances will be in the year ahead.

"On average, companies are predicting that there'll be an EU-wide trade volume of around 150 million tons of carbon dioxide emissions allowances in 2005. That means that we can count on an EU-wide wholesale turnover of between €1.4 to 1.5 billion ($1.89 - 2.03 billion)," said EEX spokesman Stefan Niessen.

There are around half a dozen bourses in Europe that will be competing for their share of this new billion euro business. Among them is the European Climate Exchange in Amsterdam, a cooperative project involving London's International Petroleum Exchange and the Chicago Climate Exchange from the United States. In Germany, EEX is in the starting blocks and hopes to become the German market leader.

"We believe we're in a good position to offer trade for all involved at very low cost. And we're confident that we've already got the major participants in emissions trading on board, so we're well prepared," Niessen said.

Since March 2004, EEX has been publishing prices per ton of carbon dioxide on a daily basis. In December, the price was around €8.50. However, trade isn't yet occurring via exchange markets, rather via independent traders. Despite this, EEX has managed to establish itself as an index -- an advantage over its European competitors.

"Added to this is the fact that Germany is home to the largest population and the largest domestic market in emissions trading," Niessen said. "Around 25 percent of the total emissions allowances in the EU are assigned in Germany."

Emissions trading isn't expected to really get into full swing until the end of February, when the German Registrar for Emissions Trading is up and running at the Federal Environment Ministry. Only then can emissions allowances be reassigned from one company to another. In other EU countries, the trade will be delayed much longer. Nine countries, including Greece, Italy and Poland, have not yet assigned their emissions allowances.

Investing in developing nations

In future, it will also be possible to trade emission credits gained from climate protection projects in developing and newly industrialized countries. In the EU, the Netherlands has been leading the way with the so-called Clean Development Mechanism (CDM). Under the scheme, Dutch energy provider Essent has already built up a wind park in Tejona, Costa Rica. The clean energy generated by the wind turbines can be credited to Essent in the form of trade certificates and then sold.

German firm BASF is also indirectly supporting projects in developing countries, via World Bank-administered funds.

"It doesn't matter where we save the CO2 emissions," said BASF's emissions trading director, Dirk Drechsel. "If you save a ton in China, it's worth just as much as a ton saved in Europe. The basic principle of emissions trading is to seek out the most cost-effective methods of reduction, and to do that on a global basis. It's not taking away from the responsibility to reduce emissions in Europe, rather, it's a way of integrating the whole world in emissions trading."

Projects in developing countries first have to be certified by independent agencies, and registered with the United Nations Framework Convention on Climate Change in Bonn. If current predictions are realized, several billions of euros could flow over the next few years to developing and newly industrialized countries to install solar power stations, modernize gas power plants, and start reforestation programs.