Climate Change, Global Warming, Emissions Trading: A Growing Concern

The topics of climate change and global warming are appearing with everincreasing regularity on our TV screens, newspapers and in the general media, as countries and institutions grapple with ways of reducing emissions of Greenhouse Gasses (GHGs). The greenhouse effect is a term that describes how natural gases in the earth's atmosphere reduce the amount of heat escaping from the earth. The more of these gases there are, the more the earth heats up.

GHGs are a natural part of the earth's atmosphere. Increases in the amounts of these gases through human activity (e.g. land clearing and combustion of fossil fuels) cause the global warming phenomenon. There are 6 primary GHGs; Carbon Dioxide (CO2), Methane (CH4), Nitrous Oxide (N2O), Hydrofluorocarbons (HFCs), Perflourocarbons (PFCs) and Sulphur Hexaflouride (SF6).

The UNFCCC / Kyoto Protocol

Recognising the scale of the problem, the world community gathered at the earth summit held in Rio de Janeiro, Brazil, in 1992, and agreed the United Nations Framework Convention on Climate Change (UNFCCC). This is an international treaty, which sets out a framework whereby countries would commit to reduce emissions of GHGs. It includes provisions for updates (called "Protocols") that would set mandatory emission limits. The principal update, the Kyoto Protocol (agreed in 1997), has become much better known than the UNFCCC itself. The objective of the Protocol is to stabilise greenhouse gas concentrations in the atmosphere at acceptable levels by imposing limits on developed nations' emissions levels. The Kyoto Protocol became an international binding agreement in October 2004 when it was ratified by Russia. Notable exceptions include the USA and Australia, who will not be subject to its commitments despite being significant emitters of GHGs.

Ireland ratified the Kyoto Protocol on 31st May 2002. Key figures relating to its commitments are presented below:

Value	Description mtCO2 p.a.
Base Year Emissions 1990	53.97
National Annual Cap	60.99
Current Emissions	67.79
Distance to Target	6.8
Overshoot	11%

Clean Development Mechanism (CDM)
ESBI has been actively tracking compliance developments under the Kyoto Protocol. Of particular interest to ESBI is the Clean Development Mechanism (CDM) which is one of the three flexible mechanisms created to facilitate compliance with Kyoto obligations - the other two being emissions trading and Joint Implementation (JI).

The CDM is a mechanism which allows emission-capped countries or entities to participate in emission reduction projects in developing countries with the resulting emission reduction credits repatriated against the account of the participating entity. For the purposes of understanding the concept, a practical manifestation of this could be ESB/ESB International participating in the carbon component of a wind, biomass or even OCGT to CCGT conversion project in Vietnam for example. If such projects displace more carbon intensive generation like coal, oil or gas, then the resulting emissions reduction can be commoditised in the form of carbon credits

Current State of Play
In January 2005, the 3-year pilot phase of the EU Emissions Trading Scheme (ETS) came into effect. This requires energy intensive users within the EU 25 to curb their GHG emissions. There are some 12,000 installations across Europe, known as the trading sector, that fall under the ETS. Facilities that exceed their emission limits must source carbon credits and/or pay a fine - 40 €/tonne for the pilot phase and 100 €/tonne for the Kyoto phase (2008 to 2012).

EU reports suggest that member states (non-trading sector) will require in excess of 100 million credits per annum from the Kyoto flexible mechanisms for compliance purposes. Estimates indicate that the total allocated budget by member states for credit purchases is in the region of €2.7 billion and rising. This amounts to one thing - Carbon is Big Business.