This document discusses carbon trading and future carbon markets. It provides background on carbon trading, including how a carbon tax or cap-and-trade system can internalize the external costs of pollution. It describes the key design components of a cap-and-trade system and provides a short history of the EU Emissions Trading System (EU ETS). It also examines the potential impact of the EU ETS on Serbia's energy sector and outlines some potential developments for future carbon markets.

1. "Environment and Energy: What
Lies Ahead for Serbia”
Carbon Trading and Carbon Future
(Belgrade, 2012/03/02)
Clemens Plöchl
www.energy-changes.com

2. Carbon Trading
Carbon Trading Background
Price = p SMC Reducing external effects of Climate
Change?
PMC´
PMC
Internalization of negative external effects
p2
t = tax on environment
p1
t = tax Tax (Pigou): internalizing external
effects by increasing prices of
SMB
(polluting) products by tax
q2 q1 Quantity = q
Price = p SMC
PMC´ Standard/Price Approach
PMC
Regulatory Body sets goal/target
p2
t = tax (see Q2 !!) based on science
p1
(environment/technological/econo
t = tax
mical) and then either sets tax or
implements Cap and Trade
SMB
Q2 q1 Quantity = q

3. Carbon Trading
Cap and Trade Design Components
• Commodity (currency of the system e.g. 1t CO2e)
• Cap/Target (determining the „optimal“ quantity of pollution)
• Coverage (geographical, upstream – downstream, size of installation, sectors)
• Allocation Rules (grandfathering, benchmarking, auctioning;)
Windfall Profits
Carbon Leakage
• Banking/Borrowing (banking to coming periods, borrow. from coming p.)
• Trading Period
• Monitoring/Verification
• Administrative Bodies

4. Carbon Trading
http://web.mit.edu/12.000/www/m2012/finalwebsite/solution/econ.shtml

5. Carbon Trading
Cap and Trade in the EU Short History
1997 Kyoto Protocol to the UNFCCC – developed countries obtain a cap
on their emissions
1990s first proposals for carbon emission trading
2000 “Green paper” Emission trading
2001 proposal of the Commission
2003 EU Directive on Emission Trading accepted. Free allocation
embraced as allocation mechanism that would minimize harm for
companies involved in the scheme. Companies agree with this
2005-2007 first period: trial and error
2008-2012 second period: creating a non-zero price
2013 – 2020 third period: greater emphasis on harmonized allocation rules,
auctioning and inclusion of aviation;
(2016) mid-term review

6. Carbon Trading
Cap and Trade in the EU
Kyoto
eg. Austria: eg. Slovakia:
AAUs AAUs has 66 Mio t AAUs
has 69 Mio t
needs 88 Mio t needs 49 Mio t
EU ETS
Industry
Energy sector
gets 30 Mio t EUAs EUAs gets 32 Mio t
needs 32 Mio t needs 25 Mio t

7. Carbon Trading
Price History EU ETS
Source: Point Carbon

8. Carbon Trading
Impact of EU ETS on Serbian Energy Sector
• ETS will not affect the competitive
position of current generation
companies in Serbian market.
• ETS costs in power sector will be
passed fully to the consumers or
socialized
• Energy Intensive Industry may
suffer competiveness
• ETS alone will not deliver expected Source: Mid-term Kyoto Protocol Implementation Plan in the Serbian Energy Sector
mitigation results unless
accompanied by other changes in
the sector and outside the sector.

9. Carbon Future
Source: Presentation EU Commission

10. Carbon Future
Potential Development of Future
Carbon Markets
Source: Presentation EU Commission