Environmental

Since the UN Convention on Climate Change in Kyoto in 1997 the environmental markets, especially in Europe, have grown dramatically. Green or Renewable Energy Certificates (Recs) and EUAs or CO2 allowances to name but two of these markets have been at the forefront of this growth.

The Italian Green Certificates scheme, for example, has been implemented to provide incentives in electricity
generation from renewables. Since April 2002 all those companies injecting power into the Italian Grid (i.e. importers and power producers) are required to inject a minimum percentage as renewable power All electricity generated by renewable energy plants, which became operational after the 1st April 1999 was not only considered as being renewable energy but would also receive Green Certificates, which could then be sold onto producers or importers, which did not have renewable power and could therefore not meet the minimum percentage required. By buying these Green Certificates from the renewables power producers, these market participants converted their nonrenewable power into renewable power.

Roughly around the same time as Italy began drawing up its plans for Green Certificates, the EU began drawing up its plan for the world's first emissions cap and trade scheme (ETS). The emissions reduction target, as agreed in the Kyoto Protocol for the EU for the second phase of the EU ETS (2008-2012) was 8% compared to the 1990 emitted levels.

The EU ETS sets a maximum limit (cap) to emissions from greenhouse gas-producing industrial installations. This limit is set through the allocation of a given number of emission allowances to each installation. Each allowance (European Unit Allowance - EUA) gives the right to emit one ton of CO2 equivalent into the atmosphere and are allocated to installations covered by the ETS Directive through National Allocation Plans.

Every year, operators of these installations are required to surrender a number of allowances corresponding to their actual emissions. Any surplus of allowances (positive difference between allowances allocated at the start of the year and actual emissions into the atmosphere) may be retained to be carried over to the following year or sold/traded in the market, whereas any deficit must be covered through the purchase of allowances.

Operators not surrendering sufficient allowances to cover their emissions during the year are penalised €100 pmt for each missing EUA. Payment of the penalty does not relieve the operator of the obligation to surrender an amount of allowances equal to its excess emissions.