CO2 emissions trading scheme proposed

London-based energy futures market promotes plan after deputy prime minister's "challenge"

Thousands of European companies could eventually trade carbon dioxide emissions permits if a scheme proposed yesterday by the London-based International Petroleum Exchange (IPE) comes to fruition.

The initiative is the first serious proposal for practical carbon dioxide emissions trading as a tool for reducing greenhouse gas emissions. A UN expert on emissions trading welcomed it today as a "historic landmark".

EU and other governments are currently discussing what role emissions trading and other "flexible instruments" should play in implementing the Kyoto climate change protocol. The proposal put forward by IPE - which is Europe's largest energy futures market - will spur supporters of trading in the run-up to international negotiations due in November.

The IPE is calling for trading to start in the UK, followed by expansion to the rest of Europe. The IPE has urged the UK government to pass legislation to enable a trading scheme to be launched. It's proposal has also been sent to the European Commission.

Trading should begin with the creation of a primary market in which carbon dioxide emissions permits could be traded bilaterally, the IPE says. Once this is established a secondary market in derivatives could develop. Of the six gases controlled by the Kyoto protocol, carbon dioxide is the natural candidate for trading, it says, because it accounts for about 80% of the "global warming potential" of controlled gases and is the most easily monitored and measured.

The IPE has put itself forward to help start a trading scheme and continue to administer it but denies "selfish" motives. The exchange hopes to be in the centre of an eventual European trading scheme, a spokesperson told ENDS Daily, but accepts that countries may want to set up national markets and that other energy markets could also set up schemes.

The stimulus for preparing the plan, the spokesperson said, was a challenge to the London financial markets to develop tradeable permit mechanisms made by UK deputy prime minister John Prescott following the Kyoto negotiations last December.

While the IPE hopes to see a functioning trading scheme in operation in "time periods less than years," emissions trading experts have expressed caution. "It is maybe a little premature," one told ENDS Daily, because "the mechanisms are not in place to allow company to company trading", and "even the wording in the Kyoto protocol is not clear on what should be allowed".

Follow Up:
IPE, tel: +44 171 481 0643.

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