Buying allowances

Buying allowances

Buying allowances is a way of compensating for the company’s greenhouse gas emissions.


There may be several reasons why a company makes use of allowance trading.


ETS (Emission Trading System) companies ordered to reduce their greenhouse gas emissions may have to buy allowances to make the ordered reduction. ETS companies can also choose buying allowances from a cost-benefit view if a reduction of their own direct emissions is quite simply more expensive than a similar reduction from buying an allowance.


Non-ETS companies wishing to lower their climate impact may regard allowance trading as an additional tool to reach their targets. The company perhaps cannot or does not want to reduce an activity such as business travelling, and then it decides to offset the activity by buying allowances. The case may also be that the climate initiatives launched by a company only feed through in the long term, and so the company chooses to offset the emissions they are unable to reduce in the short term.


Different types of allowances

Overall, three different types exist:


Allowances in the EU are known as EUAs (EU allowances) and are traded in the EU Emission Trading System. The system assigns some 11,000 companies an allowance for CO2 emission, and they are required to document that their emissions are not higher than the allowance, either by making sure to have sufficient allowances or having UN emission units as described below.


The UN emission units come from approved projects under the Kyoto Protocol’s two flexible mechanisms: CDM (Clean Development Mechanism) and JI (Joint Implementation).


VER allowances (verified emission reduction) are outside the EU and UN trading systems. Therefore, VERs have not been subject to the same certification process as the other two types of allowances. Typically, however, a third party has verified that the project has resulted in the alleged CO2 reductions. This third party does not, however, have to be accredited by the EU and UN.


Getting started

If you would like to trade allowances in the EU Emission Trading System, a list of exchanges is available under the menu item:


> EU Emission Trading System.


To trade UN-approved emission units from JI and CDM projects and VER allowances, you need to decide from which type of projects you want to buy allowances. It can be anything within renewable energy, energy efficiency improvements, projects in which new trees are planted, etc. Next, you should identify a number of companies selling allowances.


When buying VERs, you must also find out who the external auditors of the companies are. Prices may vary significantly in this respect. It is important to be aware that the different project types have a signal value and that the price also reflects the quality of the allowance and the control process to which the project has been subjected. For further information about trading in UN emission units and VER allowances, see:


> Standards for UN emission units and VER allowances.

> List of companies trading allowances and an allowance price list.


Important considerations about guarantee and effect

By trading allowances in the EU market and UN-approved emission units, companies are guaranteed that the allowance or emission unit has resulted in the reduction, which is bought. In the EU and UN markets for allowances and emission units, all allowances and emission units have undergone a mandatory certification process enjoying political support in the EU and/or UN. This guarantees that the allowances or emission units have resulted in the reductions which they represent. VER trading does not offer the same guarantee. Hence, it is even more important to examine the market thoroughly and ensure that an external auditor guarantees the allowance or emission unit. The risk of the same allowance or emission unit having been sold more than once constitutes another uncertainty element.


Effect of allowance or emission unit purchases

By buying EU allowances, a company increases the incentive to reduce CO2 emissions within Europe’s borders.


By buying UN-approved emission units from JI and CDM projects, the company supports the reduced emission (compare the project) and supports developments in the area where the project was completed. The approved UN emission units are the ones that countries having committed themselves to CO2 reductions in the Kyoto Protocol can buy to reach their targets. Buying VERs has no influence on the EU allowance trading or the fulfilment of the Kyoto Protocol targets by the countries. However, it can be regarded as a sponsorship of a project, which preferably should have resulted in a reduction in global CO2 emissions.

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