Emissions Trading is a general term used to describe market-based mechanisms in which participants trade the right to emit.
The largest Emissions Trading Scheme in the world is the EU Emissions Trading Scheme (EU ETS), one of the EU’s key policy tools for meeting emissions reduction targets adopted under the Kyoto Protocol. The EU ETS regulates the amount of CO2 11,500 installations in 27 EU member states can emit. It covers sectors as different as electricity generators and paper manufacturers.
Cap and trade scheme
The EU ETS operates as a cap and trade scheme in which member states set the overall cap on total emissions by determining how many EU Allowances (EUAs) they will issue. EUAs are then either sold to participants or allocated for free. Each EUA allows an installation to emit 1 tonne of CO2. These are then traded as installations buy and sell allowances in line with what they emit. The trading market sets the price based on its view of the supply and demand of allowances and the cost of reducing emissions to meet the cap. The system is designed to give certainty that total emissions are capped below a particular level. It also encourages the necessary reductions to occur at the installations within the scheme where it is cheapest to reduce emissions.
Centrica’s Commitment
Centrica owns eleven installations that are covered by the scheme. These include our power stations, gas production facilities and the gas storage facilities operated by Centrica Storage. One of the major effects of the EU ETS for Centrica and our competitors has been the inclusion of the cost of CO2 allowances into the wholesale power price. Carbon now impacts our generation, purchasing and trading activities both operationally and also with respect to future investments we may make in generating capacity. New, cleaner generation technology can often be more expensive than conventional fossil fuel plants. This additional cost can be offset by lower associated carbon costs, provided the scheme is designed correctly.
