The Carbon Trading Market Blooms in Central Europe

As global and European policies to limit emissions of greenhouse gases take shape, the emerging carbon market is focusing its attention on Central and Eastern Europe.

Climate change is now recognized as one of the greatest challenges facing humanity in the 21st century, and the world’s governments are moving to develop solutions. The Kyoto Protocol, signed in 1997 and likely to enter into force by the end of this year, commits industrialized countries to reduce their emissions of carbon dioxide and other greenhouse gases by 2012. Despite the withdrawal of the United States from this treaty in 2001, most other members of the OECD are pushing forward with its implementation.

The quest for solutions has focused on the market-based mechanisms established in the Kyoto Protocol to help countries meet their obligations at low cost. Their principle is simple: since climate change is a truly global problem, the precise location of emissions abatement efforts is irrelevant. As long as emissions are reduced somewhere, the benefit to the global atmosphere is the same. Emissions trading allows emitters to choose costeffective solutions, because governments or corporations can sponsor cheap emissions abatement projects outside their immediate vicinity and use the resulting carbon credits to meet climate regulations at home.

Buyers in the international emissions trading market are therefore seeking projects that reduce large quantities of emissions, at low cost, and in countries willing to part with their Kyoto-assigned quotas in exchange for foreign investment. One region in the world offers all these characteristics-Central and Eastern Europe (CEE).

Following a steep decline in emissions due to the death of many inefficient Soviet-era industries since 1990, the nations of CEE will meet their own Kyoto obligations, most with room to spare. However, the carbon intensity of the CEE economies, as measured in tons of carbon emitted per million dollars of GDP, is still many times higher than the European Union average. This signals the availability of low-cost and even cost-saving emissions reduction opportunities awaiting funding through Kyoto’s Joint Implementation (JI) mechanism.

Carbon credit buyers, including the Dutch government’s ERUPT program and the World Bank’s Prototype Carbon Fund, have begun to explore such opportunities. JI investments in this region have funded projects ranging from the construction of wind farms and biomass-fueled district heating systems to power plant renewal and forestry.

For instance, the Hungarian government recently approved the country’s first JI project, a coal-to-biomass fuel switch at the AES Borsod Power Plant. The prospective buyer, ERUPT, would contribute roughly 25% of the project’s capital cost in exchange for the rights to the plant’s future stream of emissions credits.

As interest in buying carbon credits in CEE grows worldwide, many hurdles remain to efficient, low-risk carbon commerce. Project developers are for the most part unaware of the opportunity to sell their carbon credits, governments have been slow to create the necessary regulatory environment, and there are few intermediaries who fully understand both the local market and the complex web of rules and conditions that govern carbon trading transactions. But the motto of this market is learning by doing, and as that process continues carbon commerce will become streamlined within a few years. The question is: how many good projects will remain, and will governments still be inclined to trade foreign investment for emissions quota? Stay tuned.

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