Under the IPE proposal, companies will have to hold permits equal to the value of their emissions. If they need more, they will buy or lease them from other companies. The number of permits in circulation will be controlled by government and they will be issued annually. Reduction of emission levels is achieved by gradually reducing the total number of permits.
IPE proposes a primary and a secondary market. In the primary bilateral market, companies may buy and sell permits directly with each other or through a broker. The secondary market will allow contracts equivalent to permits to be traded through an exchange. But the contracts traded will be valid for only one month, giving participants more flexibility. The monthly permits can be sold for up to three years in advance, giving a clear signal of the future market price for emission permits. According to IPE, this allows companies to make investment decisions on whether to buy or sell CO2 permits or to take other action to reduce emissions including investing in energy conservation or in renewables.
IPE expects to be involved in both markets. It hopes to play a role in administering permit allocations and transfers, collecting emission measurements from participating companies and co-ordinating audits, reconciling emissions and permits, and initiating sanctions of companies who exceed permitted emissions levels. As soon as the primary market is established, IPE plans to launch a CO2 emissions contract to trade emissions futures on its exchange alongside its other commodities.
New laws needed
The market, initially in the UK, should be phased in, starting with the largest CO2 emitters. More than 150 companies may need to reduce their emissions, believes the IPE. These account for more than half the UK's CO2 emissions. Once the operational problems are ironed out, the market could be expanded to other European countries.
Work on the proposal began following December's Kyoto Climate Change conference when Deputy Prime Minister John Prescott suggested the City of London could take an initiative on emissions trading. Indeed, IPE plans will need government backing since new laws are required to pave the way for a CO2 permits trading.