UPM sells the carbon credits produced by its climate protection projects in the world’s carbon markets.
In general, there are two forms of carbon markets, depending on whether climate policy has given legally binding reduction targets to certain public or private market participants, or reduction efforts are made of one’s own accord. In the first case, we encounter mandatory respectively compliance carbon markets, in the second, voluntary carbon markets. In addition, the mandatory market distinguishes between emissions trading by and between sovereign states on the one hand and emissions trading by and between companies on the other.
Kyoto emissions trading refers to the national level. It works according to the principle of „cap and trade“. Following the Kyoto Protocol regulations, each developed country receives a fixed amount of Assigned Amount Units (AAUs). These allow for the emission of a certain volume of GHGs.
If the emissions of a participating state exceed this upper limit (cap), its government needs to decide whether to reduce its emissions below cap by domestic measures (e.g. financial incentives for technological innovations) or to purchase additional emissions from other developed states that comply with their targets.
Free and tradeable carbon credits will be available as soon as a participating state does not fully exploit its emissions budget. The surplus credits can then be sold to generate additional revenue. Thus, a trans-national emissions trading market emerges. Furthermore, participating nations may also obtain carbon credits via the project-based CDM and JI mechanisms und use them to fulfill their emission reduction obligations.
As a consequence, sovereign buyers can also be considered prospective users of CERs from UPM’s project portfolio and are invited to get in touch with us.
The EU Emissions Trading Scheme (EU ETS) is the first trans-national emissions trading system and the largest mandatory carbon market in the world. Therefore, it is also the most important sales market for CERs from UPM’s CDM projects. Primary customers are corporate compliance buyers such as utilities with legally binding reduction obligations.
The EU has established European emissions trading on 1 January 2005 in order to achieve its Kyoto GHG reduction target of decreasing its emissions in the allocation period from 2008 to 2012 by 8 % compared to the levels of 1990. The EU ETS is an economic instrument of EU climate policy, which shall reduce GHG emissions at minimal cost.
Similar to the Kyoto emissions trading system between sovereign states, the EU ETS functions by way of „cap and trade“ but, in contrast to the Kyoto approach, it already seeks to reduce emissions at the level of industrial sites. Companies operating certain installations with mandatory reduction targets are allocated permits by the EU ETS regulatory authorities to emit GHGs. Each EU allowance (EUA) represents one unit of carbon dioxide emitted or 1 tonne of CO2e. The allocations are equal to the desired level of emissions at the end of the allocation period which will generally be lower than the beginning of the period. In the EU ETS, these periods are 2005 to 2007, 2008 to 2012 and 2013 to 2020.
In the EU ETS, installations have their emissions ‘capped’ at a given level and must buy EUAs from the market if they have a deficit and are “short” of allowances and may sell EUAs if they have a surplus and are “long”. At the end of each compliance year, installations must surrender sufficient allowances to demonstrate that they have met their targets (verified by independent auditors). In the case of non-compliance, the installation owners have to pay a fine and, moreover, will have to purchase the number of allowances that they are short of their cap, and surrender these allowances as well. By this means, those companies included in the EU ETS are given an economic incentive to develop and implement climate friendly technologies.
At present, the EU ETS covers and limits the carbon emissions of roundabout 11,000 installations in 30 European countries (27 EU member states plus Liechtenstein, Iceland and Norway) in the sectors of electricity production as well as other energy intensive industries such as cement plants. In 2012 the EU ETS has also been extended to the aviation sector. All together, the system targets more than half of European and approximately 8 % of worldwide GHG emissions. The third trading period (2013-2020) foresees the inclusion of further climate changing substances and emitters into the EU ETS.
Despite some serious design and operation weaknesses of the EU ETS, many states and regions in other parts of the world have used the EU ETS as a prototype and benchmark to establish their own emissions trading markets. The most prominent examples are Australia, Brazil, China, New Zealand, South Korea, but also US federal state California. Even if these markets are not yet satisfactorily interconnected, they form the cornerstones of an emerging carbon market on global scale.
UPM is well prepared to supply both customers from existing and new compliance carbon markets in a most reliable way with the required carbon credits.
For UPM, not only the mandatory carbon market but also the voluntary carbon market is very important.
Whenever it is not possible to avoid certain activities causing emissions, voluntary compensation is a viable option to neutralize or, at least, reduce carbon emissions that have already been released into the atmosphere. The idea is “Do the best and save the rest”. To this end, GHG emitters (e.g. flight passengers) may choose to finance specific emission reduction projects resulting in reduced emissions elsewhere. An example could be co-funding a biogas plant in a developing country. Or the polluter contributes to reforestation and thus helps to create carbon sinks, as growing trees absorb CO2 and usually bind it throughout decades.
In common international parlance, voluntary GHG compensation is usually labelled „voluntary carbon offsetting“. It is not carried through by public and private actors with the aim to achieve a specific legally binding emissions reduction target, as it is for instance required for the signatory states of the Kyoto Protocol, but because they have decided on their own to neutralize or diminish their carbon footprint.
The voluntary carbon market has seen some very dynamic development in North America and has brought about numerous innovative climate protection approaches. This is of course mainly due to the fact that in the USA there has still not been installed a nation-wide compliance market. Lately however, the voluntary market is also growing considerably in Europe, Asia and other regions of the world, since an increasing number of companies and citizens feels responsible for the climate and the environment.
Against this backdrop, more and more institutions, companies and individuals want to contribute actively to climate protection and have their GHG emissions sistematically accounted and compensated. Together with its cooperation partners, UPM offers its voluntary carbon clients not only comprehensive carbon management advisory services but also a wide range of best quality carbon credits.
At present, there is not yet one global market for CO2, but a variety of different emissions trading schemes and emission reductions mechanisms, each with their own categories of carbon credits. All these certificates endorse the reduction of one ton of CO2 equivalent (CO2e), however they are not yet fully compatible and exchangeable.
Depending on whether an emission reduction project is examined and registered by the CDM Executive Board (CDM EB), the JI Supervisory Committee (JISC) or other institutions (e.g. the Verified Carbon Standard Association, VCS) there will be issued Certified Emission Reductions (CERs), Emission Reduction Units (ERUs) or Verified Emission Reductions (VERs). Whereas VERs can only be used for voluntary carbon offsetting, CERs and ERUs may be used in both mandatory and voluntary carbon markets.
UPM’s emissions trading business is mainly based on the fact, that CERs and ERUs are eligible for inclusion, for compliance or trading purposes, in the EU ETS under the legislation contained in the European Linking Directive. This states that CERs and ERUs may be exchanged one-for-one with EUAs subject to various criteria. These carbon credit conversion options do also apply for AAUs from Kyoto-based emissions trading between sovereign states. However, CERs and ERUs generally trade at a discount to EUAs owing to the additional project and regulatory risks.
To ensure a similar quality of emissions reduction projects than that of projects within the CDM and JI framework, several new quality standards have been established in recent years. These seek to comply with the requirements of the Kyoto Protocol for CDM and JI projects but partly even go beyond. The most important are the Gold Standard (GS), which strictly prescribes the compliance with ecologic and socioeconomic sustainability criteria as well as a widest possible participation of local communities in the target areas, and the Verified Carbon Standard (VCS). Further well-known standards are Social Carbon, Climate, Community and Biodiversity Alliance (CCBA) and Carbon Fix.
UPM has the highest quality requirements, therefore, we exclusively generate and trade carbon credits of the leading carbon market standards CDM, Gold Standard and VCS.