The cost of participating in the greenhouse gas emission permit market

Cap and trade systems for emission permits have become an important tool for a cost efficient reduction of greenhouse gas emissions both in Europe and in several regions around the world, see the Cesifo Dice report 4/2012 . The current regional systems have introduced active markets for emission permits reducing the overall cost of emission reduction compliance. A greenhouse gas emission permit is a tradable right to emit one metric tonne CO₂-equivalents within a certain time frame, e.g. throughout 2008–2012 for the second Kyoto agreement period and the EU/ETS second period.

Firms and governments must acquire greenhouse gas emission permits in order to comply with international regulations and treaties. There is a growing national interest not only in the physical amounts, but also in the economics of the emission trading systems. This report explores some approaches to providing estimates of the cost of compliance for the national economies, governments and the business sector.

First, we provide an overview of the physical accounting of emission permits. Then we briefly describe Norwegian government and firm accounting practices, before turning to possible valuation approaches. Finally, we estimate the cost of compliance with the EU ETS regulation for firms and the Kyoto agreement for the Norwegian government and Norway as a nation.

For firms, we present an estimation procedure that concurs with several firms’ accounting practice, the presumption being that permits are bought monthly at a December future contract: The accumulated cost to Norwegian firms for 2008–2012 is estimated to € 803 million.

The cost to the Norwegian government in order to comply with the restrictive national commitments for 2008–2012, is estimated at € 155 million. On the other hand, the government has sold EU ETS emission permits for € 346 million. The total cost to Norway comprises both the business cost and the government cost, and nets out at € 612 million for 2008–2012