The Secondary Market for Emissions Trading: Balancing Market Design and Market Based Transaction Norms

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Abstract
The EU Emission Trading Scheme (EU ETS) is a leading example of how to strike a balance between the necessity for a sufficiently certain market design to underpin its growth and the critically important need to allow private sector mechanisms to emerge and evolve. Section 1 of this chapter considers the design elements of the EU ETS that provide market participants with the certainty necessary to underpin their participation, with a particular emphasis on the reforms to be implemented from 2013. Section 2 then considers the market mechanisms and norms that have been developed or applied to provide those participants with the confidence that key risks are addressed. Section 3 looks at some of the issues that arise in the context of the interplay between secondary markets such as the EU ETS and the primary markets where emission reduction credits under the flexible mechanisms of the Kyoto Protocol are generated. Examples of new types of transactions will be used to demonstrate the innovation that such interaction drives.

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