Emissions Trading: EU ETS, US Voluntary Market & Carbon Credit Projects As Offsets

Abstract

This project examines the Kyoto Protocol-based European Union Emissions Trading Scheme (EU ETS), the current US voluntary carbon market, and the role of carbon credit projects as offsets within emissions trading programs. The objectives of this paper are twofold: (1) to ascertain the risk factors associated with a carbon credit generating renewable energy projects that have the greatest impact on the rate of return for an investor, and (2) to identify factors of trading programs that have been or will be particularly successful, as well as factors that have/will lead to inefficiencies when implemented in the trading market. The methods used include a quantitative analysis of a carbon credit generating project, as well as a qualitative policy discussion of the existing and proposed emissions trading program designs. The quantitative method attempts to analyze the impact of different risk factors (i.e. project timing risk, credit delivery risk, price risk, etc.) on the rate of return of investment in a hypothetical carbon credit project.