Public Policy: Using Market-Based Approaches - Department for ...

only 242 in the second year. The difference in volumes of trades appears to have
occurred because Agreement Participants had to report on their emissions every
two years, and hence were less active in the market in the intervening period.
During these two years direct participants were much more consistent and
active than agreement participants, with the latter acting more as buyers than
sellers. Overall, direct participants were the source of most of the allowances
supplied, but because of their large numbers, agreement participants were able
to provide additional liquidity to the market by engaging in smaller trades.
Price developments, especially at the beginning of the scheme, suggest the
presence of low liquidity. Between August and September 2002, the price of
allowances increased from under £8 per tonne to more than £12 per tonne,
which represents a price increase of over 50 per cent. Such a price increase is
likely to be due to the relatively short supply of allowances available in the
market, as a consequence of difficulties with the verification process, which in
turn delayed the availability of allowances.
By the end of 2002, the price of allowances had dropped to around £3 per tonne,
and settled at around £2 per tonne during the following months. Although the
reasons behind this price development are less clear, NERA suggests that ‘the
price movements in the early days of the Scheme may have been affected more
by low liquidity and inexperience than by underlying demand’. 167
The operational infrastructure of the UK-ETS
Section 11 – Emissions Trading
Anyone wanting to hold, buy or sell allowances or credits needs to have an
account in the registry. The registry is an electronic, web-based system tracking
emissions allowance holdings and transfers by all participants, from their initial
allocation through all transfers of ownership until their final cancellation or
retirement. The UK emissions trading registry is run by Defra and is designed to
support the UK-ETS.
There is no firm evidence to suggest that the operational infrastructure of the
scheme has adversely affected market liquidity. However, some brokers suggest
that the UK-ETS should operate via a system providing a ‘screen’ showing the
prices offered and taken for allowances, as in any other financial market. The
absence of such a system, the brokers argue, affects market transparency as
small companies in the market would often contact only a single broker and
would pay the first price they are offered. However, the NAO report points out
that in other markets the responsibility for establishing such systems generally
rests with brokers and their trade associations and Defra has not inhibited such
developments. 168
167 See NERA Economic Consulting report (August 2004), Ibid.
168 Report by the Comptroller and Auditor General (April 2004) The UK Emissions Trading Scheme: A new way to
combat climate change. National Audit Office.
159