Shell buys “relative” emissions allowances from Solutia

17 October 2002 – Shell trading announced the completion of the first trade of “relative” allowances in the UK Emissions Trading Scheme. The sale of “relative” allowances to Shell by Solutia UK Limited demonstrates how barriers previously preventing a swathe of companies from trading in the scheme can be overcome, opening the door to significant expansion.

Under the Government’s “Climate Change Agreement” (CCA) system companies may qualify for an 80 per cent reduction in the Climate Change Levy, a downstream tax on energy usage, if they meet milestone targets. Most CCA participants have relative milestone targets – targets expressed in terms of energy consumed per unit of output.

In order to help meet CCA targets, which fall due on February 15 2003, companies may buy allowances in the UK Emissions Trading Scheme. However, until now CCA participants have only been able to buy “absolute” allowances from Direct Participants – those companies that have taken on a voluntary absolute emissions reduction target in return for a share of a governmental financial incentive. This has limited the scope and volume of trading.

The transaction between Shell and Solutia is the first time that a CCA participant has sold allowances and demonstrates how CCA companies can successfully address the environmental management and administrative hurdles involved in organising a sale of “relative” allowances. These hurdles include data collection, verification, government approval and delivery terms.

Such trades will encourage the further reduction of emissions by CCA participants by allowing them to realise a financial benefit from over-compliance, either through an outright sale or, for those companies that are concerned about meeting future targets, an ‘inter-vintage swap’. This simple concept – a sale of vintage 2002 allowances and a purchase of later vintage allowances – will have the same effect as banking allowances but, based on current price differences between vintages, will result in a net profit.