If a company is unable to conduct business with the total greenhouse gas emissions allowances given and purchased at auction, it can purchase more “credits” in the ETS (1 credit per tonne of carbon dioxide equivalent, CO2e) from companies that are able to conduct business with less than the allowances they obtained. The value of the credits tends to go up over time as the pressure to cut emissions becomes more stringent. The idea is to create rewards for companies that cut emissions.

(“Tonne” = “metric ton” - 10% greater weight than the U.S. ton. CO2e is used because there are many greenhouse gases, some of which are equivalent to more than a tonne of carbon dioxide - in terms of the harm they have on global climate change - and some of which are equivalent to less than a tonne of CO2.)

The United Nations (UN) Clean Development Mechanism (CDM) operates under the terms of the Kyoto Protocols to approve projects that companies in signatory nations, including EU nations but not limited to them, can invest in to offset their own emissions. Purchase of 1 Certified Emissions Reduction (CER) from the CDM offsets a tonne of CO2e.

The international emissions trading market is booming. Most observers expect it to boom bigger (especially after the U.S. comes on board in the 2009 to 2012 period).

Emissions trading is not, however, without problems. Growth depends on the availability of credits. The supply has slowed since the CDM tightened down on its approval process. The CDM did so to protect the quality of the projects it approves. This appears to be a temporary bureaucratic snafu but the trading community, forced to hold ready money, is concerned.

The EU ETS has worked through early difficulties and should be applauded for working out the complexities of the allowances-given-to-allowances-auctioned ratio. The system, though, has yet to prove truly effective at emissions reduction. To do so, its members must face more severe caps without pulling away.

When emissions caps are further ratcheted down, if nations that have invested aggressively in New Energy are able to sustain stable power prices, the system must be considered a complete success. The question is whether EU nations will stay within the parameters of the system until then.

Andrew Ertel, chief executive of Evolution Markets: “Lack of clarity…post-2012 is countering growth of markets such as the EU ETS…The market is truly at a crossroads as participants appreciate the complexity and risks of carbon trading.”

Perhaps only one thing is at a more crucial crossroads than the European cap-and-trade system: The earth it was designed to protect.