When private individuals buy emissions certificates

Everyone is talking about climate protection. This is achieved, for example, when private individuals purchase emission certificates, hold them for some time and then resell them. However, this requires a number of preconditions.

The recently adopted reform has opened a door for this market. The aim of this reform is to reduce the surplus certificates and to adjust the certificates offered in the near future much better to the fluctuations of the current economic situation. A number of things have been adjusted for this purpose.

Factories and power plants will have to reduce their CO2 emissions by 2.2 percent every year between 2021 and 2030 in order to reduce the surplus of certificates more quickly. Actually, there was talk at the beginning of only 1.74 percent. In addition, it is now possible for EU member states to cancel certificates on their own authority. This is intended to prevent one country from phasing out coal, for example, while another country is allowed to emit correspondingly more emissions.

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From 2019, the surplus emission allowances are to be stored in the so-called market stability reserve. As soon as the certificates become scarce again at some point, they can be returned to the market. The mechanism behind this is as follows: if there are more than 833 million surplus certificates in circulation at the end of the year, the market will temporarily park 24 percent of the quantity in the following year. From 2024, this figure will be only twelve percent. Each year, more allowances enter the market stabilization reserve. This continues until there are fewer than 833 million on the market. As a result, there are fewer new allowances on the market, so companies have to tap into reserves, further reducing the surplus. Once the limit of 400 million is reached, the mechanism turns 180 degrees. From the reserve, 100 million certificates will then be auctioned on the market in the coming year. And this will continue until the reserve is completely empty. In this way, it uses itself up.

However, the reserve only postpones the problem of surplus paper further into the future, because it is only withdrawn prematurely and later flushed back onto the market. Therefore, there is an additional mechanism of the inventors of the system. This one works like this: In 2023, a balance sheet is collected and it is checked how many certificates have ended up in the reserve and how many papers have been bought by companies in the corresponding year before. If the quantity is the same, nothing happens.

However, if there are more securities in the reserve than in the possession of companies, the difference is deleted. And this will happen forever. We are probably talking about around one billion certificates here. The more certificates that go into the reserve by 2023, the more of them will be deleted in the end. And that is exactly what is exciting. After all, it means that it may well be worthwhile for private investors to buy rights to emissions and keep them in the form of an account. However, I would like to say explicitly at this point that it CAN be worthwhile.

Private investments for climate protection

Yes, it is somewhat complex. To better understand the system, we need to take a closer look at some conditions. Private investors should not let too much time pass and grab quickly. Moreover, the certificates should not be resold immediately either, but should be shut down for the time being. They must wait until they are deleted from the system, i.e. until after 2023, otherwise the climate protection target will be lost.
Another condition is that several private investors are needed. In addition, they must manage to get companies to take notice.

In the process, companies should realize that the certificates on the market are becoming fewer much faster than predicted. This pressure can ensure that companies push ahead more quickly with climate-friendly technology and emit less CO2. This frees up more emissions allowances, which in turn go into reserve and are eventually destroyed. There is also another factor to consider. Should new entrants to the market turn the system upside down in large numbers, policymakers have come up with a contingency plan. The millions of certificates are to be deleted only if the review on the part of the politicians comes to "no other conclusion".

This case, which is not really realistic, would occur if the 833 million certificates were bought by private investors. This would mean that more and more papers would be absorbed by the reserve and then cancelled, so that after a short time companies would hardly have any rights to pollute the environment with emissions.

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But as the system shows, even a few private investors buying can upset the scalability of the mechanism. No one can know when and if they will resell their securities. However, it is precisely this ignorance that can end up having an unintended effect. Namely, that companies become even more reluctant to invest in sustainable and climate-friendly technologies.
The effect, however, according to a recent study, is already present as a result of the new reform. The system, the study's creators say, has made the mechanism so complicated that it's hard to predict how the market and prices will develop, and the incentive for companies to change is likely to be low. If the economy grows strongly, companies could exert increased pressure toward policymakers to get more of the paper.

One thing is clear: anyone who wants to buy certificates as a private investor for climate protection is acting on a fine line. For there to be a desired effect, the quantity of private investors must be large enough for the purchases to be noticed. At the same time, they must be so small that politicians do not take notice and change the system rules.