Bilateral Trades (cont.)
Traders operate under a long-term view that looks to profit from the market's
movement— up or down. Traders profit from arbitrage opportunities by buying and selling
allowances to capture the value between spreads. This can be executed, for example, through
the simple standard of buying low and selling high, working the price spreads to turn
a profit.
Brokers
Emissions trading practitioners not wishing to transact bilateral trades can enlist
brokers as middlemen. Brokers do not take a position in the market, but rather
facilitate transactions for counterparties. Just as importantly, brokers are a valuable source
of market information, which market participants use to get an accurate sense of
the current prices, as well as market volume. Another aspect of the broker's responsibility
is to maintain the anonymity of counterparties. Being unknown to the marketplace gives
a buyer or a seller the luxury to test the waters for a perspective transaction
without tipping their identity or strategy. This element of confidentiality is vital when shopping
for the best possible price. Only after the transaction is confirmed are the
counterparties' identities revealed to each other.
The hands-on-role of the broker also enables it to engage in structured transactions, which can be more time consuming than a normal cash settlement or option transactions. Deals involving complex swaps of vintage years, cross-pollutant trading, or cross-commodity trading are likely to involve a broker who can provide expertise to the transaction as well as the manpower to shepherd a deal to completion. Brokers profit from the market through commissions charged on brokered transactions.
Annual Allowance Auction
At the creation of the U.S. Acid Rain Program, there was some uncertainty
among lawmakers as to the future robustness of the emissions trading market and
the availability of allowances for new sources of generation that were not in service
during the baseline allocation period of 1985 through 1997. Of course, a case for an
active trading market could be made on paper. But if the economics did not coalesce
around allowance trading as anticipated, it was going to be tough to ascertain with
certainty whether trading would be able to perform its pivotal role in compliance.
Therefore, the Clean Air Act Amendments set up an auction system designed to ensure a measure of allowance market liquidity and provide valuable price information. The auction is held annually on the last day of March and is run by the Chicago Board of Trade. To supply the auctions with allowances, EPA set aside a Special Allowance Reserve of approximately 2.8% of the total allowances allocated to all units. During Phase I, when the allocated allowances total 5.7 million allowances annually, 150,000 allowances are available each year for auctions. During Phase II, when allowance allocations total 8.95 million allowances annually, 250,000 allowances are earmarked annually for auctions.
The sale starts with the highest priced bid and continues until all allowances have been sold or the number of bids is exhausted. Credits purchased in the advance auction cannot be used until seven years after purchase. EPA may not set a minimum price for allowances used in the auction. The end results are posted by EPA on its Web site.
For more information check these Web addresses:
http://www.epa.gov/acidrain/atsdata2.html
http://www.cbot.com/
http://www.epa.gov/acidrain/auctions/aucmain.html