When private individuals buy climate certificates

Climate protection is on everyone's lips. This can be achieved, for example, when private individuals purchase emission certificates, keep them for a while and then resell them. However, there are a few prerequisites for this. 

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 to this end.

Factories and power plants must 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, only 1.74 percent was initially mentioned. In addition, EU member states are now able to delete certificates at their own discretion. This is intended to prevent, for example, a situation in which one country phases out coal while another country is then allowed to emit correspondingly more emissions. 

From 2019, the surplus emission certificates will be kept in the so-called market stability reserve. As soon as the certificates become scarcer again, they can be brought back onto 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 park 24 percent of the amount in the following year. From 2024, this will only be 12 percent. Every year, more certificates are added to the market stabilization reserve.

This continues until there are fewer than 833 million on the market. As a result, there are fewer new certificates on the market, so companies have to use reserves and the surplus is further reduced. As soon as the limit of 400 million is reached, the mechanism turns 180 degrees. 100 million certificates from the reserve are then put on the market for auction in the following year. And this continues until the reserve is completely empty. It therefore uses itself up. 

However, the reserve only pushes the problem of excess paper further into the future, because it is only withdrawn early and then flushed back onto the market later. That is why the inventors of the system have created an additional mechanism. It works like this: In 2023, a balance sheet is drawn up and checked to see how many certificates have ended up in the reserve and how many papers were bought by companies in the previous year.

If the amount is the same, nothing happens. However, if there are more certificates in the reserve than in the possession of companies, the difference is deleted. And that is forever. We are probably talking about around a billion certificates here. The more certificates that go into the reserve by 2023, the more of them will ultimately be deleted. And that is exactly what is exciting. After all, that means that it can be worthwhile for private investors to buy rights to emissions and keep them in the form of an account. But I would like to expressly say at this point that it CAN be worthwhile.

Private Investments for Climate Protection

Yes, it is a bit complex. To better understand the system, we need to take a closer look at some of the conditions. Private investors should not let too much time pass and should act quickly. In addition, the certificates should not be resold immediately, but should be put out of service for the time being. We must wait until they are deleted from the system, i.e. until after 2023. Otherwise, the climate protection goal will be lost. 

Another condition is that several private investors are needed. They must also make companies aware of this. Companies should notice that the number of certificates on the market is decreasing much faster than predicted. This pressure can ensure that companies advance climate-friendly technology more quickly and emit less CO2. This frees up more emission rights, which in turn go into the reserve and are ultimately destroyed. There is another factor to consider. If large numbers of new participants on the market turn the system upside down, politicians have drawn up an emergency plan. The millions of certificates will only be deleted if the review by politicians "does not produce any other result". 

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

But as the system shows, even a few private investors can disrupt the scalability of the mechanism by buying. No one can know when and if they will resell their securities. But it is precisely this ignorance that can ultimately have an undesirable effect. Namely, that companies are even more reluctant to invest in sustainable and climate-friendly technologies. 

However, according to a recent study, the effect is already present due to the new reform. According to the authors of the study, the system has made the mechanism so complicated that it is difficult to predict developments on the market and the development of prices and the incentive for companies to change is likely to be rather low. If the economy grows strongly, companies could put increased pressure on politicians to obtain more of the securities. 

One thing is clear: anyone who wants to buy certificates for climate protection as a private investor is operating on a tightrope. In order for the desired effect to occur, the number of private investors must be large enough for the purchases to be noticed. At the same time, they must be small enough that politicians do not take notice and change the system rules.