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About Emissions Trading
- The instrument was introduced in order to fulfill commitments Kyoto Protocol
- The instrument objective is to reduce overall greenhouse gases emissions using cap and trade (market driven) mechanism
- One allowance represents the right to emit one tone of CO2 equivalent
- Allowances may be sold and purchased
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KB allows you to negotiate a forward purchase or sale of the following allowances credit types:
Important information for you
Risks associated with Emissions Trading
- Risk of price fluctuation of traded allowances over the holding period
- Allowances prices may be subject to unpredictable volatility, resulting in losses
- Example of market risk
On 1 March 2014, client negotiates a forward sale with the bank (settlement 15 March 2015) involving 1,000 allowaces with the agreed price of EUR 5.50 per allolwance. However, on the settlement date, the current market price amounted to EUR 6.50 per allowance. The client incurred a loss of EUR 1,000 from the forward sale (the bank pays EUR 5,500 to the client; however, he could currently sell the allowances for EUR 6,500 in the market).
- Allowance settlement system does not involve any “delivery vs. payment” guarantee
- Change of ownership of allowances is recorded in the OTE Register while cash is remitted in a standard manner – i.e. via bank transfers as a payment for invoices issued
- The party that pays (or delivers) first, bears a risk of default of the other party
- Structural risk of termination of the emissions trading system
- It is possible that the entire system set up in line with the Kyoto Protocol would be discontinued without any compensation to the system participants
- Emissions trading transactions are usually denominated in EUR; therefore overall gain and loss of companies whose functional currency is Czech crown depend not only on changes in allowance price, but also the CZK/EUR exchange rate fluctuations
- Risks associated with delivery of tax documents (invoices) – in case such documents are not delivered in time or required extent/quality, there is a risk associated with communication with tax authorities
- Problems associated with transaction administration in OTE accounts (communication with the register – blocked account in case a password is forgotten, system temporarily down, etc.)
Legal entities – particularly operators of facilities that represent pollution sources.