The limit or ‘cap’ on the total number of allowances creates the scarcity needed for trading.

Companies that keep their emissions below the level of their allocated allowances can sell their excess allowances at a price determined by supply and demand at that time.

They can take measures to reduce their emissions (such as investing in more efficient technology or using a less carbon intensive energy source),

They can buy extra allowances and/or CDM/JI credits on the market (the EU ETS links to emission reduction opportunities in the rest of the world by accepting credits from emission-saving projects carried out under the Kyoto Protocol’s Clean Development Mechanism (CDM) and Joint Implementation instrument (JI)) OR

They can use a combination of the two.

This flexibility ensures that emissions are reduced in the most cost-effective way.

[http://www.climnet.org/resources/doc_view/1793-can-europe-2009-pointcarbon-aau-seller-buyer-analysis-and-impact-on-post-2012-summary]

Countries in Central and Eastern Europe and the former Soviet Union, so-called economies in transition,

hold a surplus of AAUs in the Kyoto commitment period (2008-2012). Because their

AAU surplus has resulted from economic decline in the 1990s rather than from an effort to reduce

HPLVVLRQV LW LV VRPHWLPHV UHIHUUHGWR DV ³KRW DLU´± a term that is vehemently opposed by the

seller countries, who instead emphasise the huge social and economic costs of the transition

from planned to market economy which has enabled these reductions.

We understand that 147 million AAUs have been contracted in the AAU market so far, with a

further 50-60 million AAUs reported to be under negotiation. The largest sellers have been the

Czech Republic and Ukraine, having sold 68,5 and 44 million AAUs respectively. The Japanese

government and private companies appear to be the largest buyers, having bought most of the

volume transacted by Ukraine and the Czech Republic. Latvia and the Czech Republic have

concluded the most transactions, at four each. Individual transactions are listed in annex to this

report. [http://www.climnet.org/resources/doc_view/1793-can-europe-2009-pointcarbon-aau-seller-buyer-analysis-and-impact-on-post-2012-summary]

Demand:

1. Global Targets to reduce emissions.

2. Growth Rate of countries, Economy's performance.

3. GDP

Shocks:

supply:

1. Growth Rate of a country

2. Level of technical advancements

3. Adaptation to non conventional resources of energy

[ http://www.mfe.govt.nz/publications/climate/issues-international-carbon-market-oct07/html/page3.html ]

Kyoto market supply and demand

The Kyoto Protocol sets caps for industrialised countries, expressed as an assigned amount of greenhouse gas emissions rights. For each tonne of CO2 or equivalent, an assigned amount unit (AAU) is issued to that government.

Canada, New Zealand and the EU bloc are expected to generate demand of 3 to 4.5 billion tCO2e, based on known or planned government budgets, EU ETS demand and expected demand from the private sector in Canada, Japan and New Zealand.

The total potential supply of AAUs is put at 7 billion tCO2e, mostly from Russia, Ukraine and eastern Europe. However, most of the countries on the demand side have suggested they do not want to buy this ‘hot air’ but are willing to invest in projects that can be proven to reduce emissions.

Point Carbon expects supply of credits from the two project mechanisms, CDM and JI, to reach 2.5 billion tCO2e by 2012. The volume from ‘greened’ AAUs is not known, although this simplified demand-side sum of suggests that there will be demand for ‘green’ AAUs.

These sums are based on official data and headline projections. They are subject to many factors that will change the demand-supply dynamic, notably evolving government policy and economic growth factors.

The Kyoto Protocol sets out three flexible mechanisms: Clean Development Mechanism – where tradable carbon credits are awarded to projects to reduce

greenhouse gas emissions that are hosted in developing countries and that complete a formal approval process. These credits are known as Certified Emissions Reductions (CERs);

Joint Implementation – where the credits are awarded to similar projects, only they are hosted in developed countries or those with economies in transition. These credits are known as Emission Reduction Units (ERUs);

Emissions Trading – intended as a government-to-government market where the sovereign states can buy or sell credits they are issued as part of their cap under the Kyoto Protocol, known as Assigned Amount Units (AAUs).

http://www.climatefocus.com/documents/files/options_for_a_green_investment_scheme_for_ukraine_.pdf

SCENARIOS OF DEMAND AND SUPPLY FOR AAUS

11. The value of Ukraine’s surplus assigned amount units depends on the balance

between supply and demand.

12. The overall demand for assigned amount units will depend on:

• Whether the EU-15 and Japan use part of their Kyoto compliance budget

on international emission trading and what approach they take towards

trading;

• Whether individual EU-15 countries will reduce emissions if the EU-15 as

a whole is projected to comply with the target under the Kyoto Protocol;

• Whether Canada takes steps to comply with its Kyoto target.

13. Many of the EU-15 countries, Canada, and Japan have emissions that are

currently above the targets they have assumed under the Kyoto Protocol. In addition

to domestic measures, Japan and many EU countries plan to use the Kyoto Protocol’s

flexible mechanisms to comply with their GHG emission targets. Canada is less

active in the carbon market and there are no indications that it will use international

emission trading (IET) as part of its compliance strategy.

14s These funds will be

used to procure around 552.5 million tonnes of carbon credits or about 30 percent of

the EU-15’s overall emission reduction target of 8.0 percent. Considering all planned

and implemented measures, projected removals and achievements with use of the

flexible mechanisms, the EU-15 is expected to meet this target. +++ >

Search all AAUs, CERs, ERUs, RMUs on Wikipedia to get some idea of factors. And also search statistics.