Liam Reid explains how the emissions-trading system will work in practice in Ireland.
The emissions-trading scheme in Ireland covers 106 companies and institutions which produce one-third of the country's greenhouse gas emissions, or 22 million tonnes out of 66 million tonnes.
Although the system for trading is not fully in place, the scheme kicks in at midnight tonight; from then on every kilogramme of carbon-dioxide these companies produce is measured.
Huge CO2 producers like cement factories, power stations, major hospitals and education establishments like UCD and Trinity College will all have to be able to measure the amount of emissions they produce.
The Environmental Protection Agency (EPA), which is regulating the scheme in Ireland, has drawn up a detailed draft "allocation plan" for who gets how much of the 22 million quota.
Each of the 106 entities in the emissions trading scheme have been given a detailed indication of how much CO2 they are allowed to produce each year for the next three years.
That allocation will be finalised in the next two months.
This allocation or credit, which has been given to them for free, will be placed in a web- based emissions account, and that account has to be settled at the end of each year and must balance.
If a company believes it will generate more emissions than it has been allocated, it will buy some quota or credits from another company in Ireland or abroad which has excess capacity. Those credits can then be transferred to the firm's account.
Alternatively, large companies can use the "clean development mechanism" where they identify and invest in a scheme in a developing country which will reduce CO2 emissions there and the company will be able to claim the "credit" here.
If the company believes that it will produce less emissions it can choose to sell its quota to another firm or keep this excess for the following year.
At the end of the year an independent auditor will estimate the amount of CO2 the company has produced based on the amount of fuel used by the firm.
This will have to match or be less than the credits in the account for that period.
If a company exceeds its allowance and has not bought extra credits, it will be fined €40 for every tonne over the limit.
The web-based accounts and auditing system will be policed by the EPA.
It is envisaged that companies will go through brokers attached to financial firms to buy or sell carbon credits, much in the same way shares are traded.
A number of stockbroking firms have already begun trading and there is currently a futures market for CO2 where the price of purchasing a tonne of carbon credits is €8.
The most affected Irish company is the ESB, whose 11 plants account for nearly half of the 22 million tonnes. It has also received the biggest cut and has been allocated only 70 per cent of its current emission levels.
However, because of economies of scale, it will be easier for companies such as the ESB to comply with the scheme.
The scheme was designed at a European level with major CO2 producers in mind, such as power stations.
In Ireland, however, the majority of the companies and institutions in the scheme produce relatively low amounts, many less than 10,000 tonnes.
They are faced with similar auditing and compliance costs. If they exceed their limits they may find it difficult to buy credits as currently they are available in batches of 5,000 tonnes or more.
Many companies are likely to exceed their limits by a fraction of this and they may have to pay the €40 per tonne fine as opposed to anything else.