In our view, there are at least four reasons why our clients should consider implementing a strategy in the area of climate change:
- To ensure a balanced approach to calculating internal costs on GHG emission reduction and potential revenues from emissions trading on the global market.
Internal expenses on emission reduction, which today amount to $15–20 per tonne of carbon dioxide, should be compared with the currently low transaction prices (under $10 per tonne) and future fines for non-compliance in Europe (100 euro per excess tonne of CO2 after 2008).
- Ambiguous legal regulation means that simple strategies are not enough.
Increasing pressure from regulators is pushing a growing number of buyers into the carbon credit market. But their strategies carry risks connected with exchangeability rules (in terms of emission volumes, origins and composition), and also with issues of timing (accruals and loans). Sellers need a sophisticated but clear policy to safely handle these risks.
- Diversity of carbon products.
Companies can already start hedging short positions on carbons, but the range of carbon products on offer at the moment varies from reliable carbon dioxide emission quotas in Europe to risky emissions reduction credits in developing countries.
- Rapid growth in market volumes.
The carbon credit market has been unstable since its outset, but most experts agree that in Europe alone in 2005–2008 the market will have volumes of over $10 million and that this figure will grow more than 10 times over the next five years.
European signatories to the Kyoto Protocol are already in the process of discussing post-Kyoto obligations, which shows their commitment to continuing work in this area. The growth of the global carbon market is also a result of the new role of products with CO
2 emissions. While in the recent past they were merely considered as a means for ensuring regulatory compliance, today they are widely used as a new hedging instrument in the energy sector.
