Applying emissions trading strategy to industrial companies
2005 marked the start of the carbon-constrained economy in Europe. Prior to that, many companies in the industrial sectors had made significant reduction in emissions of greenhouse gases, but largely on a voluntary basis. However, with the introduction of the EU Emissions Trading Scheme, carbon dioxide emission levels in five key industry sectors in the EU are now regulated―and it is not likely to stop there. There is political pressure to bring additional industries and greenhouses gases into the Scheme over the medium term. The approach to carbon regulation adopted by the EU is a market-based approach, so companies under the scheme have a choice: to cut their own emissions, to invest in emission reduction projects internationally, or to trade emissions in a new European market. With this choice come new risks and opportunities.
With this in mind PricewaterhouseCoopers undertook an intensive study of both the short- and long-term effects of the Scheme. Its findings are presented in this study. Its authors concluded that the introduction of the EU-ETS will require a change in thinking and processes throughout industrial companies. Of course, there will be operational implications and the need to demonstrate compliance―and companies will need to buy and sell allowances to close off short or long positions. But, the report suggests, the implications will be more fundamental than that: carbon thinking will need to span the full range of activities within a company―from operations and trading, M&A strategy and investment planning to legal and environmental compliance, as well as tax and accounting.
It seems that most companies have made good progress with the more operational and systems aspects, but many companies are still grappling with longer-term strategic issues and trading arrangements, as well as tax and accounting treatments. These issues seem to be a low priority for companies with favourable trading allocations for the initial trading period (i.e., 2005-2007). However, the outlook for allocations in the future may be less favourable, and future regulatory developments (and the likely market response) are less certain.
The authors also report that many companies are concerned about the (possible) detrimental long-term impact of carbon constraints on shareholder value and profitability. Particular concerns are the expected increases in energy prices and the potential impact of EU-ETS on global competitiveness. These risks and uncertainties say the report, suggest that companies will need to look at a range of different strategies to survive and prosper in the new carbon constrained world. Among the topics covered are the Kyoto Accord and linking policies, how companies are responding, EU-ETS allowance trading market behaviour, as well as financial risk and opportunities.
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