Energy Emission Certificates
Emissions Certificate Tradinga New Opportunity for Business?
Gases harmful to the environment could soon become a source of income and new business if the regulated trade in emissions rights becomes reality. A compromise reached at the World Climate Conference in Marrakesh in November 2001 laid the foundations for such trade.
Scenario 2010: Instead of building a conventional coal-fired power plant, an energy provider in Hungary chooses to build a modern combined-cycle (gas and steam turbine) power station. Thanks to this decision, the operator will be able to increase energy efficiency by up to 20 % and reduce greenhouse gas emissions by 250,000 t of CO2 equivalents per year (e.g., 1 t of hard coal equals 2.762 t of CO2 equivalents). The operator of the power plant will sell these CO2 equivalents on the market at a price of around 10 /t as a way to recoup part of its own costs.
Scenario 2015: Private households are allotted rights to produce certain amounts of CO2 equivalents when they buy a heating system or automobile. If the allotted volume of oil, natural gas, or gasoline is exceeded, users are obliged to purchase additional emissions rights. Given the resulting higher consumption costs, users have good reason to save on energy where they can.
What seems utopianor even unappealing to somecould soon become reality. Preliminary projects are in fact already under way. Since 2000, emissions rights in the form of emissions-reduction certificates can be acquired for investing in emissions-reduction projects in developing countries. Such rights may be freely tradedtheir market prices are determined by supply and demand. A program aimed at reducing acid rain has also been in place in the U.S.A. since 1995. This particular program grants emissions rights to power plants in order to regulate sulfur dioxide (SO2) emissions.
A basis for trading in greenhouse gases was established with the 1997 Kyoto Protocol (see box). At a meeting of signatories in Marrakesh, Morocco, in November 2001, additional measures were taken to put the climate protection protocol into effect. Although the principle of international trading in emissions rights is generally accepted, discussions about the final form and associated regulations are still under way. Possibilities include an international trust to permit and certify projects for trading greenhouse gases. New projects such as power plants would be registered there and international calls for tenders announced. Bidders with the most economical technologies for reducing emissions would be awarded the contracts. Establishment of a reference scenarioi.e, a quantifiable picture of how emissions would develop without the certified projectis essential. Tradable emissions certificates would then be based on differences between actual and reference emissions results.
According to the Kyoto Protocol, the international trading of emissions rights is allowed only between signatory countries. However, there are strong arguments for extending trading rights to certain companies or even the entire private sector in order to increase liquidity and efficiency on the international market. After all, trading provides an incentive for economical emissions reduction.
The Kyoto Protocol's Toolbox...
...for International Emissions Trading:
Clean Development Mechanism (CDM)An industrialized country participates in the financing or support of an emissions-reduction project in a developing country. The credits ("certified emissions reductions") gained may be used retroactively from 2000 onwards as a means of offsetting the country's own obligations. Example: German companies upgrade coal-fired power plants in Africa.
Joint Implementation (JI)An industrialized country participates in the financing or support of an emissions-reduction project in another industrialized or transition country* for example, in Central or Eastern Europe. Unlike the Clean Development Mechanism, JI credits may not be used until the 2008 to 2012 commitment period to offset the national emissions-reduction obligation of the country that financed or promoted the project. Example: A consortium of German and French companies builds combined-cycle power plants in Eastern Europe.
International Emissions Trading (IET)Emissions rights may be traded among signatory countries. Trading is based on Assigned Amount Units (AAUs), which are determined by the reduction obligations of the individual signatory countries. If a country does not exhaust its emissions budget, unused certificates may be saved for a later period or sold to other countries. Example: Due to a slowdown of its economy, Russia produces less CO2 than theoretically allowed by the Kyoto Protocol, and therefore sells emissions rights to Germany.
*) Transition: Structural conversion from one economic system to another, e.g., from a centralized planned economy to a market economy
To simplify implementation, the number of participating companies would initially be limited. The first participants could include energy suppliers or industrial producers with their own energy production facilities. The European Union trading system, scheduled for launch on January 1, 2005, will initially be open to power plant operators and companies that consume a large amount of energy.
Some countries are already introducing a national trading system in order to achieve an advantage in expertise. For example, Denmark is gaining initial experience with such systems. Furthermore, since April, 2002, Great Britain has been trading CO2 emissions certificates. There, 6000 companies have committed themselves to reduce their CO2 emissions. The government compensates them to the tune of 87.50 for every ton they save over their average emissions between 1998 and 2000. Companies can now sell or trade their emissions rights among themselves, allowing the market to dictate price. In Germany, a task force of representatives from business and government is currently examining the options and modalities associated with a national trading system.
Many businesses are skeptical of company-specific allotments when it comes to emissions rights. They are concerned that their previous efforts to minimize emissions may not be recognized and are uncomfortable with the prospect of having to pay substantial fines should they exceed the maximum permitted CO2 emissions.
Can new business opportunities arise despite the skepticism? "Trading in emissions certificates is virtually unstoppable," says Dr. Wolf-Eberhard Schiegl, head of Corporate Environmental Affairs & Technical Safety at Siemens and chairman of the Climate Policy steering committee of the Federation of German Industry. Schiegl believes the greatest advantages of trading lie on the international level. "As a global provider of comprehensive technology solutions, including financing, Siemens has excellent prospects when it comes to participating in international, certified projects." Possible projects include the construction of combined-cycle power plants in China, retrofitting coal-fired power plants in eastern Europe or the installation of photovoltaic facilities in developing countries.
Dr. Josef Janssen, head of emissions trading and climate policy at the University of St. Gallen, Switzerland, believes that the trading systems will result in new business opportunities: "It then becomes worthwhile from a purely financial perspective to structure projects in such a way as to achieve additional savings in emissions." Tradable emissions rights obtained in this way could also improve credit ratings and project financing conditions. Brokers and financial service providers also stand to benefit from new business opportunities. They could manage trading as well as initiating projects that result in tradable emissions rights.
Detlef Leinberger, board of management member of the German Development bank (KfW) with responsibility for environmental issues, can imagine the creation of climate protection funds. Emissions reductions achieved by specific projects would receive certification and then be transferred from investors to such funds. These funds could subsequently market the certificates and then distribute the proceeds among their shareholders.
Just how individual companies manage emissions rights is illustrated by a transaction that took place in June, 2002, between German energy supplier HEW and Canadian energy company Transalta. HEW accrued CO2 emissions rights by operating wind power facilities, and sold the rights to emit 3,000 t annually to Transalta for the period 2000 to 2007. New York-based broker Natsource handled the deal.
According to estimates from Prognos, a European consulting firm, nearly 30 mill. t of CO2 are traded annuallya relatively small amount when compared to the 26 billion tons of CO2 emitted worldwide each year. Prices fluctuate considerablyvarying from $0.30 to $10.00 per ton of CO2 equivalent. Therefore, the essential basis for establishing a flourishing trade will be the acquisition of expertise in the pricing of international emissions rights, and the establishment of appropriate political conditions. Studies from the University of St. Gallen indicate that, depending on the number of participating countries, an annual market volume of $18 billion to $38 billion could arise, resulting in prices of between $8.00 and $10.00 per right. Deutsche Bank Research estimates an even greater trading volumesome predictions go as high as $60 billionwhen the Kyoto Protocol goes into effect.
Sylvia Trage
The Kyoto Protocol ...
... and the Marrakesh Declaration and Accords:
ObjectiveThe so-called Annex B countriesall signatory countries that have set absolute emissions goals for the six most important greenhouse gaseshave committed themselves to reducing their average emissions by 5.2 % relative to 1990 levels by 2012. Germany aims to reduce greenhouse gas emissions by 21 to 25 %, which equals 212 mill. t of CO2 equivalents. The U.S., which produces a quarter of worldwide CO2 emissions, has rejected participation in the Kyoto Protocol.
RatificationThe Kyoto Protocol could go into effect immediately after the World Environmental Summit in Johannesburg in September 2002if a minimum of 55 countries which accounted for at least 55 % of CO2 emissions in 1990 have ratified the agreement by that time.
Approved instruments for attaining emissions objectives
1. Direct national reduction of greenhouse gases
2. Clean Development Mechanism (CDM)
3. Joint Implementation (JI)4. International Emissions Trading (IET)
ReductionForests and land retain carbon and are therefore considered in climate protection calculations. Numbers must be verifiable, transparent, and backed up with concrete data. Heavily forested countries like Russia and Canada will benefit from this clause. Credits accumulated in this way may be saved up for use at a later date.
Verification and sanctionsAll countries have committed themselves to regular publication of figures on greenhouse gas emissions and reductions achieved. A commission will supervise compliance. If commitments are not fulfilled, sanctions may be enacted. For every ton of the CO2 emissions target not achieved by 2012, an additional reduction of 1.3 t must be achieved later.
Assistance for developing countriesSeveral funds for implementing environmentally friendly policies in developing countries have been set up. Developing countries are not committed to implementing concrete climate protection measures until 2012.
