Natural Resources – Emission Certificates
Trading with Greenhouse Gases
In 2005, emission-rights trading for carbon dioxide will be introduced in the EU. Not only will this change basic corporate economics; it will also open up new sources of profit for the most efficient players.
Paying the price for hot air. Carbon dioxide will be offered at market prices when the EU introduces emission-certificate trading next year. The goal is to avoid future emissions in those places where it is cheapest to do so
Back in October 2003, the European Union passed a guideline that will lead to the first phase of emission rights trading in 2005, thus making the EU a global pioneer in this area. According to the Kyoto Protocol agreement of 1997, in which many countries pledged to reduce their emissions of greenhouse gases by at least 5 % by 2008 to 2012 (compared with 1990 levels), international emission-certificate trading was not due to begin until 2008 (see Pictures of the Future, Spring 2002, Emission Certificates). The Kyoto treaty will go into effect when the signatories account for at least 55 % of emissions produced in 1990. However, the 117 countries that have so far agreed to join are responsible for only 44.2 % of the emissions. Russia, which accounts for 17.4 %, could make up the difference, but it won’t reach a decision until the end of 2004.
As a result of emissions trading, one ton of CO2 will be given a market price. The goal is to avoid emissions in those places where it is cheapest to do so. Voluntary trading actually began in 1996, often internally at international corporations such as BP. Since then, sales generated by CO2 emissions trading have reached one billion euros worldwide.
A Simulated Carbon Dioxide Market
In 2002, participants from 12 companies simulated nine years of emissions trading in Karlsruhe, Germany, as part of a project led by the Fraunhofer Institute for Systems and Innovation Research (ISI). During the project, they bought and sold emission certificates via an Internet trading platform. First, the companies determined their emissions for 1990 and 2000 and entered these figures and the corresponding production volumes into a special database. Future production volumes were then estimated and used as a basis to extrapolate future emission levels. The emission targets were set on the basis of this information and previously registered technical reduction measures. In the next phase, free emission certificates were issued in accordance with a special key. Then the actual trading began. Those companies that remained below their emission targets were entitled to sell the difference. Those that exceeded them, on the other hand, had to buy additional certificates or take steps to reduce their emissions. To help the participants, a tool was set up for calculating the minimum price of carbon dioxide at which reduction measures would make economic sense. For example, if it costs ten euros per ton of carbon dioxide to increase a plant’s efficiency, it was cheaper to do so than to buy more certificates for 15 € per ton of carbon dioxide. Participants could therefore quickly and easily see whether investing in a given reduction measure would be worthwhile. Sanctions of 100 € per ton of carbon dioxide had to be paid for excess emissions. The project goal was to prepare the participants for real-life emissions trading. As project manager Dr. Joachim Schleich from ISI explained, "If you haven’t mastered the rules, you won’t be able to boost your efficiency."
Everything from Cement to Steel. Pilot projects have revealed that the problems often lie in the details. There are some tricky questions to answer. For instance, how will CO2 rights initially be assigned? Who will get what? How will new countries be integrated? Emissions trading in the EU is not a straightforward matter. After all, it will affect around 10,000 industrial plants across the continent, from power plants and steelworks to cement factories. The EU has asked its member states to draw up national allocation plans for the certificates by the end of March 2004. These plans will be used to determine how many certificates will be issued for the first trading period (2005 to 2007) and how this process will be carried out. Overall, the goal is to issue exactly the number of certificates that will enable EU member states to fulfill their reduction commitments. Emission-reduction measures that plant operators have taken since 1990—known as early actions—will be taken into account. National governments also have to verify how they intend to meet the country-specific reduction obligations laid down in the Kyoto Protocol. This includes a declaration of how they will deal with sectors such as transportation and households that are not directly affected.
Even though the U.S., which emits more CO2 than any other country, does not want to sign the Kyoto agreement, a voluntary exchange for certificates has been set up in Chicago. The first certificates were auctioned in September 2003, and electronic trading was launched in mid-December. The Chicago Climate Exchange (CCX) currently has 32 members, including the city of Chicago and industrial names like Ford and Motorola. All of them have committed themselves to cutting their CO2 emissions by 1 % a year until 2006.
Richard L. Sandor, the founder and chairman of CCX, was involved in the introduction of trading for sulfur-dioxide certificates back in 1995. Now he’s thinking of trading other raw materials, such as water, on stock exchanges. Sandor is convinced that in the future more markets will emerge for natural resources that previously seemed inexhaustible and therefore do not yet have a price tag. He believes that the financial sector should also take part in the trading process. After all, the idea of using emission credits to finance investments in emission-reducing plants could well become reality someday. Emissions trading therefore opens up new opportunities for business.
As a supplier of energy-efficient products and solutions, Siemens can help limit CO2 emissions worldwide—for example, through the latest power-plant technology (see Clean Future) or energy-saving measures related to performance contracting (Saving Energy). If state-of-the-art technology were introduced into all of the coal-fired plants in operation in the EU today, their CO2 emissions would be cut by about 20 %.
Sylvia Trag
EU and Kyoto
