The EU’s emissions trading scheme is up and running, but are companies taking on board the full implications?

Janet Wood

Market activity in trading in greenhouse gas emissions has been steadily growing for a number of years. According to research from Natsource LLC, worldwide trades increased by 38 per cent from around 78 million tonnes in 2003 to 107 million tonnes in 2004 (see diagram). Those worldwide trades, however, will be outweighed by trading in the EU’s emissions trading scheme (ETS), which will see allocations for half of Europe’s emissions of carbon dioxide change hands.

The ETS imposes prescribed targets for reducing CO2 emissions on companies from a variety of industries, from power generation to building materials production. It will allow the trading of emissions allowances on an open market. Companies can choose whether to reduce emissions or purchase spare allowances, but if they are not fully prepared for this legislation they face costs and even fines that could run into millions of Euros, thanks to penalities for non-compliance at €40 per tonne of unauthorised CO2 emissions.


Total traded volume of project-based emissions reductions Source: Natsource LLC
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The EU’s emissions trading scheme has already gone into operation and trading has begun. The first spot trade was back in March when a bilateral trade was carried out by Shell Trading and Barclays Capital. But now that the European Commission has approved almost all the countries’ allocation plans, and several allocation registries have gone live, trading is beginning in earnest. London-based ICAP Energy claimed the first on-screen spot transaction at the end of April. Now new trading platforms are being set up to handle the expected volume of trades. Among them are the International Petroleum Exchange’s platform, which hosted a trade between E.ON UK and BP. Meanwhile, the London Energy Brokers Association has launched a new benchmark index for trades in emissions allowances, known as the LEBA Carbon Index.

With all the financial instruments in place and trading underway, have companies come to grips with the scheme and its effect on their business? Far from it.

New research from LogicaCMG suggests that in the UK at least, companies have a long way to go before they have fully grasped all the implications of ETS. The company used an independent research firm Coleman Parkes to conduct research on the power generation, refinery, cement, iron/steel, heavy engineering and automotive sectors. Some 100 senior executives were surveyed to gauge companies’ perception of, and compliance with, the ETS regulation.

Five months into the scheme, half of UK companies told Logica they were fully compliant with the trading scheme and a further 23 per cent said they would be ready by December 2005. However, the remaining 28 per cent of companies did not know when they would be ready to comply. “This suggests an element of complacency towards the scheme and indeed the issues behind it,” said Logica, and that lack of support from companies was borne out by the fact that one in four companies said they view the scheme as an unnecessary piece of Government regulation.

The survey found that the majority of UK companies have grasped the importance of verification. Three quarters have invested in it, and 61 per cent had appointed an accredited verifier – a stipulation of the scheme. However, one fifth of companies told the survey they would not appoint a verifier by the end of this year. LogicaCMG said, “This means that an alarmingly large group of companies do not seem to realise the repercussions of their complacency – the fines for not being able to report on emissions could run into thousands of pounds.”

Nearly half of UK companies said they saw a correlation between emissions management and share value. Yet an overwhelming number – 83 per cent – had not discussed the financial impact of the ETS with either their insurer or institutional investor.

In addition, companies strongly felt that emissions management affects customer-buying preferences. Nearly half felt that customers would prefer to purchase from a company that was environmentally friendly, with just six per cent believing customers would rather buy from a non-compliant company.

Just one in ten companies in the UK feel they will be in a position to sell allowances. More will buy, but they have financial concerns regarding trading. Thirty nine per cent fear the market will be volatile, making it hard to plan and budget for trading and a further 37 per cent worry that emissions prices will be high due to high demand (caused by a general shortfall across the UK).

However, despite the concerns clearly shown by companies regarding the number of allocations they have received and the links to share value and customer opinion, a surprising 83 per cent of companies had made no financial provision for fines or trading.

It seems that in the UK, although the idea of emissions trading has been taken on board by companies, many are still ill prepared for the full implications.