A better climate for business

Jason Rayfield examines how participation in the UK Emissions Trading Scheme can help companies to cost-effectively reduce their greenhouse gas emissions in line with the Kyoto Protocol.

We’ve all heard how the UK is the ‘dirty old man of Europe’ in terms of waste and recycling. It’s enough to make you choke on the filthy, exhaust-filled air as you sit on one of our congested roads, contemplating the dire state of the environment. But there is one aspect of industrial emissions reduction where the UK leads the world. I’m talking, of course about the much-vaunted UK Emissions Trading Scheme (UK-ETS). Over the next five years, participating companies have pledged to reduce their annual greenhouse gas emissions by more than four million tonnes of carbon dioxide – over five per cent of the planned reduction in the UK’s annual emissions by 2010.

Emission reduction

The auction for entry in to the UK-ETS took place from 11-12 March 2002 and was completed successfully after nine rounds. The auction cleared at a price of £53.37, which is the price the government will pay per tonne of emission reduction delivered by organisations. A total of 34 organisations won the auction at this price, taking on binding emission reduction targets totalling four million tonnes of CO2 equivalent by the end of five years of the scheme. This was approximately an 11 per cent average emission reduction from organisations’ baselines.

Many more companies are expected to join the scheme in the coming months, when the 6,000 companies with climate change agreements can buy allowances to meet their targets, or to sell any over-achievement. UK-based approved emission reduction projects will also be able to sell credits into the scheme. Anyone who doesn’t want to enter the scheme on the basis of an emissions reduction target, or an emissions reduction projection, can simply open an account on the registry to buy and sell allowances.

Kyoto Protocol

The Department for Environment, Food & Rural Affairs’ (DEFRA) publicity machine has been keen to promote the positive aspects of the UK-ETS, especially the benefits to participants of compliance with the Kyoto Protocol. In a much-publicised visit to Shell’s Trading Floor in London in April this year, Environment Secretary Margaret Beckett traded tonnes of greenhouse gases through the Emissions Registry. Commenting at the event, Beckett quoted:

“The government is demonstrating to the world how cutting greenhouse gas emissions reductions can be achieved at minimum cost…Emissions trading will allow organisation to reduce their emissions of greenhouse gases in the most economically efficient way. It is a central feature of the Kyoto Protocol, and the European Commission has proposed that EU-wide trading should begin in 2005. The UK’s Scheme is giving both the government and its participants early experience of emissions trading, as well as creating an opportunity for the City of London to become a global hub for greenhouse gas emissions trading.”

Beckett’s sentiments were echoed by Shell UK country chairman, Clive Mather, who said: “We believe that market mechanisms are the best way of achieving the maximum reduction in emissions of greenhouse gases at minimum cost to society. Market mechanisms promote the most cost-effective reductions in emissions, wherever they occur.”

By appealing to participants and potential participants’ bottom line, the government hopes to strengthen its general strategy to reduce carbon emissions from industry and help to meet its Kyoto targets. The Mantra was also picked up by former Shell UK chairman and official ‘ETS Champion’, Dr Chris Fay. In his role, Dr Fay will work with businesses to promote and develop the scheme and then help businesses achieve greenhouse gas reductions and ‘first mover advantage’ in the coming carbon trading market. He stated, “This scheme is a great example of how climate change can be good for business. The UK now has the chance to become a world leader in the field of greenhouse gas emissions trading, giving British business a head start in this important new market.”

He went on to explain that there are substantial benefits for the UK economy and business from starting emissions trading early, ensuring that the UK will be in the vanguard when emissions trading becomes international, as envisaged under the Kyoto Protocol.

Corporate agenda

One organisation that is working hard to push carbon up the corporate agenda in the UK is The Carbon Trust. The Trust states that the issue of carbon management is becoming a key factor for businesses as carbon becomes a tradeable commodity and managing carbon risk becomes a key aspect of company performance.

“The UK Emissions Trading Scheme is an exciting development which will give the UK a head start in tackling climate change and help us to address our Kyoto commitments,” Carbon Trust’s chief executive, Tom Delay told IEM. “By putting an actual value on greenhouse gas emissions, the government has recognised carbon as a commodity and is making carbon management a financially significant issue for companies to deal with. This creates a market for carbon that will help drive investment in low carbon technologies. This can only be a good thing and is an important part of a series of market, fiscal and regulatory measures and incentives that will stimulate the cultural and commercial changes which are necessary to achieve a low carbon economy.”

Delay continues, “The Carbon Trust welcomes the impetus emissions trading is bringing – and will increasingly bring – to investment in energy efficient and low carbon goods, services and products. We see emissions trading as an opportunity for companies to benefit individually through effective carbon management and trading of their surplus quota, as well as through improved customer perceptions of corporate social responsibility and environmental performance.

Carbon management

“In the long term, investment in companies practising sound carbon management will become increasingly attractive compared with those companies who fail to implement carbon management measures. This means that carbon will become a significant balance-sheet risk and those companies which move quickly to address it will be best placed to take advantage of the commercial benefits it can bring.”

Greenergy, a UK-based company specialising in carbon strategies, management and systems development also emphasises the business, as well as the financial, benefits of participation.

Donna Clarke, business development and strategy director at Greenergy Carbon Partners, told IEM: “With the implementation of the UK Emissions Trading Scheme and a gateway to trading for the 6000 companies in Climate Change Agreement with energy efficiency targets, companies are beginning to take a more structured approach to energy and emissions management. One of the reasons for this is the potential to generate new revenue streams from over performance against target, another is the potential for losing the Climate Change Levy (CCL) rebate because of underperformance.

“Data monitoring and risk management become critical,” Donna continues, “especially if there is a risk of a company missing its Climate Change Agreement target. For these companies buying allowances and keeping the CCL rebate may be the most cost-effective option – even with pricing at around £12t/CO2emissions.

“Those companies who have achieved their target are in an enviable position,” Donna concludes, “They can sell or hold their surpluses and sit back and see how the emission market develops. However, if they decide to sell their data will have to be verified before they can do so. Again, this is where a strategic, practical and systems-based approach to greenhouse gas management will be of benefit – turning energy and emissions reductions into cash.”

Staying with Climate Change Agreements and energy, Noy Trounson, barrister in DLA’s environmental practice, makes the point that, “the most obvious incentive to companies for complying with Kyoto results from the Climate Change Levy the government has introduced in order to induce companies to reduce their emissions. This is a tax on energy consumption but in the case of many intensive energy users there is the possibility of signing up to Climate Change Agreements. This gives companies an 80 per cent rebate on Climate Change Levy provided that they comply with the emissions reduction targets set out in the agreements. Companies which fail to meet their targets will lose this rebate, which provides a powerful incentive as large amounts of money are at stake.”

A chemical reaction

The Chemical Industry is a major energy consumer and has been working to reduce consumption through a voluntary energy efficiency agreement with the UK government. The Chemical Industries Association (CIA) on behalf of the industry has been pushing for emissions trading as the best approach to continue this process since the introduction of the Climate Change Levy. The Association continues to support Emissions Trading but has expressed concern about the possible conflicts between the UK scheme and the EU Emissions Trading proposals.

The CIA’s Objectives and Proposals document recognises the need for CIA members to trade in order to effectively manage their Climate Change Agreements. But it also states: “Whilst we were hopeful that the UK government would create a significantly simplified mechanism for trading between CCA energy efficiency participants, this is no longer being offered. It has also been suggested that CCA participants may have to move to absolute emissions targets at some stage in the future. This will be difficult for companies which cannot count on a contribution to their performance from renewables. This is because there is no mechanism in place for consumers to effectively influence decisions about large-scale investment in energy generation and, in most cases, it is the generators, which will claim this improvement against their Renewables Obligation.”

According to the CIA, the fundamental flaw in the design of the UK-ETS lies in the fact that it has been designed to fit around the CCL rather than as the most effective market mechanism in its own right. The UK-ETS has been designed around allocation of indirect emissions primarily because the details were developed after the announcement of the CCL and it was, therefore, a political necessity that the UK-ETS be designed to fit around the fiscal instrument already announced by government.

The CIA’s concerns about the compatibility of the UK-ETS with the proposed EU scheme centre around the fact that when the EU Commission approved the UK-ETS under its state aid rules, it indicated that differences between the two schemes might lead to market distortions in the future and proposed, in time, modifications to the UK-ETS to smooth adaptation to the EU legislation.

In conclusion, it seems to me that the UK-ETS has so far served to focus the thoughts of industry around the wider issues of their Climate Change Agreements. Of course, the UK Scheme is still in its infancy and has not been immune from criticism, but initial reactions have been largely positive – more, unfortunately, than I have room to mention here.

One thing is for sure though, and that is all eyes will be on the UK-ETS as events unfold in the months and years ahead. The Scheme’s future in the UK depends on a number of factors, including the introduction of Emissions Trading in other countries to name but one. Let’s hope the overall outcome is a positive one, especially in offering a vital boost to UK manufacturing industry.

Further information on the UK-ETS can be found at www.defra.gov.uk

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