Calling all energy intensive small & medium sized European companies: Are you maximising profit and minimising costs in this brave new Kyoto era?
Melanie Barry, Head of Business Development at Carbon Capital Markets highlights emissions trading issues for the SME sector.
With the price of CO2 hitting all time highs this week now is a very good time to sell allowances but should you need to buy allowances, to meet your EU ETS compliance targets, the strong upward price trend demonstrates there's every risk you'll pay too much if you mis-time or leave your purchase to the last minute. CO2 prices have increased more than four fold since the beginning of the year from approximately €6-7 per tonne to around €29-30. (see graph below)
It's impossible to time the market but there are simple and cost effective ways to take advantage of market mechanisms to cost effectively meet your allowance targets, avoid fines or losses of operating permit and possibly profit - while pursuing business as usual - even if you don't know your current allowance position or what it's likely to be for the 2006 compliance period.
If you don't act now you may put yourself in a position where you are in a rush to buy or sell just prior to the compliance deadlines when prices will be volatile. Experience shows that most small to medium companies will wait until late in the day before making decisions about their allowance exposure.
If you need to buy allowances you don't want to be doing so with everyone else when the price could be higher.
As you can't know with certainty what future prices will be, by planning ahead you can start now to average your cost thereby guarding against buying when the price is not in your favour. Moreover, if the worst happens and you fail to surrender a number of allowances equal to the amount of CO2 emitted you will face fines of €40 per tonne in the first phase (increasing to €100 per tonne in the second) and potential loss of your operating permits.
Conversely, if you have a surplus of allowances and don't realise it you are missing out on the current high prices. Either way, qualified third parties can provide simple and cost effective ways to buy or sell allowances and advise which quantity and frequency best suits your needs.
Want certainty and predictability?
As the value of carbon changes so does the risk associated with it, which becomes an ever more material issue for companies. Averaging out your exposure to volatile prices is good practice. It's the difference between well informed risk thinking and not understanding your risk at all. This balanced approach will give you the resilience you need in a volatile price environment.
No fees, little effort!
If you're time constrained like everyone else you'll be pleased to know you can achieve your optimum position with very little paperwork if you go via a third party. If a broker or exchange agrees to deal with you they will charge fees and have certain membership registration requirements that are likely to involve paperwork. The simple solution therefore, one better tailored to small and medium sized companies, is to go direct to a third party.
As you only need to actually have your allowances on the compliance date Carbon Capital Markets can buy your allowances at an agreed price and will sell them back to you when you need them, leaving you free in the meantime to use the working capital for energy efficiency improvements which may mean you gain even more allowances to sell.
Unsure what to do next?
It's simple. Believe it or not you don't need to know. Nor do you need trading experience. Whether you need to buy or sell allowances you should act in a timely manner rather than rush at the wrong time, and asking for advice from a qualified third party will enable you to just that.
Carbon Capital Markets
(Published on the 8th July 2005)