OnPoint looks at the developing market for C02 emissions. Guests Daniel Chartier, president of the Emissions Marketing Association, and Rob Bradley, senior associate with World Resources Institute, talk with senior reporter Brian Stempeck about how companies are responding to Europe's imposition of CO2 emissions limits. Key questions include: Will Canada and states from the US join Europe's CO2 market? How are US multinationals responding? Who is best -- and least -- prepared to deal with trading C02? What's the price for a ton of C02 and how much is being traded?
Brian Stempeck: Hello, I'm Brian Stempeck and this is OnPoint. Today we'll be discussing the new greenhouse gas cap-and-trade system in Europe, and we're joined by Rob Bradley from the World Resources Institute and Dan Chartier here from the Admissions Marketing Association. Rob, trading started a little bit earlier this month, give us a sense of how this system in Europe works, the new emissions trading scheme.
Rob Bradley: Yeah, this system is going to make a big difference. If you're the operator of a cement kiln, a power plant or an oil refinery or a number of other really big installations that emit a lot of carbon dioxide, you're going to find that over the next three years, during this first period, but this is going to continue more or less indefinitely, your CO2 emissions are going to be capped. What it also means is that if you can manage to emit less than your cap you're going to be able to sell the difference to other players in the market. On the other hand, if you find you can't reduce your emissions, if you're going over your cap, you're going to have to be able to buy those. What it means is that it's going to be a strong incentive to start reducing emissions.
Brian Stempeck: How are countries, so far, taking the initiative? If you're a cement kiln in the U.K., what's happening in terms of the government? How do they determine your allocation?
Rob Bradley: Well, the way that the government determines anything of course is always a bit of a murky mystery. In principle, what they should be doing is looking at where the country needs to be as a whole, looking at its Kyoto target, where the countries of the E.U. all have targets to reduce their emissions or to at least limit emissions growth. What they're doing in practice of courses is they're allocating what this installation emitted last year plus or minus a little bit with the idea of constraining emissions.
Brian Stempeck: So pretty lenient targets so far?
Rob Bradley: So far the most disappointing aspect has been that the so-called national allocation plans. The plans that the government has put forward for their own industry have been pretty lax and that's mainly because each individual government does it for its own industry and there's been a kind of competition among them to make sure that they're not disadvantaging their own installations against those of other E.U. countries.
Brian Stempeck: Dan, your association includes about 100, 190 or so companies, how are they reacting to emissions trading so far? Have they been given their individual allocations for each company yet?
Dan Chartier: Well one thing about the EMA is we're a consortium of companies that span the U.S., Canada as well into Europe. So right now the Kyoto Protocol or the E.U. emissions trading scheme doesn't apply to U.S.-based companies, but we have a number of members that are multinationals.
Brian Stempeck: Right.
Dan Chartier: For their installations in Europe, they're getting their allocations, you know, set by their governments, they don't have the physical E.U. allowances in hand yet, but they're getting a feel for what their obligations are going to be for their plans, trying to come up with strategies for compliance and some of them are far ahead and actually starting to trade already.
Brian Stempeck: Who are some of those companies that are already ahead and starting to trade? Can you give me a few examples of that?
Dan Chartier: Well, two good examples are British Petroleum, BP, and Shell. Both of them have very active trading desks, they've been doing a lot of work to bring their people up to speed over the years on what emissions trading means, what options exist within their facilities around the world and then integrating that into a program. Both Shell and BP had pilot programs that they ran in advance to get their people up to speed. But right now they're actually trading forward for essentially compliance purposes.
Brian Stempeck: BP and Shell are energy companies. Obviously, that's going to be one of the hardest hit sectors because greenhouse gas emissions are so high from that sector. What other industries are seeing that, you know, this emissions train is coming down the road and they're going to be hard hit? What other industries are we looking at?
Dan Chartier: Well, you've got the fuel producers obviously wondering what impact it will have on them, but companies like Holcim, which produces cement, a very energy intensive product. The aluminum industry, the primary aluminum folks, are looking at their impact because their direct emissions from their refining are going to be measured in count against their E.U. targets.
Brian Stempeck: Rob, you said that the targets so far are pretty lenient, a lot of these companies are getting emission allocations that are pretty much the status quo. When, at what point are we going to see stronger cuts in emissions dealt out by these various national governments?
Rob Bradley: Well, I think there's two points here. One is that these early allocations are pretty lenient, but what we're dealing with is a kind of initial period, from 2005 to 2007, which all happens before the actual Kyoto compliance period of 2008 to '12 kicks in. So there's some hope, I think, and some expectation on the part of industry that targets will tighten in that second period. They will be set next year. So that's something which you have to start anticipating. If you work in the sectors, you got a long lead time if you want to install a more efficient boiler or if you want to upgrade your combined heat and power generation plant, you need to wait three or four years before you can even, you know, get that thing on the ground. The second thing is that the example of BP that Dan mentioned is a really interesting one. They put in place a system voluntarily over a three-year period and what they found was that just the discipline of actually measuring the emissions, reporting on them and making their line manager's bonus actually dependent on finding emission cuts meant that they found cuts that cost nothing. In fact, that saved money and BP is estimated to have actually made $650 million of shareholder value in actual reduced costs from saving energy. That's the kind of thing that I think we'll see coming out of the woodwork in a lot of sectors over the next couple of years.
Brian Stempeck: Aren't there going to be financial costs to these companies as well though? I mean some of these, some of this low hanging fruit that they get early on, energy efficiency changes, pretty simple changes they can make to their manufacturing line can save money, but what about further down the road? You talked about 2008 to 2012. A lot of industry groups in the E.U. say that they expect electricity prices to rise maybe 20 or 30 percent, maybe even higher. Are we going to see higher power prices in Europe?
Rob Bradley: I think it's inevitable that power prices will be affected upwards slightly, 20 to 30 percent rise, those are figures really, to be perfectly frank, that go around lobbying statements more than, I think, independent analysis. There's a lot of analysis that shows that even on quite high expectations of carbon value the impact on, say, competitiveness in these energy intensive sectors is much, much less than you see just from normal currency exchange rate fluctuations. So it's important to keep these things in perspective. Nevertheless, certainly in some sectors I think you will see a lot of low hanging fruit being captured and in the early stages there'll be a lot of savings. But yeah, the idea is to put a price on carbon and somebody is going to be paying that price.
Brian Stempeck: Dan, what do your member companies tell you? What do they think is coming in terms of either power prices or what they're going to have to do in terms of a financial hit in the short and long term?
Dan Chartier: Well, because a lot of our members are U.S.-based companies they're all planning for a carbon constrained future. We don't know when it's going to come, but my members expect it to come and when it does come to the U.S., they want to have it be a market-based system like we're seeing in the E.U. So to the extent that things like the RGGI process, the Regional Greenhouse Gas Initiative, that's going on in the Northeast, our members are in there working towards making sure it's market-based so it's a fair, flexible and business-friendly system that provides the environmental benefit that we need to protect, you know, the environment we live in.
Brian Stempeck: But at the same time, you have some energy companies as members in your association, don't they see further down the road if you're an electric utility and you're looking after 2012 and thinking something might come along in the U.S. or a utility Europe, you're going to face pretty drastic cuts coming down the road and someone's going to have to pay those costs. I mean, where is that going to come from?
Dan Chartier: Well, there's two issues here. Number one is how they recover those costs whether they're a merchant-based power producer or regulated utility, so some will have the right to pass on those costs to consumers. But even if you're a merchant-based or a regulated utility, you want a market-based system because that will reduce the costs. The ability to trade emissions with other affected sources, you know, gets you the emission reduction you need at the lowest possible cost. So, to that extent they'd like to see it be market-based most definitely. The other thing that affects the power companies is the planning horizons that Rob was talking about. You put a power plant in the ground and you expect it to be there for 30 years. So no utility today wants to make a decision and in four years from now be faced with a carbon constrained economy that they didn't plan on today. So they're looking for some sort of regulatory certainty today to the extent that they can get that.
Brian Stempeck: Who are some of the American multinationals that are going to be affected right now? And do they see emissions trading in the E.U. as giving them an edge if and when there is a system in the U.S.?
Dan Chartier: There's two sides to that. There's folks that are saying the U.S. companies, the U.S. multinationals, will have an advantage because the E.U. folks have a constraint on their carbon that we don't have. But there's also the problem that some of these multinationals have some of the low hanging fruit, some of the cheapest reductions at their U.S.-based facilities and they won't be able to trade those into the Kyoto Protocol or into the E.U. emissions trading scheme. So they may actually, somewhat, be disadvantaged. So people are arguing both sides of that equation right now.
Brian Stempeck: What about in terms of getting, the Northeast is working on their cap-and-trade plan, Canada is also working to meet their requirements under the Kyoto Protocol. Is there a potential for some of the Canadian provinces and the Northeast states to be involved in the European trading scheme?
Rob Bradley: There is absolutely that potential and in fact, there's a sort of little recognized, but quite significant little change that was made at the last minute to the E.U. legislation, which essentially said the commission, the European Commission can come forward with proposals to link to other systems, and they don't have to be Kyoto parties. They don't have to be countries that have signed up to the Kyoto Protocol. That's important in not only that it doesn't have to be Kyoto Protocol, but doesn't have to be a country. So there are already talks about linking with Australian provinces and states, U.S. state systems if they arise, as well as Kyoto parties like Canada. I think probably for political reasons you'll see a strong inclination to link first with a Kyoto party. I know that the E.U. has been talking very actively to both Canada and Japan. But there's a lot of interest in potentially linking to U.S. systems.
Brian Stempeck: Doesn't that violate international law though? How can you have the United States reject the Kyoto Protocol and then a group of, you know, rogue states in the Northeast decide that they do want to trade? Is that allowable under international law?
Rob Bradley: There's nothing to stop it under international law, it essentially would be a sort of voluntary agreement between the E.U. and a group of U.S. states to recognize mutually each others' credits. Now it has to be said that the E.U. still has the task of actually complying with its Kyoto Protocol target. So what you couldn't see happening is a kind of large net flow of credits from the Northeast system into the E.U., because the E.U. would be left with emission permits, if you like, that weren't actually valid for its international obligation. But that doesn't mean that you can't have a system which works in the other way, in which U.S. companies partly meet their target by purchasing E.U. credits and in fact even without a large net flow, just increasing the pool in which people can trade, is actually shown in previous systems to increase the incentive for people to find those low-cost opportunities.
Brian Stempeck: Dan, how are your members reacting to the fact that some of these schemes in Canada and the U.S. might be coming down the road and in the Northeast in particular? Are they, you said they've been involved so far on kind of shaping how that's going to work.
Dan Chartier: Well, the EMA is very careful not to call for or go out against any kind of emission reduction strategy. What our members are doing and what the EMA is trying to do is make sure that market-based principles get applied regardless of what the final legislative or regulatory fix is in greenhouse gases or any other emission reduction market for that matter. So my members are out there looking for things like Rob said, that increase in liquidity of the market, the number of players, the ability to bring in offsets from outside, you know, a geographic region, whether it be RGGI or if it's a single state. Those things will, you know, increase the liquidity, the functioning of the marketplace, keep costs low not only for the companies, but don't forget these companies are passing their costs on to their consumer, whether it's a product that they're producing or electricity. There's no one out there that doesn't use electricity today to heat their homes or run their business, whatever it is. So greenhouse gas reduction has a definite impact on everything we do in our entire economy. So if we can do it cheaper, we're better off.
Brian Stempeck: Some of the carbon trading has already started in Europe, and we're seeing kind of small volume trade so far. I think a ton of carbon there is trading for about eight euros per ton. What do you expect to see in the first year in terms of price fluctuation or the amount of volume we see? What are some of the factors that we're looking for that are going to drive the price of carbon?
Rob Bradley: It's interesting, because if you look in the actual allocation plans, which as we discussed earlier are very lenient, you would expect the price of carbon to be very low and the fact that it's, it's fairly low, but it's still significant, actually means that companies are looking further ahead. What we saw, the U.K. actually had a system of its own prior to the E.U. system being put in place and what we saw then was at first a fairly volatile situation. What happens is that, yeah the BPs and the Shells, these companies trade, they have huge trading desks. They trade gas. They trade oil. So they're pretty sophisticated participants in the market. That's actually not true of most of the participants in the E.U. system. If you run a cement kiln you care a lot about complying with legislation, not getting prosecuted. You don't have much idea about trading emissions. Why would you? It takes time before that picks up. What we saw in the U.K. system is that in the early stages companies that actually had plenty of credits and were in compliance relaxed and weren't particularly interested in selling. Those who were out of compliance actually were highly motivated. So you would sometimes see spikes in the price. What I hope we'll see in the E.U. system is that the system is so much bigger and it covers so much greater quantity of emissions that there'll be more liquidity and you won't see that kind of volatility.
Brian Stempeck: Right.
Rob Bradley: But there will be a lot of just trying to search out where those bottlenecks lie.
Brian Stempeck: Dan, what are your members looking for in the first year of trading and how much do you expect to see American multinationals involved in trading in the E.U.?
Dan Chartier: I think they're going to be very involved. I was reading an article that said last year, just six months ago, about 35,000 tons of EU emissions allowances were moving on a monthly basis. Today 350,000 tons on average are moving on any given day. So the liquidity is coming up, so the companies are getting very involved looking for, you know, the solution that's going to, not only bring them into compliance, but hopefully make them some money if they are able to capitalize on the reductions that they're already making. So they're very interested in moving this program forward for compliance purposes, for cost reduction.
Brian Stempeck: All right. Well, we're out of time. I want to thank Dan Chartier of the Emissions Marketing Association for joining us along with Rob Bradley from the World Resources Institute. I'm Brian Stempeck and this is OnPoint. Join us again tomorrow for another edition.
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