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A changing climate for carbon services in the EU
ENVIRONMENTALBUSINESS OPPORTUNITIES
A Changing Climate for Carbon Services in the EU
Rob Arnold
he signing of the Kyoto Protocol in 1997 heralded major changes in methods that business and government could use to tackle climate change. Until then, despite the growing consensus that humanity's production of ,greenhouse gases was causing climate change, there were only two driving forces for response from the commercial sector: public opinion and the risk of damage to assets or markets through extreme weather conditions.
T
By Rob Arnold
Mechanisms introduced by the 1997 Kyoto Protocol have changed the wa~s in which the problems ofreducing greenhouse gas emissions can be addressed. This is especiaIA, the case in the EU, where financial instruments for controlling emissions are being developed at both national and supra-national levels. The new regulations are resulting in the emergence of a new type of business opportunit)': carbon services, which enable co)porations to control their greenhouse gas output via management of their energy, materials and land use. This article explains the basis of the new indust U and examines its prospects in three of Europe's largest economies. The United Kingdom is first in designing a carbon trading system and is implementing taxation to encourage energy efficiencv. France is introducing st)ingent taxes on the carbon content offuels and electricih,, hz German3; meanwhile, the Green pa.rh, has gained political power and is promoting renewable energ; although there is little attempt to link national polic}, to greenhouse gas output. The potential opportunities provided by carbon services to businesses world-wide ate assessed, suggesting that this will be a major growth industrv in the coming years.
For many companies, this was enough to justify a response, but their good intentions foundered on the problem of how to address climatic issues and yet still maintain short-term competitiveness. After all, it was no good setting out to save the planet if they were going to become bankrupt long before the), had any effect. The KyotoProtocol changed this fundamentally for much of the world. It created a flamework for reducing greenhouse gas emissions, not just through national and international legislative processes as is normally the case, but through commercial ones, too. In the European Union, recent changes in legislation and market conditions in the aftermath of the Protocol look set to produce a new range of greenhouse gas related services. However, the ramifications of this are not just applicable to Europe, where the Protocol is most favoured. In the US, where ratification of Kyoto is still uncertain, and in the signatory states that are not even bound to emission reduction targets, reduction of greenhouse gas emissions looks set to open up new business opportunities.
Kyoto Creates a Carbon Market Rob Arnold is the Science and Policy Advisor to Greenergy, a company based in London (UK), specialising in clean fuels and power and a single-point provider of products and services for greenhouse gas management. He currently represents Greenerg~, on the UK Emissions Trading Group and holds a Master's Degree in Environmental Technology. from Imperial College, London, where he conducted research for the UK Meteorological Office into modelling and predicting climate change. 298
The two new commercial drivers introduced into greenhouse gas management by Kvoto are fairly well known: tax and trade. To encourage emission reduction, some signatory countries have introduced taxes on carbon in fuel, whilst others have introduced them on ener D' use. Trading is used parallel to tax measures: if a participant brings down their emissions more than is required, CORPORATE ENVIRONMENTAL STRATEGY 1066-7938/00/$- see front matter © 2000Elsevier Science Ioc. All rights reserved,
Rob Arnold
the surplus reductions may be certified as "avoided emissions" and sold. Other parties to the Protocol, who are unable to bring about a suitable level of reduction on their own, can then make up their shortfall by purchasing these certified emission reductions. The financial sticks and carrots of tax and trade effectively place a monetary value on "carbon emission", as the release of greenhouse gases is often called. Thus, a new business cost has been created out of what was formerly seen as a solely ethical environmental concern. This will come as no surprise to most readers, as ethical issues often translate into business costs via public opinion long before the introduction of legal instruments to force the corporate hand. Emission reduction, though, is different to other legally enforceable aspects of environmental ethics, such as the prevention of biodiversity loss or pollution: unlike most environmentally responsible action it can not just be encouraged, but it can also be manufactured, bought and sold. In effect, it is a commodity and, like all commodities, it has its own markets. At present, these are only embryonic, but the experimental carbon market activity that is already being seen in places like Australia1, The Netherlands2 and Costa Ricaa is expected to roll out to most of the world's economies. The creation of a new commodity also implies the emergence of markets in its investment and management, as well as its trade. Emission reduction units can be generated and traded more or less anywhere in the world, providing that the certification process is reliable, but investment and management services require more elaborate market conditions. These will only be viable in areas either where carbon emission has already gained a real value or where uncertainty in its value creates an associated risk in business costs.
Risk and Cost Management Uncertainty over the value of carbon is already a reality in the EU, in Australia and, given the expecVol. 7, No. 3 2000
ENVIRONMENTAL BUSINESS OPPORTUNITIES
tations over carbon trading markets, in the USA, too. In parts of Europe, at least, this opens up the possibility of providing services to manage those facets of risk-exposure and of energy and materials use associated with greenhouse gas emissions. With the development of fiscal instruments for controlling carbon emissions by national governments, it is likely that emitting greenhouse gases in will soon carry a price tag for European businesses as all business activity uses energy in one form or another, this will affect the whole business sector. The unknown factor is how large the price tag will be. At the moment, there is no clear-cut price for carbon, with estimates varying from below US $10 per tonne to above US $100. Such a large uncertainty is a big risk for business planning. Corporations who fail to control their greenhouse emissions are putting their competitiveness on the line should carbon prices tend towards the US $100 mark. Similarly, the business that spends much of its budget on expensive, low-carbon electricity and greenhouse gas abatement measures will also run into trouble if carbon remains a low value commodity or becomes worthless.
Carbon Service Provision Minimising risk is one goal of "carbon service provision". In its most general form, this is the supply of products and services to enable a client to both keep track of their greenhouse gas emissions and to set and achieve targets in them. This information can then be used to identify the least-cost options for changing the CO2 output of a particular business to the point where risk exposure is deemed acceptable. Carbon services, however, are not just for risk control: they exist to help business take a responsible attitude to its energy supply. Companies wishing to purchase power from a particular renewable resource, or to buy in emissions reduction credits (when they become widespread), would be able to obtain these from their providers of carbon services, too. 299
Rob Arnold
ENVIRONMENTAL BUSINESS OPPORTUNITIES
Objectives for emissions reductionin the E.U. III
.
Recent emissmns h,story
Change from 1990 emission levels -13% -7.5% -21% 0% 0% -21% 25% 13% -8.5% -28% -6% 27% 15% 4% -12.5%
54 127 55 70 546 949 130 64 487 10 196 87 347 72 636
3% 12% 29% 11% 0% -11% 7% 5% 6% -43% 12% 13% 3% 11%
-8%
3840
-1%
Austria Bel~]ium
Denmark Finland France Germany Greece Ireland
Italy Luxembeur9
Netherlands Portugal
Spain Sweden
United Kingdom European Union
.
Annual emissions allowed by the end of the Kyoto compliance perlo~ (2008-2012) Million tonnes CO2 equivalent
Targets for emission reductions within the EU by 2012
i
Change in C02 production (1990 to 1996)
Source: European Enviromnent Agency, Environmental Signals 2000, 2000.
Exhibit I
In practice, the exact range of services will vary with the provider's background. Greenergy, the first company in the UK to attempt selling carbon services commercially, is originally an energy company. It bases its products mostly on providing electricity and fuels of known carbon intensity. That is to say, clients' greenhouse gas production can be managed through using energy that has a known amount of CO2 per kilowatt-hour (or equivalent measures, in the case of fuel) associated with its production and use 4. Effective management of this, supplied from a wide range of renewable and conventional sources, and combined with measures such as energy efficiency and carbon sequestration, provides cost-effective greenhouse gas control. Of course, energy companies are not the only background from which carbon service providers may come. In the wet, temperate climate of northern Europe, land use can have a significant impact on an area's greenhouse gas production - especially that of methane, a much more powerful greenhouse gas than CO2. Agriculture, forestry and waste management are other market sectors with scope for the expansion of the carbon service industry: 300
changes in fertiliser use, irrigation forestry management and waste disposal can all have very marked effects on regional greenhouse gas release5. All these areas provide excellent prospects for the development of their own carbon services.
Prospects for European Carbon The Kyoto Protocol recommends reductions in emissions of six greenhouse gases over the period 2008-2012. Each signatory has a target: a quota of emissions reductions that must be achieved during the compliance period, based on reducing emissions to a certain fraction of what the)' were in the year 1990. Although the Protocol has not yet been accepted world-wide, the EU requires its member states to achieve their agreed reductions targets, giving them a legally binding status within the Union. The EU itself has a reduction target of 8% fewer emissions than in 1990 overall, but has redistributed the individual member states' targets internally for its own economic development reasons. Consequently, the more industrialised states tend to have larger reduction targets than the rest (see Exhibit 1). CORPORATE ENVIRONMENTAL STRATEGY
Rob Arnold
This does not mean that there is no incentive for good practice in countries with low targets. The EU recently introduced proposals for a Union-wide carbon trading market, expected to start around 2005. At the same time, availability low-emission technologies will increase uniformly across the region. Countries with low targets therefore have the opportunity to keep their emissions even lower than they are required to and to sell their surplus reductions in the EU trading system to those states having trouble meeting their targets. The urgency of response varies from country to country, with many of the states with lower targets choosing to stake their climate policies on the success of emissions trading. Nevertheless, there have been significant, reasonably encouraging developments in the larger EU economies, which provide the largest potential markets for carbon services. The following three case studies all come from these larger states, but it should not be forgotten that similar events are also occurring in the other twelve members. The
UK- first in the field
Under Kyoto, the UK is obliged to cut its greenhouse emissions to 12.5% less than 1990 levels. This it looks set to achieve, as much by accident as by design. A large-scale switch from coal to gas-fired power stations during the 1990s not only reduced sulphur dioxide emissions and boosted the North Sea gas industry, as intended, but also led to a dramatic fall in CO2 from electricity generation. One might think that this would provide little incentive for UK business to control its emissions, were it not for the fact that its Government views climate change as a political priority. The Blair administration has based its environmental credentials on the following three policy initiatives: An additional reduction target of bringing national CO 2 emissions down to twenty percent less than 1990 values by 2010. • A tax on energy consumption from April 2001. Known as the "Climate Change Levy", this places Vol. 7, No. 3 2000
ENVIRONMENTAL BUSINESS OPPORTUNITIES
flat rates on business use of coal, gas and electricity (but not petrochemicals, which are already taxed), with exemption status for electricity when produced by combined heat and power (CHP) or renewable sources. Companies and industrial sectors may negotiate reduced Levy rates with the government by taking on voluntary emissions reduction or energy efficiency measures. Active engagement with the business community via the establishment of the UK Emissions Trading Group. This collaboration between business and leading industry is involved in developing a nation-wide system for trading carbon, which is expected to go live in the spring of 2001. The proposed energy taxation, the first to be implemented in Europe, has been extremely controversial as it focuses on the promotion of efficiency of energy use, rather than that of low-carbon power generation. Also, as a tax on the end user, it places little pressure on major power generators to improve the performance of their equipment. Despite these shortcomings, the option to negotiate reduced Levy charges by the voluntary measures mentioned above and the special treatment of CHP and renewable sources act as major drivers to the progress of carbon services. The main criterion for the negotiated agreements with the government is that the claimed emissions reductions should be verifiable - exactly what carbon service provision is designed to do. Additionally, it provides a convenient route for the certification of reductions into tradable credits, useable in the future UK carbon trading system. France - stringent carbon taxes France only has to reduce its emissions to 1990 levels, although, in numerical terms, this means they will actually have to emit less carbon per year than Britain. France will fall within this limit in 2000 but, unlike Britain, it is presently on line to fail its target by 2010. 6 301
ENVIRONMENTAL BUSINESS OPPORTUNITIES
To counter this and other problems, France is introducing a series of stringent "ecotaxes" on waste disposal, fuel use, atmospheric emission and sound pollution. Of particular relevance to the carbon service industry is a direct tax on carbon emissions, due to start in 2001, which will require companies to pay" between EUR 23 - EUR 30 (US $21 US $27) per tonne of carbon released to the atmosphere.7 This includes emissions from landfill, sewage and the chemical industry and may even be extended to include land use, too. Such a law will demand a robust system of emissions tracking, accounting and management, if effective carbon savings are to be made. There are the core service elements of a carbon service provider's business, making the French market fertile ground for the growth of this industry. Options for ser~4ces based around electricity management are more limited than the UK, as France has not deregulated its power markets and only off grid generation can be sold. However, this is offset by the fact that France has a very high percentage of arable farmland (thirtythree percent of its land area), providing good conditions in particular for the expansion of agribusiness into the carbon industry in the coming years.
Germany - a buyer of carbon credit Germany has one of the greatest proportions of renewable power in its national energy' mix for any European country. It also has some of the largest emission reductions of all to make: twenty-five percent less than 1990 levelsS. The last set of German elections brought a coalition government of the right wing Social Democrats and the mid-left Green part), to power, along with promises to increase taxes on fuels and energy'. This has already occurred: a new regime was introduced in April 2000 which increased energy tax, placed guaranteed prices on renewable power and created an obligation for German power suppliers to purchase electricity from all available renewable sources. 9
There is no obvious link to the amounts of 302
Rob Arnold
greenhouse gas released by energy production the taxes' only effects are to increase the government's revenue from energy, and to drive Germany towards environmental action based solely around energy efficiency. Germany is expected to fall a long way short of meeting its Kyoto obligation, but there is still precious little financial incentive for any part of its economy to reduce carbon - in fact, as things stand, there is a large disincentive. The one major opportunity here for the carbon services market will only arise if the EU-wide carbon trading system become a reality: Germany will be an excellent customer for carbon credits created abroad.
Reducing Carbon World-wide The case of German)" demonstrates that failure to link national climate change policy to greenhouse gas emissions can prove counter-productive. It can remove some of the drivers for market mechanisms such as carbon services, which assist emissions reduction. If the countries had an unchanging demand for power, this would not be a problem and the intended reductions would be achieved. But this is not the case. Energy efficiency measures alone are not a long-term solution for emissions reduction. Most countries have both increasing populations and an increasing consumer demand for energy'. This will ahvays oft~et energy, efficiency over time as long as present, high-carbon energy' production techniques are the norm. Technologies for low-carbon energy production, on the other hand, can always be refined and improved providing greater scope for emission reduction than energy saving in the long-term. The carbon service industry is viable anDvhere in the world where there is a price on either emission or abatement of carbon. Its main attraction from the point of environmental policy is the promise of a flexible, cost-effective method of reducing emissions from the commercial sector. However, as the above examples show, the degree to which it CORPORATEENVIRONMENTALSTRATE6Y
Rob Arnold
can be employed usefully depends on how effectively local environmental policies link finance to greenhouse gas emissions. Given this, it seems most likely that carbon services will make their first appearance in Northern Europe and in Australia. The EU's attitudes have been described above, but it is the northern members in particular, which have a history of both high carbon emissions, a willingness to introduce environmental legislation and of strong commodity trading markets, that carbon services should really take off.
ENVIRONMENTAL BUSINESS OPPORTUNITIES
Endnotes
1 Sidney Futures and Options Exchange, SFE expands into carbon trading, SFE press release 31st August 1999. 2 The FACE Foundation, More Forest, Less CO2 - The FACE Foundation Homepage (Available online at www.facefoun-
dation.nl ). 3 Ann Goodman, "Carbon Trading Up and Running", Tomorrow, Issue 3, May-June 1998. Greenergy, Carbon Intensity® of Electricity, available online under "Electricity, Carbon Certified" at www.greenergy.com,April 2000. 4
5 Intergovernmental Panel on Cliante Change, Revised Australia, in comparison, is aiming to become a prime mover in any international carbon trade that may develop. It is also attempting to throw off its reputation as an country with little regard for good environmental practice. After spending much of the late 20 th century dogged by inefficient land-use practice and an energy grid based almost entirely on fossil fuell0, Australia is orienting national policy towards becoming a major player in greenhouse gas reduction world-wide. At present, the Sydney Futures and Options Exchange is vying with its equivalents in London and Chicago to become the world centre of carbon trading. With the development of carbon as a commodity, there is a growing incentive for governments to create links to it in their policy-making. This implies an increase in global demand for carbon services, at least in industrialised nations. Greenergy believes that there is the potential for the market to grow to a similar size to that of the industrial and commercial sectors of the world energy market, with a similar diversity of players. Carbon services are likely to be one of the major new industries of the early 21 st century, i~
Vol. 7, No. 3 2000
1996 IPCC Guidelines for National Greenhouse Gas Inventories, Geneva, 1996. (Available online at
http: //www.ipcc.ch/pub/guide.htm ) 6 Agence France
Presse Internationale, Ecology Tax, Petrol Hike Behind French Plan to Cut Greenhouse Gases, AFP Intl. press release 19th January 2000. 7 Theresa Sotto, "France Reveals National Plan to Combat Global Warming", Weathervane, 24th January 2000. (Available online at http://www.weathervane. rff.org/negtable/France plan.html ) 8 BEO (German Energy Agency), Policy Report on Renewable energy. (Available online at http://www.agores.org/Publications/EnR/GermanyRE Policy2000.pdf ) Internationales Wirtschaftsforum Regenerative Energien, New Electricity Feed Law was Passed in Germany, IWR news item, 25th February 2000. (Availableonline at http://www.uni-muenster.de/Energie/re/ iwr/archive.html ) 9
10 Central Intelligence Agency (USA), The World Factbook 1999, CIA, Washington DC, January 1999 (Available online at http://www.cia.gov/cia/publications/factbook/index.html )
303
A Changing Climate for Carbon Services in the EU
Rob Arnold
he signing of the Kyoto Protocol in 1997 heralded major changes in methods that business and government could use to tackle climate change. Until then, despite the growing consensus that humanity's production of ,greenhouse gases was causing climate change, there were only two driving forces for response from the commercial sector: public opinion and the risk of damage to assets or markets through extreme weather conditions.
T
By Rob Arnold
Mechanisms introduced by the 1997 Kyoto Protocol have changed the wa~s in which the problems ofreducing greenhouse gas emissions can be addressed. This is especiaIA, the case in the EU, where financial instruments for controlling emissions are being developed at both national and supra-national levels. The new regulations are resulting in the emergence of a new type of business opportunit)': carbon services, which enable co)porations to control their greenhouse gas output via management of their energy, materials and land use. This article explains the basis of the new indust U and examines its prospects in three of Europe's largest economies. The United Kingdom is first in designing a carbon trading system and is implementing taxation to encourage energy efficiencv. France is introducing st)ingent taxes on the carbon content offuels and electricih,, hz German3; meanwhile, the Green pa.rh, has gained political power and is promoting renewable energ; although there is little attempt to link national polic}, to greenhouse gas output. The potential opportunities provided by carbon services to businesses world-wide ate assessed, suggesting that this will be a major growth industrv in the coming years.
For many companies, this was enough to justify a response, but their good intentions foundered on the problem of how to address climatic issues and yet still maintain short-term competitiveness. After all, it was no good setting out to save the planet if they were going to become bankrupt long before the), had any effect. The KyotoProtocol changed this fundamentally for much of the world. It created a flamework for reducing greenhouse gas emissions, not just through national and international legislative processes as is normally the case, but through commercial ones, too. In the European Union, recent changes in legislation and market conditions in the aftermath of the Protocol look set to produce a new range of greenhouse gas related services. However, the ramifications of this are not just applicable to Europe, where the Protocol is most favoured. In the US, where ratification of Kyoto is still uncertain, and in the signatory states that are not even bound to emission reduction targets, reduction of greenhouse gas emissions looks set to open up new business opportunities.
Kyoto Creates a Carbon Market Rob Arnold is the Science and Policy Advisor to Greenergy, a company based in London (UK), specialising in clean fuels and power and a single-point provider of products and services for greenhouse gas management. He currently represents Greenerg~, on the UK Emissions Trading Group and holds a Master's Degree in Environmental Technology. from Imperial College, London, where he conducted research for the UK Meteorological Office into modelling and predicting climate change. 298
The two new commercial drivers introduced into greenhouse gas management by Kvoto are fairly well known: tax and trade. To encourage emission reduction, some signatory countries have introduced taxes on carbon in fuel, whilst others have introduced them on ener D' use. Trading is used parallel to tax measures: if a participant brings down their emissions more than is required, CORPORATE ENVIRONMENTAL STRATEGY 1066-7938/00/$- see front matter © 2000Elsevier Science Ioc. All rights reserved,
Rob Arnold
the surplus reductions may be certified as "avoided emissions" and sold. Other parties to the Protocol, who are unable to bring about a suitable level of reduction on their own, can then make up their shortfall by purchasing these certified emission reductions. The financial sticks and carrots of tax and trade effectively place a monetary value on "carbon emission", as the release of greenhouse gases is often called. Thus, a new business cost has been created out of what was formerly seen as a solely ethical environmental concern. This will come as no surprise to most readers, as ethical issues often translate into business costs via public opinion long before the introduction of legal instruments to force the corporate hand. Emission reduction, though, is different to other legally enforceable aspects of environmental ethics, such as the prevention of biodiversity loss or pollution: unlike most environmentally responsible action it can not just be encouraged, but it can also be manufactured, bought and sold. In effect, it is a commodity and, like all commodities, it has its own markets. At present, these are only embryonic, but the experimental carbon market activity that is already being seen in places like Australia1, The Netherlands2 and Costa Ricaa is expected to roll out to most of the world's economies. The creation of a new commodity also implies the emergence of markets in its investment and management, as well as its trade. Emission reduction units can be generated and traded more or less anywhere in the world, providing that the certification process is reliable, but investment and management services require more elaborate market conditions. These will only be viable in areas either where carbon emission has already gained a real value or where uncertainty in its value creates an associated risk in business costs.
Risk and Cost Management Uncertainty over the value of carbon is already a reality in the EU, in Australia and, given the expecVol. 7, No. 3 2000
ENVIRONMENTAL BUSINESS OPPORTUNITIES
tations over carbon trading markets, in the USA, too. In parts of Europe, at least, this opens up the possibility of providing services to manage those facets of risk-exposure and of energy and materials use associated with greenhouse gas emissions. With the development of fiscal instruments for controlling carbon emissions by national governments, it is likely that emitting greenhouse gases in will soon carry a price tag for European businesses as all business activity uses energy in one form or another, this will affect the whole business sector. The unknown factor is how large the price tag will be. At the moment, there is no clear-cut price for carbon, with estimates varying from below US $10 per tonne to above US $100. Such a large uncertainty is a big risk for business planning. Corporations who fail to control their greenhouse emissions are putting their competitiveness on the line should carbon prices tend towards the US $100 mark. Similarly, the business that spends much of its budget on expensive, low-carbon electricity and greenhouse gas abatement measures will also run into trouble if carbon remains a low value commodity or becomes worthless.
Carbon Service Provision Minimising risk is one goal of "carbon service provision". In its most general form, this is the supply of products and services to enable a client to both keep track of their greenhouse gas emissions and to set and achieve targets in them. This information can then be used to identify the least-cost options for changing the CO2 output of a particular business to the point where risk exposure is deemed acceptable. Carbon services, however, are not just for risk control: they exist to help business take a responsible attitude to its energy supply. Companies wishing to purchase power from a particular renewable resource, or to buy in emissions reduction credits (when they become widespread), would be able to obtain these from their providers of carbon services, too. 299
Rob Arnold
ENVIRONMENTAL BUSINESS OPPORTUNITIES
Objectives for emissions reductionin the E.U. III
.
Recent emissmns h,story
Change from 1990 emission levels -13% -7.5% -21% 0% 0% -21% 25% 13% -8.5% -28% -6% 27% 15% 4% -12.5%
54 127 55 70 546 949 130 64 487 10 196 87 347 72 636
3% 12% 29% 11% 0% -11% 7% 5% 6% -43% 12% 13% 3% 11%
-8%
3840
-1%
Austria Bel~]ium
Denmark Finland France Germany Greece Ireland
Italy Luxembeur9
Netherlands Portugal
Spain Sweden
United Kingdom European Union
.
Annual emissions allowed by the end of the Kyoto compliance perlo~ (2008-2012) Million tonnes CO2 equivalent
Targets for emission reductions within the EU by 2012
i
Change in C02 production (1990 to 1996)
Source: European Enviromnent Agency, Environmental Signals 2000, 2000.
Exhibit I
In practice, the exact range of services will vary with the provider's background. Greenergy, the first company in the UK to attempt selling carbon services commercially, is originally an energy company. It bases its products mostly on providing electricity and fuels of known carbon intensity. That is to say, clients' greenhouse gas production can be managed through using energy that has a known amount of CO2 per kilowatt-hour (or equivalent measures, in the case of fuel) associated with its production and use 4. Effective management of this, supplied from a wide range of renewable and conventional sources, and combined with measures such as energy efficiency and carbon sequestration, provides cost-effective greenhouse gas control. Of course, energy companies are not the only background from which carbon service providers may come. In the wet, temperate climate of northern Europe, land use can have a significant impact on an area's greenhouse gas production - especially that of methane, a much more powerful greenhouse gas than CO2. Agriculture, forestry and waste management are other market sectors with scope for the expansion of the carbon service industry: 300
changes in fertiliser use, irrigation forestry management and waste disposal can all have very marked effects on regional greenhouse gas release5. All these areas provide excellent prospects for the development of their own carbon services.
Prospects for European Carbon The Kyoto Protocol recommends reductions in emissions of six greenhouse gases over the period 2008-2012. Each signatory has a target: a quota of emissions reductions that must be achieved during the compliance period, based on reducing emissions to a certain fraction of what the)' were in the year 1990. Although the Protocol has not yet been accepted world-wide, the EU requires its member states to achieve their agreed reductions targets, giving them a legally binding status within the Union. The EU itself has a reduction target of 8% fewer emissions than in 1990 overall, but has redistributed the individual member states' targets internally for its own economic development reasons. Consequently, the more industrialised states tend to have larger reduction targets than the rest (see Exhibit 1). CORPORATE ENVIRONMENTAL STRATEGY
Rob Arnold
This does not mean that there is no incentive for good practice in countries with low targets. The EU recently introduced proposals for a Union-wide carbon trading market, expected to start around 2005. At the same time, availability low-emission technologies will increase uniformly across the region. Countries with low targets therefore have the opportunity to keep their emissions even lower than they are required to and to sell their surplus reductions in the EU trading system to those states having trouble meeting their targets. The urgency of response varies from country to country, with many of the states with lower targets choosing to stake their climate policies on the success of emissions trading. Nevertheless, there have been significant, reasonably encouraging developments in the larger EU economies, which provide the largest potential markets for carbon services. The following three case studies all come from these larger states, but it should not be forgotten that similar events are also occurring in the other twelve members. The
UK- first in the field
Under Kyoto, the UK is obliged to cut its greenhouse emissions to 12.5% less than 1990 levels. This it looks set to achieve, as much by accident as by design. A large-scale switch from coal to gas-fired power stations during the 1990s not only reduced sulphur dioxide emissions and boosted the North Sea gas industry, as intended, but also led to a dramatic fall in CO2 from electricity generation. One might think that this would provide little incentive for UK business to control its emissions, were it not for the fact that its Government views climate change as a political priority. The Blair administration has based its environmental credentials on the following three policy initiatives: An additional reduction target of bringing national CO 2 emissions down to twenty percent less than 1990 values by 2010. • A tax on energy consumption from April 2001. Known as the "Climate Change Levy", this places Vol. 7, No. 3 2000
ENVIRONMENTAL BUSINESS OPPORTUNITIES
flat rates on business use of coal, gas and electricity (but not petrochemicals, which are already taxed), with exemption status for electricity when produced by combined heat and power (CHP) or renewable sources. Companies and industrial sectors may negotiate reduced Levy rates with the government by taking on voluntary emissions reduction or energy efficiency measures. Active engagement with the business community via the establishment of the UK Emissions Trading Group. This collaboration between business and leading industry is involved in developing a nation-wide system for trading carbon, which is expected to go live in the spring of 2001. The proposed energy taxation, the first to be implemented in Europe, has been extremely controversial as it focuses on the promotion of efficiency of energy use, rather than that of low-carbon power generation. Also, as a tax on the end user, it places little pressure on major power generators to improve the performance of their equipment. Despite these shortcomings, the option to negotiate reduced Levy charges by the voluntary measures mentioned above and the special treatment of CHP and renewable sources act as major drivers to the progress of carbon services. The main criterion for the negotiated agreements with the government is that the claimed emissions reductions should be verifiable - exactly what carbon service provision is designed to do. Additionally, it provides a convenient route for the certification of reductions into tradable credits, useable in the future UK carbon trading system. France - stringent carbon taxes France only has to reduce its emissions to 1990 levels, although, in numerical terms, this means they will actually have to emit less carbon per year than Britain. France will fall within this limit in 2000 but, unlike Britain, it is presently on line to fail its target by 2010. 6 301
ENVIRONMENTAL BUSINESS OPPORTUNITIES
To counter this and other problems, France is introducing a series of stringent "ecotaxes" on waste disposal, fuel use, atmospheric emission and sound pollution. Of particular relevance to the carbon service industry is a direct tax on carbon emissions, due to start in 2001, which will require companies to pay" between EUR 23 - EUR 30 (US $21 US $27) per tonne of carbon released to the atmosphere.7 This includes emissions from landfill, sewage and the chemical industry and may even be extended to include land use, too. Such a law will demand a robust system of emissions tracking, accounting and management, if effective carbon savings are to be made. There are the core service elements of a carbon service provider's business, making the French market fertile ground for the growth of this industry. Options for ser~4ces based around electricity management are more limited than the UK, as France has not deregulated its power markets and only off grid generation can be sold. However, this is offset by the fact that France has a very high percentage of arable farmland (thirtythree percent of its land area), providing good conditions in particular for the expansion of agribusiness into the carbon industry in the coming years.
Germany - a buyer of carbon credit Germany has one of the greatest proportions of renewable power in its national energy' mix for any European country. It also has some of the largest emission reductions of all to make: twenty-five percent less than 1990 levelsS. The last set of German elections brought a coalition government of the right wing Social Democrats and the mid-left Green part), to power, along with promises to increase taxes on fuels and energy'. This has already occurred: a new regime was introduced in April 2000 which increased energy tax, placed guaranteed prices on renewable power and created an obligation for German power suppliers to purchase electricity from all available renewable sources. 9
There is no obvious link to the amounts of 302
Rob Arnold
greenhouse gas released by energy production the taxes' only effects are to increase the government's revenue from energy, and to drive Germany towards environmental action based solely around energy efficiency. Germany is expected to fall a long way short of meeting its Kyoto obligation, but there is still precious little financial incentive for any part of its economy to reduce carbon - in fact, as things stand, there is a large disincentive. The one major opportunity here for the carbon services market will only arise if the EU-wide carbon trading system become a reality: Germany will be an excellent customer for carbon credits created abroad.
Reducing Carbon World-wide The case of German)" demonstrates that failure to link national climate change policy to greenhouse gas emissions can prove counter-productive. It can remove some of the drivers for market mechanisms such as carbon services, which assist emissions reduction. If the countries had an unchanging demand for power, this would not be a problem and the intended reductions would be achieved. But this is not the case. Energy efficiency measures alone are not a long-term solution for emissions reduction. Most countries have both increasing populations and an increasing consumer demand for energy'. This will ahvays oft~et energy, efficiency over time as long as present, high-carbon energy' production techniques are the norm. Technologies for low-carbon energy production, on the other hand, can always be refined and improved providing greater scope for emission reduction than energy saving in the long-term. The carbon service industry is viable anDvhere in the world where there is a price on either emission or abatement of carbon. Its main attraction from the point of environmental policy is the promise of a flexible, cost-effective method of reducing emissions from the commercial sector. However, as the above examples show, the degree to which it CORPORATEENVIRONMENTALSTRATE6Y
Rob Arnold
can be employed usefully depends on how effectively local environmental policies link finance to greenhouse gas emissions. Given this, it seems most likely that carbon services will make their first appearance in Northern Europe and in Australia. The EU's attitudes have been described above, but it is the northern members in particular, which have a history of both high carbon emissions, a willingness to introduce environmental legislation and of strong commodity trading markets, that carbon services should really take off.
ENVIRONMENTAL BUSINESS OPPORTUNITIES
Endnotes
1 Sidney Futures and Options Exchange, SFE expands into carbon trading, SFE press release 31st August 1999. 2 The FACE Foundation, More Forest, Less CO2 - The FACE Foundation Homepage (Available online at www.facefoun-
dation.nl ). 3 Ann Goodman, "Carbon Trading Up and Running", Tomorrow, Issue 3, May-June 1998. Greenergy, Carbon Intensity® of Electricity, available online under "Electricity, Carbon Certified" at www.greenergy.com,April 2000. 4
5 Intergovernmental Panel on Cliante Change, Revised Australia, in comparison, is aiming to become a prime mover in any international carbon trade that may develop. It is also attempting to throw off its reputation as an country with little regard for good environmental practice. After spending much of the late 20 th century dogged by inefficient land-use practice and an energy grid based almost entirely on fossil fuell0, Australia is orienting national policy towards becoming a major player in greenhouse gas reduction world-wide. At present, the Sydney Futures and Options Exchange is vying with its equivalents in London and Chicago to become the world centre of carbon trading. With the development of carbon as a commodity, there is a growing incentive for governments to create links to it in their policy-making. This implies an increase in global demand for carbon services, at least in industrialised nations. Greenergy believes that there is the potential for the market to grow to a similar size to that of the industrial and commercial sectors of the world energy market, with a similar diversity of players. Carbon services are likely to be one of the major new industries of the early 21 st century, i~
Vol. 7, No. 3 2000
1996 IPCC Guidelines for National Greenhouse Gas Inventories, Geneva, 1996. (Available online at
http: //www.ipcc.ch/pub/guide.htm ) 6 Agence France
Presse Internationale, Ecology Tax, Petrol Hike Behind French Plan to Cut Greenhouse Gases, AFP Intl. press release 19th January 2000. 7 Theresa Sotto, "France Reveals National Plan to Combat Global Warming", Weathervane, 24th January 2000. (Available online at http://www.weathervane. rff.org/negtable/France plan.html ) 8 BEO (German Energy Agency), Policy Report on Renewable energy. (Available online at http://www.agores.org/Publications/EnR/GermanyRE Policy2000.pdf ) Internationales Wirtschaftsforum Regenerative Energien, New Electricity Feed Law was Passed in Germany, IWR news item, 25th February 2000. (Availableonline at http://www.uni-muenster.de/Energie/re/ iwr/archive.html ) 9
10 Central Intelligence Agency (USA), The World Factbook 1999, CIA, Washington DC, January 1999 (Available online at http://www.cia.gov/cia/publications/factbook/index.html )
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