Carbon Conundrum: Carbon Trading Is Becoming a Reality for Companies around the World. but as Elisabeth Jeffries Reveals, the Introduction of Carbon Taxes in Many Parts of the World May Not Be That Far Away

By Jeffries, Elisabeth | Financial Management (UK), October 2012 | Go to article overview

Carbon Conundrum: Carbon Trading Is Becoming a Reality for Companies around the World. but as Elisabeth Jeffries Reveals, the Introduction of Carbon Taxes in Many Parts of the World May Not Be That Far Away


Jeffries, Elisabeth, Financial Management (UK)


Finance directors sitting at the world's boardroom tables could be surprised by the offer of a rather attractive bowl of bonbons one of these days--the permits handed out to big carbon emitters involved in new cap-and-trade schemes. If the EU's Emissions Trading Scheme (ETS) is anything to go by, big carbon emitters, such as cement and coal mining companies from New South Wales to Guangdong, could be reaping massive windfalls in the years to come.

That is because there is a minor eruption of carbon emissions trading schemes being launched around the world. In Australia, the Clean Energy Act ushered in a new emissions trading scheme in July 2012 (due to be linked to the EU scheme in three years' time), while another is due to come into force in California in 2013, which will be linked to Quebec's. Mexico and South Korea have also passed legislation laying the foundation for future trading schemes, while similar plans are emerging in China and South Africa.

There is a good reason for this, of course--the failure of the Copenhagen climate summit talks in 2009 aimed at creating a successor to the Kyoto Protocol, the international treaty to stabilise greenhouse gas emissions that expires in 2012. That is one factor now prompting the rash of national emissions-cutting initiatives using cap-and-trade schemes, carbon taxes and other related tools.

Many campaigners observing these individual programmes are aching to put them back together again in a single piece as originally intended, as Kat Watts, climate advisor at NGO WWF, explains: "The danger of all these schemes cropping up is that they'll have different rules and frameworks, rather than a globally rule-based system, so there's a lot of negotiations ramping up into a live convention to get a centralised basis for this."

But for the next few years, and until a global system does finally fall into place, it is individual, bottom-up carbon-cutting schemes that will dominate. And one of the key questions for corporate financial managers has to be: what will this do to our profitability?

Ethical investment advisors are given to making dark warnings of new carbon policies that turn investment ratios on their head. Take budget airlines--apparently performing much better than most of the national carriers. Yet research by index company FTSE suggests that they will be much worse hit financially by the airlines' entry into the EU ETS this year because costs will take a larger bite out of their air fares.

But the problem is that these policies, pioneered in Europe, have veered off the rails in their early years. When setting up cap-and-trade schemes, governments arguably hand out licences to pollute to major industries in the form of carbon permits. A polluter can trade these permits with another who might make equivalent changes more cheaply. This is the approach underlying the EU ETS, introduced in 2005 and the world's largest carbon market to date. The idea is that the availability of carbon permits is gradually reduced by tightening the caps, ensuring scarcity, so that the market retains its value while at the same time forcing a reduction in the overall level of pollution.

In the meantime, though, some companies have found themselves deposited on a thick gravy train, according to Sandbag, an NGO digging out injustice in the EU ETS. In a 2011 press release, it identified ten carbon "fat cats" (all steel and cement companies) that it calculates made a combined profit of [euro]4.1bn from free carbon permits negotiated with politicians in 2008-2010. One way they may have made money from the allowances is by selling them on to others that are more skilled at cutting carbon. Since they will not have paid for them in the first place, that is a rather attractive and easy bonus.

On top of that, the caps were set too high during the scheme's first phase, so there was little motivation for saving energy in some industries. …

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