With the establishment of the EU Emissions Trading Scheme, Europe is calling for companies to manage their greenhouse gas emissions, meaning that CO2 emissions shortly will have a direct impact on a company's financial performance.
Managing risk associated with climate change presents an enormous challenge to all mankind, from the man-in-the-street to business executives. But like many difficult issues, it falls to politicians to draft the appropriate legislation - a long and complex process. Today, six years after Kyoto, the measure has yet to be ratified by Russia.
The Kyoto Protocol comprises many aspects, for instance trading schemes, and the EU is now implementing its own Emissions Trading Scheme, abbreviated as the EU ETS, regardless of the Protocol ratification process. According to Alexander de Roo, a Dutch member of the EU Parliament and vice-president of the committee on the environment, "The climate change issue will be the significant challenge for the next generations."
De Roo has been engaged in environmental questions his whole professional life, and serves today as Coordinator of the Green Group. Having completed more than ten years of studies in chemical engineering and political science, de Roo joined the Green Group in 1985 as staff member. From 1994 to 1999, he was environmental advisor to the group, which has since grown to 48 deputy members, making up 8 percent of the Parliament.
Supported and ratified by the politicians in record time, the new trading scheme will go into effect 1 January 2005.
"It was a very interesting and comprehensive process. Huge pressure was put on the Germans, then on the Parliament. The discussions went back and forth as we negotiated compromises, before the directive was finally approved this summer," he explains.
The scheme includes energy activities covering combustion activities, mineral oil refineries and coke ovens, production and processing of ferrous metals, mineral industry and the pulp and paper industry.
Companies will be given an annual CO2 emissions cap in the form of emission allowances. During the period 2005-2007, at least 95 percent of all allowances will be issued free of charge. It is up to the member country to decide if the remaining allowances will be auctioned. Failing to hand over allow-ances matching their CO2 emissions will invoke a penalty or require companies to buy allowances from other participants which, under the terms of the scheme, have surplus allowances.
The Kyoto Protocol allows for the creation of transferable greenhouse gas emission reductions through investment in mitigation projects operated under so-called "flexible mechanisms". One of these is the Clean Development Mechanism (CDM), where industrialised countries or companies are permitted to finance emissions-avoiding projects in developing countries and receive credit for doing so. Thus, companies can supplement their commitments at home by purchasing lower cost emissions, and thereby contribute to sustainable development in developing countries.
Linking directive
The EU Commission has confirmed that credits obtained through flexible mechanisms will be recognised as being equivalent to EU emission allowances from an environmental and economic point of view. As a result, a coming directive (known as the linking directive) proposes that such credits can be converted to EU allowances from 2008 on a one-to-one CO2 equivalent basis. It is estimated that mitigation costs for European companies will be halved by the possibility to import such credits.
As a member of the EU Parliament, de Roo is responsible for the linking directive, which connects the flexible mechanisms with the trading scheme. "The EU ETS will be implemented as planned, whether or not the Kyoto Protocol is ratified. We will go ahead anyway," de Roo says. "But with regard to the linking directive, we are facing a problem. This directive will not function properly until the Protocol is ratified."
However, de Roo is optimistic about a future ratification of the Kyoto Protocol. He notes that if Russia ratifies, then the Protocol becomes valid. "I visited the Duma in September. Russian emissions have been dramatically reduced since 1990, which is the level the Kyoto Protocol defines as the base level. This means that Russia will have quotas for sale. In addition, Russia wants industrial countries to invest in their country. With the ratification in place, industrial countries are more likely to invest in flexible mechanism projects in Russia. So I think we will see this ratification take place within a year," de Roo claims.
Developing countries
Another aspect of the climate change issue is the developing countries. All signs indicate that energy consumption in these countries will increase in the future. The US insists that the developing countries take part in the effort to reduce climate change emissions, as well as the industrial countries, while other countries are willing to discuss this aspect.
"From my point of view, it would make sense to include the 20-25 biggest developing countries within 2020, provided that the US sign up, as well," says de Roo, naming Brazil, China, India and South Africa, as examples of developing countries that might cope with this issue and at the same time, represent a major part of the world's population. De Roo says that these countries should not be asked to reduce their consumption, but to stabilise it at per capita levels, like for instance in Russia. Education and new technology will also be provided by the industrial countries as well as CDM-projects.
Furthermore, the EU will have to reduce their consumption by 30 percent by 2020. However these complex issues are resolved, companies are starting to realise that they are on the runway to a carbon restricted future.