Multinationals Need To Wise Up To Europe’s Carbon Regulations

Wednesday, 22 June 2011

According to the June 2011 World Bank report ‘State And Trends Of The Carbon Market’, between 2005 and 2010 the value of trade in the EU Emissions Trading Scheme (ETS) grew from $7.9 bn to $119.8 bn; a CAGR of 72%. By contrast the primary CDM market, representing trade in Certified Emission Reductions from Kyoto projects, has fallen from $2.6bn in 2005 to $1.5bn in 2010; a CAGR of -10%. Back in December 2008 our analysis of the CDM project developers flagged up the risks of a market meltdown. And it happened. Between 2008 and 2010 the primary CDM market fell from $6.5bn to $1.5bn; a 77% fall in traded value.


The EU carbon market now represents a whopping 97% of the global market. In the US, trade in Regional Greenhouse Gas Initiative (RGGI) permits fell between 2008 and 2010. Policy inaction in Australia, China and Japan means European dominance is set to continue. But this doesn’t mean firms headquartered outside Europe can ignore what is happening in the EU.


Phase 3 of the EU ETS will impact the P&L of hundreds of non-EU headquartered firms. From January 1, 2012 CO2 emissions from flights that arrive in or depart from EU airports must be reported. All airlines will face a CO2 emissions cap 3% below the average of the sector’s emissions between 2004 and 2006. This will cost the airlines money. Standard & Poors estimates the cost for the first compliance year is €1.1bn; based on a €15 / tCO2 permit price. From 2013 Europe’s power utilities must purchase 100% of their ETS emissions allowances. They will pass on this cost to their industrial and commercial customers. Major energy users like chemicals firms will also pay for CO2 emissions based on process-specific carbon efficiency benchmarks.


The message is clear. To compete in the European Union, a market with 500 million people and annual GDP of $15 trillion, your firm needs to wise up to carbon regulations.

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