ANALYSIS - Emissions trading systems developing as patchwork

For multinationals, these trading regimes raise questions about how to adopt strategies to fit each region in which they operate, and whether credits obtained in one country can be used to help offset the requirements imposed by another. \"This is a fragmented market,\" said Andrei Marcu, executive director of the International Emissions Trading Association. \"The standards are not there. You have a patchwork, but you need linkages,\" he told EyeforEnergy\'s Emissions Trading conference in Amsterdam. The UK and Denmark have set plans to allow firms to buy and sell allocations of carbon dioxide, the main contributor to global warming, and the EU has sketched out its pilot programme which will kick off in 2005. For companies such as oil giants BP and Shell , the new trading regimes offer a chance to take their already established in-house systems to the outside world. BP, which reckons its three-year old internal emissions trading system yielded 650 million pounds ($929.8 million) in extra value for the company, says the challenge will be adapting its methods to government-run schemes. \"We need to evolve (our system) to take advantage of emerging schemes,\" said Mark Akhurst, BP manager climate change. \"We want the widest possible market access to the widest possible audience...We just want a stable solution,\" said Garth Edward, Shell\'s trading manager for environmental products. KYOTO TARGETS Carbon emissions trading regimes are usually tied to the Kyoto Protocol designed to slow global warming, although the United States, which has denounced the treaty, last week announced a voluntary trading programme for U.S. companies. Under the Kyoto pact agreed last November, industrialised states must cut carbon dioxide emissions by an average of 5.2 percent from 1990 levels by 2012, although it will not enter into force until ratified by at least 55 countries responsible for 55 percent of the 1990 output. Under emissions trading, companies are allocated an allowance to emit carbon dixiode, although the EU has not yet set the mark for its 2005 plan. Companies which fall below their ceiling will be able to sell the extra emission rights to those companies which will surpass their limits. By using such a financial tool, companies will be able to decide whether it would be cheaper to upgrade existing facilities with cleaner technology, reduce utilisation rates or to buy extra emission rights on the market. Advocates say linking states\' trading systems would attract needed volume to ensure long-term success and offer the most cost-effective way to meet the Kyoto targets. That size is what the EU\'s mandatory trading regime will offer, according to Peter Vis, the principal administrator of the European Commission\'s climate change unit. \"This is a very big market, 46 percent of C02 emissions (in the EU) by 2010. This will be the biggest emissions trading scheme in the world,\" Vis told. \"With regards to linking with other schemes outside the European Union, the door is very much left open. The community could...link its scheme with another in Japan, or Canada or another country which has its own scheme,\" he said. NO U.S. LINK But the United States\' refusal to join Kyoto will heavily impact what companies operating there can do toward Kyoto targets elsewhere. \"Whatever credits we might acquire (from other trading regimes) would be used toward the fulfillment of our Kyoto protocol demand...(but) whatever we buy from the U.S. couldn\'t be used toward Kyoto,\" Vis said. Merging trading platforms could be a difficult task, since the various systems require different sectors to participate and have different penalties for failing to meet targets. With a patchwork of systems, emissions trading could develop into a global arbitrage play or result in gaming which would distort the market, according to Mark Kenber, UK-based emissions trading expert at the environmental group WWF. \"If there aren\'t harmonised systems, (multinationals\') risk systems will be very difficult to manage,\" he said. Under the Danish system now in place, companies exceeding their pollution cap face a 40 crown ($4.78) charge per tonne of CO2 equivalent, well below the 10-20 euros most analysts estimate as a per tonne cost for emission rights in the EU trading regime. The EU has set its penalty at 50 euros ($43.78) per tonne fee under the EU plan in an effort to ensure it remains higher than the market price for emissions rights. \"FLEX\" CREDITS The issue is also clouded by uncertainty about how some of the Kyoto Protocol\'s \"flexible mechanisms\" to reach pollution targets will be melded in. Those mechanisms include Joint Implementation (JI) and the Clean Development Mechanism (CDM), which offer credits to companies that help set up or finance cleaner industry in developing states. \"Some of our other business units around the world generate credits which we could use to meet UK requirements,\" Akhurst said, although those credits would not be allowed under the present structure of the national scheme there. \"We do want there to be some way of admitting those credits into an emissions trading scheme. We haven\'t worked out yet quite how to do that,\" the EC\'s Vis said, adding that a working group was expected to issue proposals early in 2003. Story by Matt Daily REUTERS NEWS SERVICE