Green Markets

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If we must: most big corporations believe emissions trading merely for compliance and not for speculation

Posted by gmarkets on 27 September, 2007

Compliance is the most often-cited motive for dealing with the EU-ETS, which the following quote of Swiss cement company Holcim illustrated: “Our priorities for the EU-ETS for 2005-07 are compliance management — i.e. internal and external balancing of emis­sions and allowances — and learning to use the system as it is conceptually intended to be used. We do not engage in speculative trading,” according to an article in European Management Journal (2007).

Trade “for compliance” only: The belief that trading was merely for compliance and not for speculation is shared by several other global firms. ExxonMobil does not consider ‘trading emission allowances as a business’ and Repsol remarks that its ‘participation in the market is orientated to low cost compliance and not to speculation.’

Cost minimization is key concern: Minimizing the cost of compliance is an often-heard argument, closely linked to firms buying allowances when they a fear a shortage at the end of the first trading period, which runs until 2008. Still, for global firms that strive for compliance it does not follow logically that they are also buying or selling allowances. This can for instance be because a multi­national is already affected by some other regulation that shows overlap with the EU-ETS. Cadbury Schweppes has tried to ‘opt out’, calling upon its par­ticipation in the UK’s Climate Change Agreement; while Johnson & Johnson is exempted from trading in Belgium thanks to an ‘energy covenant’. Many others, however, have refrained from trading for other reasons. A justification firms give for a `no-trading strategy’ is that they own a few installations only. Even if they have a surplus of allowances, they believe the administration and verification costs of selling them are generally too high compared to potential revenues.

EU over-allocation of allowances: Another reason is that it has turned out that in the first allocation period (2005­2007) there is simply no necessity to buy, because there has been an over-allocation of allowances (Har­vey, 2006).

Trading kept to bare minimum: To summarize, notwithstanding its public nature, being covered by the EU-ETS does not auto­matically mean that it is perceived as a strong institu­tional constraint. Although big corporations cannot avoid the cap, this does not always mean they have to buy or are willing to sell allowances. This is not to say that the trading provision of the EU-ETS is not used at all. A number of big corporations asserts that they are active traders in the EU-ETS, mainly including energy producers such as E.ON, Iberdrola, Suez, Shell, and ENI. However, for most firms that are directly impacted, trading entails occasional transactions, instead of continuous involvement. For example, Volvo mentions that their trading ‘is limited to get the allowances needed.’ Purchase of allowances is typically for compliance, but not many mention that they have done so already. Although there are more firms that report a surplus of allow­ances, only a few explicitly state having sold excess allowances.

Corporations trade within themselves: Before selling their surplus, it seems that many big corporations first balance their allowance accounts on a corporate level. In other words, the EU-ETS enables big corporations to trade across Member States but within their own organizations to deal with regula­tory differences across the EU.

Reference: Pinkse, J. and Kolk, A., Multinational Corporations and Emissions Trading; European Management Journal (2007) doi:10.1016/j.emj.2007.07.03

Erisk Net, 27/9/2007

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