Abstract
This paper empirically shows how the uncertainty associated to the absence of a mitigation regime which follows the United Nations Framework Convention on Climate Change Kyoto Protocol (UN FCCC Kyoto Protocol) is affecting investments in abatement activities in the EU electricity sector and, thus, future emissions levels. Based on a survey of EU electric utilities, it identifies the most likely post-Kyoto scenarios considered by them and how they are coping with such uncertainty in their investment decisions. It is found that firms react differently to such uncertainty and adopt different strategies to cope with it, diversifying their emissions control activities. Although most companies foresee post-Kyoto compliance regimes with emissions trading systems, they differ in their perceptions of the form that a post-Kyoto regime could take and are, thus, positioning differently to face such regime. The particular features of each company and the country where they operate affect their perception of the uncertainties, their position regarding a possible post-Kyoto regime and their inclination to carry out mitigation activities. Complying with Kyoto (and, eventually, post-Kyoto) targets significantly influences the investment decisions of European electricity companies. Uncertainty about a post-Kyoto regime may already be affecting investments in mitigation activities in the electricity sector. Therefore, significant progress has to be made in the definition of a post-Kyoto regime. It is urgent to define and agree internationally the emissions reduction objectives and the mitigation instruments that will be accepted for compliance, ensuring continuity of the international emissions trading system foreseen in the Kyoto Protocol.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
Note that our firm survey was undertaken before these events, suggesting that firms would have responded differently to the questions posed if the survey had been passed today.
According to the International Emissions Trading Association, 60% of the return on capital for an electricity generation plant starting today will take place in the years following 2012 (IETA 2005).
The Kyoto reduction units arising from the Kyoto flexible mechanisms which can be interchanged are four: AAUs (assigned amount units) initially assigned to Annex B countries; emission reduction units (ERUs) arising from joint implementation projects; removal units (RMUs) arising from forestation or reforestation projects; and lastly certified emission reductions (CERs) arising from clean development mechanism (CDM) projects. They all correspond to 1 metric tonne carbon equivalent.
Apart from those mentioned, other design questions exist which have not been tackled in this study, given their excessively complex and uncertain nature and their limited relevance for the purpose of this paper. Amongst them is the question of differentiation of objectives and the allocation of objectives. Various alternatives exist in this sense, including the multi-stage approach, contraction and convergence, global triptych approach, Brazilian proposal and allocations based on costs. For more information, see Philibert (2005).
The following are usually considered to be the main qualitative approaches: (1) trading without objectives; (2) policies and measures; (3) technology agreements; (4) carbon taxes. Qualitative approaches are not necessarily compatible with a system of trading emissions.
A full description of these alternatives is provided in Bodansky (2004).
Of course, after the design of these scenarios, there have been important events which could lead to a variation in those scenarios. For example, due to the recent ratification of the Kyoto Protocol by Australia, the political background of scenario C has changed in the meantime. Furthermore, a parallel existence of some scenarios is possible. This is the case, for example, with scenarios A and D, in so far as linked domestic emissions trading schemes at the company level and government emissions trading under a post-Kyoto agreement are set up (see e.g. Anger 2008). We thank an anonymous referee for these remarks.
As Kyoto units have a possible post-Kyoto value and some firms have made mitigation investments, the pressure of investing companies could be a fundamental element for recognition of Kyoto units to happen (del Río 2008).
As mentioned above, some firms may also be considering how to profit by overcomplying.
The so-called “linking directive” (EU 2004) allows European companies to use credits (CERs) from CDM or JI projects to comply with their targets under the EU ETS.
Again, note that this involvement may also be influenced by other factors. Apart from obtaining CERs for compliance purposes, engagement in the CDM may reflect a desire or need to learn or experiment with this instrument. We thank an anonymous referee for this remark.
The peculiar features of the firm and the country where the firm is located affect the perception of the uncertainties related to a post-Kyoto regime, the reactions to this regime and, thus, the greater or lower propensity to carry out mitigation activities.
The most important electric utilities in Germany, Italy, Spain, Belgium and The Netherlands were considered fundamental due to their influence in the European market. The utilities in the UK and the Nordic countries were identified as interesting because of the political context. France was not considered due to its concentration on nuclear energy.
In most of the cases the person responsible for the environment or for sustainability was interviewed; in others, it was the strategy, project development, or institutional relations manager.
Given the small size of the sample, a more rigorous analysis based on econometric techniques or cluster analysis is not deemed appropriate in this context.
This is confirmed by the Pearson correlation coefficient between post-Kyoto importance and CDM involvement, which is very close to cero (0.09), indicating that these variables are little related to each other.
Note that a firm with a low carbon intensity generation is less likely to attach a high relevance to Kyoto/post-Kyoto and to get involved in the CDM compared to a more carbon-intensive one (i.e., region 4). In contrast, companies with a high carbon intensive electricity generation would probably be located in quadrant 2. Firms overcomplying in order to gain extra profits are likely to attach high relevance to Kyoto and post-Kyoto. However, they would probably reduce emissions themselves and not through engagement in the CDM (i.e., quadrant 1). However, this does not imply that all firms in quadrant 1 are expected to overcomply.
Of course, when setting reduction targets, the issue of competition from countries without similar carbon restrictions should be taken into account.
This may happen in two different situations: Either the company carries out the mitigation activities now in a very decisive manner by investing heavily in measures, or decides not to do anything. In the first case, the “extreme” risk is in the final scenario being one typified by the absence of a mitigation regime, or by the existence of a mitigation regime with very lax objectives for emissions reduction. In the second case, the extreme risk consists of not having taken measures when the final scenario is one in which strong emissions reductions are required. The adoption of the intermediate strategy reduces the risk of falling into one of these two situations.
Although efforts have recently been made by United Nations organisations to reduce the transaction costs of CDM projects, more must be done in this sense, with measures leading to reduce the risk of these projects. There is no doubt that an international agreement on a post-Kyoto mitigation regime would contribute significantly to reducing part of the risks associated with the realization of these projects.
References
Anger N (2008) Emissions trading beyond Europe: linking schemes in a post-Kyoto world. Energy Econ (in press)
Bodansky C (2004) International climate efforts beyond 2012: a survey of approaches. Pew Centre on Global Climate Change, Arlington, VA, USA
del Río P (2008) Will there be value for Kyoto units in a post-Kyoto regime? Climate Policy 8(1):75–90
Demailly D, Quirion P (2006) CO2 abatement, competitiveness and leakage in the European cement industry under the EU ETS: grandfathering versus output-based allocation. Climate Policy 6(1):93–113
Demailly D, Quirion P (2008) European emission trading scheme and competitiveness: a case study on the iron and steel industry. Energy Econ (in press)
EU (2004) Directive 2004/101/EC, amending directive 2003/87/EC establishing a scheme for greenhouse gas emission allowance trading within the community, in respect of the Kyoto protocol's project mechanisms. European Commission, Brussels
Eurostat (2006) Energy: yearly statistics, data 2004. European Commission, Brussels
Grubb M, Neuhoff K (2006) Allocation and competitiveness in the EU emissions trading scheme: policy overview. Climate Policy 6(6):7–30
Grubb M, Sato M, Cust J, Chan KL, Korppoo A, Ceppi P (2008) Differentiation and dynamics of competitiveness impacts from the EU ETS. Climate Policy (in press)
Hoffmann V (2007) EU ETS and investment decisions: the case of the German electricity industry. Eur Manag J 25(6):464–474
Höhne N, Phylipsen D, Ullrich S, Blok K (2005) Options for the second commitment period of the Kyoto protocol. Prepared by Ecofys for the German Federal Environmental Agency, Berlin. http://www.umweltbundesamt.org/fpdf-l/2847.pdf
ILEX (2004) Impact of the EU ETS on European electricity prices. A report to DTI, Oxford
International Emissions Trading Association (IETA) (2005) Greenhouse gas market 2005: the rubber hits the road. Geneve, Lausanne
International Institute for Sustainable Development (IISD) (2007) Summary of the thirteenth conference of parties to the UN framework convention on climate change and third meeting of parties to the Kyoto protocol: 3–15 December 2007. Earth Negotiations Bulletin 12(354):1–20
Kara M, Syri S, Lehtilä A, Helynen S, Kekkonen V, Ruska M, Forsström J (2008) The impacts of EU CO2 emissions trading on electricity markets and electricity consumers in Finland. Energy Econ 30(2):193–211
Keats K, Neuhoff K, Martinez K (2005) Allocation of carbon emission certificates in the power sector: how generators profit from grandfathered rights. Climate Policy 5:61–78
Kolk A, Pinkse J (2005) Business responses to climate change: identifying emergent issues. Calif Manage Rev 47(3):6–20
Levy C (2005) Impact of emission trading on power prices. A case study from the European emission trading scheme. Université Paris Dauphine. DEA d’Economie Industrielle, Paris
Linares P, Santos F, Ventosa M, Lapiedra L (2006) Impacts of the European emissions trading scheme directive and permit assignment methods on the Spanish electricity sector. Energy J 27(1):79–98
Mannaerts H, Mulder M (2003) Emissions trading and the European electricity market, consequences of emissions trading on prices of electricity and competitiveness of basic industries. CPB Memorandum, The Netherlands
Matthes F, Graichen V, Repenning J (2005) The environmental effectiveness and economic efficiency of the European union emissions trading scheme: structural aspects of allocation. A report to World Wide Fund for Nature (WWF). Öko-Institut, Berlin
Neuhoff K, Martinez K, Sato M (2006) Allocation, incentives and distortions: the impact of EU ETS emissions allowance allocations to the electricity sector. Climate Policy 6(1):73–91
Oranen A (2006) The impact of emissions trading on the price of electricity in Nord Pool market power and price determination in the Nordic electricity market. Master’s thesis in environmental economics for a degree of master of science in agriculture and forestry. University of Helsinki Department of Economics and Management, Helsinki
OXERA (2004) CO2 emissions trading: How will it affect UK industry? Report prepared for The Carbon Trust, Oxford
Pew Center (2007) Summary of COP 13 and COP/MOP 3 prepared by the Pew Center on Global Climate Change, Arlington, VA, USA
Philibert C (2005) Approaches for future international co-operation. International Energy Agency (IEA), Paris
Reinaud J (2005) Industrial competitiveness under the European union emissions trading scheme. OECD/IEA, Paris
Reinaud J (2007) CO2 allowance and electricity price interaction. Impact on industry’s electricity purchasing strategies in Europe. IEA, Paris
Rodríguez M, del Río P (2007) The regional impact of the CO2 emissions trading market. International seminar on the ex-post valuation of the EU ETS. University of Vigo, Vigo, Spain
Russ P, Wiesenthal T, van Regemorter D, Ciscar JC (2007) Global climate policy scenarios for 2030 and beyond analysis of greenhouse gas emission reduction pathway scenarios with the POLES and GEM-E3 models. JRC reference report, EUR 23032 EN, Sevilla, Spain
Sijm J (2004) The impact of the EU emissions trading scheme on the price of electricity in the Netherlands. ECN Policy Studies. ECN-RX-04-015, Petten, The Netherlands
Sijm J, Neuhoff K, Chen Y (2006) CO2 cost pass-through and windfall profits in the power sector. Climate Policy 6(1):49–72
Smale R, Hartley M, Hepburn C, Ward J, Grubb M (2006) The impact of CO2 emissions trading on firm profits and market prices. Climate Policy 6(1):29–46
Storey M (2002) Kyoto and beyond, issues and options in the global response to climate change, for the Swedish Environmental Protection Agency, Stockholm, Sweden
Sousa J, Pinto B, Rosa N, Mendes V, Barroso J (2007) Emissions trading impact on the power industry with application to the Iberian Electricity Market. Mimeo
Sugiyama T (2005) Governing climate. The struggle for a global framework beyond Kyoto. International Institute for Sustainable Development, Winnipeg, Canada
Torvanger A, Twena M, Vevatne J (2004) Climate policy beyond 2012. A survey of long-term targets and future Frameworks. CICERO Report 2004:02, Oslo
Ulrich O, Rennings K, Sahin B (2006) The impacts of the European emissions trading scheme on competitiveness and employment in Europe—a literature review. A report commissioned by World Wide Fund for Nature (WWF), Brussels
WBGU (2003) Evolution of the Kyoto protocol regime. An environmental and development economics analysis. Expertise for the WBGU Special Report, Climate Protection Strategies for the 21st Century: Kyoto and Beyond, Berlin. http://www.wbgu.de/wbgu_sn2003_ex02.pdf
Acknowledgment
The authors are grateful to PricewaterhouseCoopers Spain for financial support to carry out this study.
Author information
Authors and Affiliations
Corresponding author
Additional information
This article was written before Könnölä joined the European Commission. The views expressed are purely those of the authors and may not in any circumstances be regarded as stating an official position of the European Commission.
Rights and permissions
About this article
Cite this article
del Río, P., Carrillo-Hermosilla, J., Könnölä, T. et al. Challenges and opportunities of a post-Kyoto mitigation regime: a survey of the European electricity sector. Mitig Adapt Strateg Glob Change 13, 863–885 (2008). https://doi.org/10.1007/s11027-008-9146-5
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11027-008-9146-5