Regulars
CONSERVATION
Where there's muck there's brass

by Andrew Taylor
September 2004

In line with a general shift in international environmental policy toward greater use of market-based instruments, the EU has introduced an emission trading scheme to begin from January 2005 to reduce greenhouse gas pollution.

The EU Emission Trading Scheme (or EU ETS, as it is more commonly known) is based upon the principle that governments do not themselves cause significant volumes of pollution, but rather companies do. Therefore companies should be forced to take greater responsibility for the consequences of their pollution. EU ETS is a so-called cap and trade system, which means that all defined market participants will be issued with a fixed volume of credits to pollute every year. Should a participant have insufficient credits compared to its actual level of pollution it will face a penalty of 50 euros a ton for every ton over the credits held. Furthermore, the number of credits issued will be reduced every year, forcing companies to either become internally more efficient in their use of energy, or purchase others surplus emission reductions. In this way it is hoped that the market will seek out the lowest costs solution to the pollution problem.

How does all this sophisticated European legislation actually affect Romania? There are two main ways that Romania is directly affected. The first is that EU ETS is mandatory upon all member states, including the newer members. If Romania succeeds in joining the EU in 2007 it will have no choice but to participate in EU ETS. Two years is a very short time in energy terms and therefore large users of energy need to begin thinking about the impact of EU ETS upon their business very soon, if not immediately. Second, the EU has introduced a linkage mechanism, which will allow companies within EU ETS to purchase emissions reductions through other mechanisms of the Kyoto Protocol. As Romania has recently been rated (for the second year running) as the most attractive country in Central Europe from which to purchase emission reductions, this holds out the prospect of significant investment potential for the country.

For managers of energy intensive businesses EU ETS is both an opportunity and a threat, with the prospect of leveraging investment capital for energy efficiency works, while presenting significant financial risks upon EU entry.

The structure of Romania's position within the EU ETS will largely be determined by the national allocation plan (NAP), which determines how affected industries will be credited. The development of the NAP is already underway. Needless to say this is a highly political process, in which industries have already begun lobbying to protect their interests. Yet whilst some industries, such as cement, have taken an early lead on both completing transactions and lobbying on the shape of the NAP, others, such as steel and oil and gas, remain almost unaware of the carbon economy.

As January 2005 draws nearer, the price of emission reductions is rising rapidly - in fact it has more than doubled over the last twelve months. In the short term this creates significant opportunity for Romanian industry. However, over the medium term companies that fail to include EU ETS in their business plans risk significant additional unplanned expense.

The process of risk management in the area of emissions trading is causing even the largest companies to get into a mess. For example, last year, Romania's Carpatcement was ready to sign a transaction under a Kyoto Protocol mechanism with the Dutch government. At the last moment Heidelberg Cement (Carpatcement's owner) withdrew the project in order to save it for internal transfer into the EU ETS. Interestingly, Heidelberg cement is currently considering legal action against the German government over its NAP allocation. Despite the complexity and confusion that surrounds the whole area of emissions trading and the Kyoto Protocol, there is one certainty. All companies face a carbon constrained future, in which there will be an increasingly valuable connection between pollution reduction and financial performance. Such logic is already steering higher amounts of both government and private capital toward energy efficiency and renewable energy research and development.

The key to participation in the so-called carbon economy is, firstly, the recognition that pollution is now a financial, as well as an environmental issue, and secondly the development of an effective strategy, in which a company completes a cost-benefit analysis of the opportunities and risks to its own business presented by emission trading.

There do exist technologies that can significantly reduce pollution for the same levels of energy output, many of which remain largely unrecognised, or under-valued. One such example is a technology called Ecobik, which was invented here in Romania. It has three principal effects: emission reductions, fuel savings and corrosion reduction. Furthermore it is offered to clients on a 'no saving, no fee' basis. Such technologies are just beginning to be regarded more seriously by large international companies as they begin to face up to the true cost of their activities.

Whether one likes it or not, Romania is already a participant in the European (and increasingly global) market for emission reductions and this will become an ever more significant feature of the future business landscape. Forward thinking companies are already acting now. Whilst Romania has huge potential to reap rewards in this area, the danger is that it will become just another sad Romanian story of shrugging shoulders and saying ''we didn't realise''. All of which will count for nothing in the bigger game of European politics. Let's hope it won't be another case of too little too late.

Andrew Taylor runs Connect-CEE, an outdoor training company.