GLOBAL WARMING NEWS

New Limits on Pollution Herald Change in Europe

New York Times, 1-1-05
by KATRIN BENNHOLD

For Peter Koster, the beginning of 2005 merits more than one glass of Champagne. Mr. Koster, the chief executive and founder of the European Climate Exchange, says he sees new rules on pollution as the dawn of a "new era for European business."

With the arrival of the new year, 12,000 industrial plants across the European Union will face new limits on their carbon dioxide emissions, the first step in putting into practice the requirements of the Kyoto Climate Protocol.

In February, Mr. Koster's exchange, the first mandatory carbon emissions trading market, will go live, formalizing a system aimed at fighting global warming.

The new regulations place limits on the amount of carbon that may be emitted by power, steel, cement and paper pulp plants. Companies that stay within their limits can sell the emission rights they have not used to those that have exceeded their carbon output quotas.

This ambitious experiment, spanning all 25 European Union countries, is intended to prepare them for the Kyoto treaty, which requires the nations that signed it to cut carbon emissions beginning in 2008. As a result of Russia's ratification of the treaty in October, it will go into effect in February.

"Europe will be an example to the world," said Mr. Koster, 52, a Dutchman who started the emissions exchange in July. "It's the first time that you are rewarded for being an environmentally friendly manager."

Many European companies fear they will be at a competitive disadvantage compared to their American rivals, which are not subject to compulsory constraints because the United States did not sign the accord.

A recent poll by the New Economics Foundation in London found that 85 percent of European businesses believed that companies not facing the restrictions of the Kyoto Protocol would have an unfair advantage.

"The fact is that between now and 2012, some European companies are going to be heavily affected," said Daniel Cloquet, environment spokesman at Unice, the European employers' federation, based in Brussels.

The 12,000 plants earmarked by the European Union's three-year preparation period to Kyoto operate mainly in energy-intensive industries like electricity generation, steel, paper, glass, refining and cement. Power generation alone accounts for 55 percent of emissions covered by the plan.

Analysts at Ilex Energy Consulting, based in Oxford, England, estimate that the combined costs for the affected businesses across Europe could amount to $23 billion in 2005.

But, according to the European Commission, the executive arm of the European Union, the cost in economic output growth will be less than 0.1 percentage point a year because the regulations will give companies room to adjust.

In general, emission permits have been handed out generously, and companies have been given the option to invest in emission reduction projects in developing countries as a cheaper way to earn credits.

"The psychological hurdles for companies are much higher than the real ones," said Peter Zapfel, a climate specialist at the commission.

The European plan operates on free-market logic: by allowing plants to trade emission permits, the market will channel investments to companies with the most energy-efficient technologies. At the same time, total carbon emissions permitted under the Kyoto pact remain limited to the number of permits in the market.

"You have to look at this as an investment," said David Hone, who is the climate change adviser in London for the Royal Dutch/Shell Group.

Ken Ruffing, the deputy director of the environment directorate at the Organization for Economic Cooperation and Development in Paris, said that as European businesses were forced to pay more attention to their energy consumption, they would be "leaner and more efficient, and that could turn into a long-term business advantage even if it's a bit painful in the short term."

Europe is already home to a range of activities that could set global standards for energy-efficiency technology. Some law and accounting firms and investment banks are training employees in the intricacies of emissions trading.

London, as Europe's financial capital, is building a reputation for expertise in carbon-related finance, while investment trusts and banks like Fortis in Amsterdam and Caisse des Dépôts et Consignations of France are gearing up for what they expect to be a lucrative business in trading emission rights.

Climate Change Capital, the world's first merchant bank entirely dedicated to carbon-related projects, is based in London, as is the government-run Carbon Trust, which advises and supports companies on reducing carbon dioxide emissions.

London is also home to the European Climate Exchange. Some informal trading started on the exchange last summer and increased sharply after Russia ratified the Kyoto Protocol this fall. By some estimates, activity could surge 20-fold after mandatory trading begins in mid-February. The right to release one ton of carbon dioxide into the atmosphere has already risen in price, trading at around 8.50 euros, or $11.53, on the European exchange's informal market, up from about 6 euros in mid-2003.

Many executives expect the United States to eventually join some form of post-Kyoto global agreement. They note that some American multinationals with foreign operations must comply with the new regulations but have no opportunity to cash in on emission-reduction efforts at home. In 2003, a group of companies including DuPont, International Paper, Ford Motor, American Electric Power and Motorola established the Chicago Climate Exchange as a pilot program, in the hope of creating a market for member companies and governments to trade emission rights based on voluntary caps.

Bruce Braine, vice president of strategic policy analysis at American Electric Power, said eventual American regulation on the issue was inevitable.

The company, he said, has committed itself to a 10 percent cut in carbon dioxide emissions by 2006. "We would like to get ourselves geared up for a carbon-constrained world," Mr. Braine said.

The Xerox Corporation has cut carbon dioxide emissions through recycling and by increasing the energy efficiency of its copier machines by 50 percent, said Jack Azar, vice president of environment, health and safety. "There is a growing awareness in America of the risk of leaving Europe a head start on some of these new technologies," he added.