Market forces
10 May 2005
The EU ETS is a huge undertaking, involving some 12 000 installations in the 25 EU member states, and trading some 2.1billion tonnes of CO2. The industries involved encompass all the major carbon dioxide producing processes — cement manufacturing and processing, glass manufacture, electricity generation, oil refining, steel production, pulp and paper, brick manufacture, and the various parts of the chemical and associated industries. Installations with a rated thermal input of 20MW must participate in the scheme, although some sectors have negotiated voluntary climate change agreements (CCAs) which allow them to opt out until 2008 in return for pledges of emission reduction. The largest sector covered by the EU ETS is power generation, accounting for about 60% of emissions covered by the scheme.
The goal of the scheme is, of course, to reduce emissions; each country has its own goal for reductions relative to 1990 levels. For example, under the Kyoto Protocol, the UK pledged to reduce emissions by 12.5%. The EU ETS aims to reduce emissions by a stated amount, again different for each country. The UK’s goal is relatively modest — to reduce emissions from the qualifying installations by 1.7%, from 567million tpa to 557million tpa. All the installations participating in the scheme have their own targets; emissions are capped, and those which emit less CO2 than their allocated target have credits which they can sell to companies emitting more. As the scheme is EU-wide, this selling is cross-border.
The price of carbon dioxide equivalent emissions permits rose sharply as the market was launched, and has remained high, though volatile, for the first few months of the scheme. ‘There are a number of key factors that will influence the price of carbon in the 2005-2007 period,’ says PointCarbon, which monitors the carbon market. These will include policy and regulatory issues; market fundamentals, including weather and production levels; together with technical indicators. ‘Insight into these price drivers will inform a company’s trading strategy, risk strategy and, ultimately, its investment decisions.’ By comparison, after the UK’s small-scale emissions trading scheme opened in 2002, prices rose from £5 per unit at launch to £12 per unit five months later, then gradually fell to £2-3 per unit and have since remained stable.
The small reduction goal is one of the controversial points, with Friends of the Earth claiming that it puts the whole basis of the scheme at risk. ‘It is clear that UK industries have the technological potential to go far farther,’ it says. ‘It is likely therefore that they [UK installations] would seek to be sellers; however, every country will seek to ensure their industries are also sellers, and there is a real risk that both liquidity and the price of carbon will collapse.’
Moreover, FoE points out, the first phase of the scheme does not allow permits to be banked. ‘The net effect could easily be that the UK and Europe as a whole become locked into a zero-reduction pathway for the best part of the remainder of the decade,’ it says.
Many companies have, of course, been working to reduce emissions for some years. BP, for example, began implementing targeted greenhouse gas reduction programmes in 1998, committing to reduce emissions to 10% of 1990 levels by 2010. It achieved its target by 2001, it says, and continues to implement reduction programmes.
In 2003, for example, it reduced emissions from its Trinidad operations by an amount equivalent to 460 000tpa of CO2, by upgrading compressors to reduce or eliminate flaring and venting; onshore US oil extraction operations reduced emissions by 144 000tpa CO2 equivalent by improving wellhead automation to reduce venting; fuel replacement, from high-carbon decanted oil to natural gas, led to a 62 000tpa CO2 equivalent reduction at Whiting, in the US; and at Lavera, France, 16 000tonnes of CO2 was compressed, chilled and sold on through a partnership with industrial gases company Messer.
BP was also one of the founder members of the UK’s voluntary emissions trading scheme. As part of this, the company’s exploration and production division committed to reducing emissions by 353 500tonnes CO2 equivalent over four years. In its two years of operation, it overachieved reduction targets, earning incentive payments from the government of £53.37 per tonne CO2 equivalent.
BP Chemicals also participated in the scheme, but like most of the chemicals sector, opted for the CCA section of the UK ETS. This allowed companies to commit to a two-year voluntary emissions reduction, in return for an 80% exemption from the Climate Change Levy. Two of BP’s UK sites exceeded their targets, generating emissions credits which were used to help two other sites meet their commitments — the late commissioning of a combined heat and power plant had led to these sites failing to meet their original targets.
There are still ways to effect large reductions in CO2 emissions, BP says, although most of these involve switching from high-carbon to low-carbon combustion fuels. The company quotes a study from Princeton University which picks out a number of changes which could reduce emissions by 1billion tonnes CO2 equivalent by 2050. These include gas replacing coal in 1400 new large-scale power stations; doubling the fuel economy of some 2billion cars worldwide; and increasing solar capacity 1000-fold, or wind energy 70-fold.
Clearly, all of these are major undertakings, and beyond the scope of individual companies of any size. In practical terms, however, there are still steps that can be taken. Guy Kennett of the Melsmart Energy Centre, run by Mitsubishi Electric to advise on energy-saving techniques, says there are ten steps which every company can take, some of which are ‘almost flippant’. Insulation and double-glazing should be a priority, he says, as ‘space heating and cooling is a killer’.
Introduction of variable speed drives can save significant amounts of energy, preventing machinery from running at unnecessarily high speeds. All motor operations, especially fans and pumps, should be reviewed, as older motors and damper schemes could be wasting energy constantly. Lighting is frequently the single biggest electrical load in an organisation. Compressed air is ‘usually very inefficient’. Logic blocks and PLCs can be fitted with feedback devices to gain maximum energy savings. Dedicated energy safety software, of which there are many examples on the market, can be a sound investment. The on/off switch on equipment is often under-used; powering-down equipment, rather than leaving it idling, can save huge amounts of energy.
And finally, Kennett says, human imagination should not be underestimated. ‘Now, if ever, is the time to think out of the box. Government ministers did come up with emissions trading, so meet fire with fire.’
