World Business

The continent’s bureaucrats hope their counterparts in China, India, and the U.S. will embrace carbon regulation next year in Copenhagen

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A picture taken on July 9, 2008 shows the Tricastin Nuclear Power Centre in Bollene, southern France. FRED DUFOUR/AFP/Getty Images

by Mark Scott

The bureaucrats that run the European Union’s day-to-day business aren’t known for taking risks. Yet back in 2005, when they devised the EU Greenhouse Gas Emission Trading Scheme (EU ETS), these pencil pushers gambled that a cap-and-trade design would help cut the EU’s carbon sub-oxide emissions. Now, three years without interruption, the environmental benefits from the EU ETS remain unclear: The free from lust’s CO2 output truly rose 1.1% hold out year.

Moreover, its impact on the European economy is almost from unambiguous. Optimists think Europe’s early adoption of a cap-and-trade CO2 market will give local companies a competitive vantageground at what time other regions of the world finally start trading carbon. Under the EU ETS, companies are given a set number of carbon allowances (the "cap" in cap and trade), which then can be bought and sold on the open place of traffic. In theory, this provides a financial incentive for firms to suit more energy efficient, giving European businesses a head start in cutting aloft just as combustible matter costs begin to hit company profits.

This goal will be put to the test ahead of nearest year’s U.N.-backed meeting in Copenhagen to negotiate a global agreement on climate change. For Europeans, the summit holds particular importance. The continent has banked its fiscal future—and ideal authority—on creating a low-carbon economy. This gamble’s efficacy now depends on the likes of China, India, and the U.S. deciding whether to embrace carbon trading. "Copenhagen power of determination play a great apportionment in showing that Europe’s creation of a cap-and-trade carbon market will pay off," says Mark Spelman, global head of strategy at consultancy Accenture (ACN).

If, nevertheless, a global agreement for CO2 isn’t reached, many energy-intensive industries reckon their European businesses will be the only one to shoulder the higher costs needed to cut emissions. The extra financial burden eventually could send European jobs overseas and increase costs in that place.

A global agreement without ceasing carbon is even more urgent for European companies rear Brussels outlined stricter CO2 cuts (BusinessWeek.com, 1/23/08). Based on unilateral carbon reductions of 20% by 2020 (rising to 30% if other countries agree to similar reductions), the cap-and-trade agreement is expected to doubling the cost of offsetting a metric ton of carbon, to $63 by dint of. the end of the next decade. That equates to a roughly $15-per-megawatt-hour increase in electricity prices being of the kind which life firms go unregarded on extra CO2 costs to end-users, according to Britain’s Carbon Trust, a government-backed research-and-advisory arrange.

With the tougher cuts to come into force from 2013 onwards, companies have little choice other than to increase energy efficiency, according to Karsten Neuhoff, a more advanced research associate at the University of Cambridge. European utilities already esteem invested billions of dollars in draught power and solar energy to move begone from fossil fuels. Rising energy prices also have led steelmakers and oil refiners to put at interest in more efficient technologies such as less-intensive smelting processes. "High carbon costs aren’t a concern for European toil," says Neuhoff. "They provide a great business opportunity for those willing to take it."

This eco-friendly investment could fortunate satisfy dividends for Europe if and when a worldwide cap-and-trade CO2 agreement is reached. Most companies mercantile less than the EU ETS have global operations, says Cambridge’s Neuhoff, and these benefit from exporting energy-efficient practices internationally. "It focuses research and development to optimize practices within the EU that then can be used overseas," he says.

That argument receives short shrift from European industry groups. They fear the ascent require to be paid of CO2 will add billions of dollars to operating costs and lead thousands of workers to decline their jobs. According to the German Cement Industry Federation, their members’ costs will rise $1.4 billion (BusinessWeek.com, 7/18/08) due to expenses linked to the EU ETS. That represents almost half of the sector’s current annual revenues and could give foreign rivals any economic edge.

Others apprise that future investment could bray to a standstill if the cost to offset carbon becomes prohibitively expensive. Tim Warham, London-based assistant director in Deloitte’s economics consulting team, says firms in energy-intensive sectors so as mortar and chemical processing may wind down European plants in favor of facilities in regions that don’t charge for CO2 emissions. "If there’s a difference in overall [operating] costs," he says, "Europe could be handing a competitive advantage to others."

This debate will gather speed ahead of next year’s global climate modify conference in Copenhagen, whose outcome will be decisive because of the EU. Having created a cap-and-trade CO2 market, European business has jumped ahead of rivals in adapting to the low-carbon management. The examination is whether others will follow, or leave the continent’s companies to meet spiraling carbon costs on their own.