By Katrin Bennhold
EU companies coming under Kyoto limits
For Peter Koster, the beginning of 2005 merits more than one glass of Champagne. As millions of fellow Europeans celebrate just another New Year's Eve, the chief executive and founder of the European Climate Exchange will quietly drink to what he calls the dawn of a "new era for European business."
Starting on the first day of 2005, 12,000 industrial installations across the European Union will find that the days of pumping unlimited amounts of carbon dioxide into the atmosphere are over, as EU-wide regulations spawned by the Kyoto Climate Protocol come into effect.
In February, Koster's exchange, which is the world's largest, and its first mandatory, greenhouse-gas trading market, will go live, formalizing a system aimed at fighting global warming.
The new regulations place strict limits on the amount of carbon that may be emitted in the power, steel, cement and paper pulp industries. Companies that stay within their limits can sell any emission rights that they have not used to companies that have exceeded their carbon output quotas.
This ambitious experiment, spanning all 25 EU member states, is designed to prepare them for the Kyoto treaty, which obliges the industrialized countries that signed it to cut carbon dioxide emissions between 2008 and 2012. As a result of Russia's ratification of the treaty in October, it will come into effect in February.
The United States and Australia are the only wealthy economies that have refused to sign the climate treaty. But industrial producers in those countries could soon start to feel nervous about being holdouts as European competitors capitalize on going "green."
"Europe will be an example to the world," said Koster, 52, a dynamic Dutchman who started the pan-European emissions exchange in July. "It's the first time that you are rewarded for being an environmentally friendly manager."
The emission reduction trading system could prove beneficial for European businesses by giving them an incentive to raise energy efficiency and to invest in new technologies at a faster pace than competitors in, for example, the United States.
The EU program operates on free-market logic: By allowing producers to trade emission permits, the market will ultimately channel investments to companies where energy-efficient technologies are the cheapest. At the same time, total carbon emissions permitted under the Kyoto pact remain limited to the number of permits in the market.
Other countries, including Canada and Japan, are planning similar mandatory markets.
Many European business federations continue to fear a competitive disadvantage against American rivals that are not subject to compulsory constraints. But the grumbling in boardrooms around Europe over the new emissions standards already seems to be subsiding.
Some executives have come to recognize that the cost burden will not be enormous. Others have begun to embrace the new regulations as an opportunity for long-term improvements in their corporate image and their balance sheets.
"You have to look at this as an investment," said David Hone, the London-based climate change adviser at RoyalDutch/Shell Group.
"From 2005, companies that work to reduce their emissions will get a double benefit," he said. "They are reducing their energy costs, and they can monetize their emission cuts."