A Response to Climate Change

Corporate Reporting of GHG Emissions

The Climate Disclosure Standards Board (CDSB) has recently issued an exposure draft on the corporate reporting of greenhouse gases (GHGs). The document outlines how companies could present such information and link it to the management commentaries that accompany the financial statements they publish.

A Carbon Valuation Method

The UK's Department of the Environment and Climate Change (DECC) has published details of a methodology that it proposes government departments should use to evaluate the future price of carbon dioxide and other greenhouse gas emissions. The methodology has been changed from one that attempted to value the so-called "social cost of carbon" (SCC) to one based on estimates of what abatement costs would be required to meet specific emission reduction targets. Abatement costs have been developed for emissions in sectors covered by trading systems (e.g. EU ETS) and those in sectors not covered by trading schemes.

Spot Price of EU Allowances

Text updated - February 2011: The following graph shows how the price of carbon dioxide has varied over the six years that the European Union Emissions Trading System (EU ETS) has been in operation. Values have been tracked from a website operated by the European Energy Exchange, but other exchanges such as NordPool (now owned by NASDAQ) and ICE ECX can also be used. Traders including Point Carbon and Bloomberg's New Energy Finance publish such data for a fee.

Spot Price of EUAs - €/tonne Carbon Dioxide
Source : CARBIX, http://www.eex.com

Phase 1 of the scheme ran from April 2005 until March 2007. After firming during the first year of trading, prices collapsed when the market determined that too many allowances had been allocated - see a previous discussion on reporting emissions. Prices recovered at the start of Phase 2, peaked at around €28/tonne in August 2008 and then collapsed again as the economic downturn and reductions in demand (in sectors such as pulp, paper and cement, but not power) encouraged companies to off load surplus permits. Prices fell to as low as €8 by early 2009, but have since held at €13-15/tonne. The UN's climate change conference convened in Copenhagen (December 2009) and even recent efforts by computer hackers to steal allowances from the emissions registry (January 2011) have had little impact on this pricing trend. Phase 2 of the scheme will run until 2012.

The volatility and low price of carbon dioxide remains a significant issue for a number of reasons (of which more in a later blog):

• It continues to provide little incentive for operators or new entrants to invest in more carbon efficient facilities.
• Accounting effort continues to focus on trading the contingent liability and the impact this has on the profit and loss account, rather than the balance sheet and any potential return on investment.

For a detailed review of the forces driving the price of carbon dioxide in 2010 and forward into 2011, download the annual report from the Point Carbon website.

US Legislative Progress

Details of a cap and trade system that would be used to regulate the emissions of green house gases in the United States are incorporated in Title III of the American Clean Energy and Security (ACES) Act. This bill was narrowly approved by the House of Representatives on 26th June and will now proceed to the Senate for review. If passed (possibly as a companion bill), details will have to be reconciled with the ACES Act before a final vote in both chambers and signature by President Obama. It seems unlikely that this process will be completed before December when the US will attend concluding negotiations in Copenhagen for a post-2012 extension to the Kyoto protocol.