CLIMATE STRATEGY
Company strategic behaviour in relation to CO
2emissions trading
CLIMATE STRATEGY
Company strategic behaviour in relation to CO
2emissions trading
M.E. Mittendorff
Student number: 0953563
Supervisors;
Prof. Dr. J.J. van der Werf Drs. B.J.W. Pennink
The author is responsible for the contents of this report; copyright is with the author
Cover: www.emagazine.com
University of Groningen
Faculty of Management and Organisation
ECN Policy Studies
PREFACE
This thesis is the result of a research on company strategic behaviour in relation to CO2
emissions trading. The research was done in order of and in co-operation with the Energy Research Centre of the Netherlands (ECN). This thesis is my final thesis for the Business Administration study, specialisation Business Development, of the University of Groningen Although CO2 emissions trading receives a big deal of attention these days it is still in the early stages of development. Only very few companies are aware of the implications of emissions trading and even fewer have formulated a strategy in dealing with the consequences CO2
emissions trading will have. To me the subject of global climate change policy and specifically CO2 emissions trading proved to be a really interesting research field. Especially the fact that the subject is one of the most current affairs in international climate policy negotiations appeals to me.
Special gratitude goes out to Ton van Dril from ECN for his supervision during this research.
Without his help and contacts this research would not have been possible. Further I would like to thank prof. van der Werf for his directions and pleasant co-operation. Finally I want to thank mr. Pennink for co-supervising this research in spite of his busy schedule.
SUMMARY
Over the past twenty years global warming and associated climate change effects have become one of the world leading issues of negotiation. In 1997 the Kyoto protocol was signed binding industrialised nations to reduce greenhouse gas emissions by an average of 5.2% below 1990 levels between 2008 and 2012. After long and fierce negotiations it now looks like the protocol will come into force in the near future. Other than most industrialised countries the Netherlands have a history of climate policy measures. Most of the policy instruments are voluntary agreements aimed at increasing energy efficiency within energy intensive industries. With the emergence of the Kyoto protocol a relatively new policy instrument is gaining popularity, international emissions trading. Under a system of emissions trading the emission of greenhouse gases will be restricted and rights to emit will become interchangeable. Especially a system for trading of CO2 is seen as a good way to reduce global CO2 emissions in a cost-effective manner.
In October 2001 the European Commission issued a draft Directive on Emissions Trading declaring its intention to introduce a system of emissions trading. Scheduled to start in 2005 the system will initially be restricted to trading of CO2. In the Netherlands too CO2 emissions trading enjoys wide spread attention. The Dutch government is currently developing a national plan for allocation of allowances as prescribed by the draft Directive.
For companies involved in a CO2 emissions trading system two important consequences can be pointed out. Firstly a restriction on the free of cost emission of CO2 and secondly a price for CO2 emissions. Since these two consequences can have severe impact on company operations and profitability, companies should develop effective CO2 management strategies. To asses which factors influence company strategic behaviour in relation to CO2 emissions trading two useful tools are introduced in this report. First the CO2 emissions trading decision tree has been developed, depicting possible action measure in reacting to the consequences of emissions trading described above. Second the intensity-latitude matrix is introduced making it possible to position companies in relation to the effects emissions trading will have on production costs, the divergence of the emission standard and the latitude a company has to react. Latitude here is used to describe the amount of freedom of choice companies have between various action possibilities. Companies with a high degree of latitude have more options to choose from than companies with a low degree of latitude.
Following up on the concept of latitude a number of factors that determine company latitude have been indicated in this research. Amongst others ability to identify energy efficiency measures, ability to identify process emission abatement measures, switchover limitations, ability to pass on CO2 costs to consumers and ability to transfer production to other regions are named. These different latitude factors are influenced by a number of influencing factors, combined in a latitude-scoring model. Based on identified latitude factors and influencing factors a latitude profile can be made for an individual company. Through the emissions trading decision tree and the intensity-latitude matrix a clear description of factors that influence strategic behaviour in relation to CO2 emissions trading in provided. However, this picture is not complete since many company and decision maker specific influencing factors can be decisive.
Most consulted companies consider CO2 emissions trading an instrument that provides them with more freedom in developing a CO2 strategy. Companies believe that because of the seriousness of the problem CO2 emission restrictions are inevitable in the future. Emissions trading is a welcome tool in dealing with the challenges these restrictions pose. However considerable negative side effects can occur. These negative effects are primarily attributable to inability to transfer additional costs to consumers and competitive distortions. The leading position of the Netherlands in energy efficiency improvement can become a disadvantage while additional improvements will be far more expensive in comparison to foreign competitors.
CONTENTS
PREFACE 3 SUMMARY 4 1. INTRODUCTION 7
2. THE WORLD-WIDE CLIMATE POLICY 8
2.1 The greenhouse effect and climate change 8 2.2 The climate treaty of Kyoto and the Kyoto mechanisms 8
2.2.1 Joint Implementation 10
2.2.2 Clean Development Mechanism 10
2.2.3 International Emissions Trading 11
2.3 current state of affairs 11
3 RESEARCH DESIGN 13
3.1 ECN 13
3.2 Research approach 13
3.2.1 Problem formulation 14
3.2.2 Research goal 15
3.2.3 Conceptualisation 15
3.2.4 Boundary Conditions 18
3.3.5 Assumptions 18
3.3.6 Research questions 19
3.3.7 Research model 20
3.3.8 Data collection 20
3.2.9 Data analysis 20
4 THEORETICAL BACKGROUND ON EMISSIONS TRADING 21
4.1 The working of emissions trading 21
4.2 System attributes 23
4.2.1 Caps 23
4.2.2 Initial allocation 24
5 CLIMATE POLICY IN THE DUTCH CONTEXT 27
5.1 Overview of the Dutch climate policy 27
5.2 Voluntary agreements 28
5.2.1 MJA 28
5.2.2 Covenant Benchmarking Energy Efficiency 29
5.3 Kyoto Mechanisms 30
5.4 Emissions Trading 31
6 EMISSIONS TRADING IN THE BUSINESS ENVIRONMENT 33
6.1 Emissions Trading decision tree 33
6.2 Phase I: pre-introduction 35
6.3 Phase II: compliance 37
6.3.1 Develop compliance strategy 37
6.3.2 Understanding the principles 37
6.3.3 Determining emissions and baselines 38
6.4 Mitigation possibilities 39 7 THE INTENSITY-LATITUDE MATRIX 43
7.1 Distance to CO2 emissions standard 44
7.2 CO2-intensity 44
7.2.1 Percentage of CO2 costs in relation to total production costs 45
7.2.2 Second order impacts 47
7.3 Latitude 47
7.4 Latitude factors 50
7.4.1Lobbying 52
7.4.2 Internal CO2 abatement 52
7.4.3 Take organisational measures 57
7.4.4 Buy 59
7.4.5 Active trading 60
7.5 Determining Latitude 60
7.6 Latitude Profile 62
7.7 Company CO2 strategy 67
8 CONCLUSIONS 70
9 REFERENCES 71
Annex I Latitude Scoring 73
1 INTRODUCTION
Emissions trading is generally considered a promising policy instrument in achieving global greenhouse gas emissions abatement. A strong indicator for the growing popularity of emissions trading is the draft Directive on Emissions Trading by the European Commission of October 2001. In the Netherlands too, a discussion is taking place on whether to implement emissions trading and what a system for emissions trading should look like. On account of this discussion in depth research has been conducted by both the specially appointed CO2-trade Commission and the Social Economic Board. Implementation of emissions trading at present primarily focuses on CO2 because of its major contribution to total greenhouse gas emissions and relatively good monitoring possibilities.
The goal of ECN is to get more insight into the way companies deal with the emergence of emissions trading. In order to improve this insight it is of interest to know witch factors influence corporate strategy in relation to CO2-emissions trading. What options do companies have and which factors influence the way companies can behave. The goal of this research is not to make statements on how the system for emissions should look. Its goal is to map which factors should be taken into account by companies when formulating a strategy to react on the consequences of emissions trading.
This report consists of two parts. It will start with an overview of climate policy developments and the emergence of the Kyoto protocol, the basic principles of emissions trading and its relation to other Dutch climate policy instruments. The basis of the second part is formed by the emissions trading decision tree presented in chapter six. This decision tree maps action possibilities to the consequences of CO2 emissions trading. Finally, in chapter seven a model is presented that can be used to position companies in relation to the impact CO2 emissions trading will have and the latitude companies have in reacting to this disturbance. Knowing the consequences CO2 emissions trading will have, which factors influence latitude in reacting to the disturbance and company scores on various latitude factors, companies can develop their specific CO2 strategy.
2 THE WORLD-WIDE CLIMATE POLICY
2.1 The greenhouse effect and climate change
Today general agreement exists within the international community that the emission of so- called greenhouse gases is contributing to global warming and subsequent changes in climate patterns. The Intergovernmental Panel on Climate Change (IPCC) was established by the United Nations and World Meteorological Organisation in 1988 to provide unbiased assessments of climate change science. In its most recent Third Assessment, issued in 2001, IPCC documented substantial scientific evidence of global warming and concluded that: “there is new and stronger evidence that most of the warming observed over the last 50 years is attributable to human activities1.”
The earth's atmosphere acts as a filter for the suns energy. Approximately half of the visible light and ultraviolet radiation given off by the sun is either absorbed by the various layers or reflected back into space. Most of the 50% that does get through heats the earth's surface and is eventually reflected back into space as infrared radiation. The greenhouse effect is the atmospheric trapping of that infrared radiation; a natural phenomenon without which the Earth would be too cold to sustain human life. Burning of carbon-based fossil fuels causes emissions of so-called greenhouse gases such as carbon dioxide, methane and nitrous oxide. These gases add to that atmospheric layer that is permeable to ultraviolet, but not infrared radiation, which causes heating. As more fossil fuels are burned, the layer of greenhouse gases thickens; solar radiation continues to pass through unimpeded, while heat reflected from the earth finds it harder and harder to escape into space. In the medium to long term, this results in the gradual increase in the Earth's temperature known classically as global warming2.
The global climate is unpredictable. Climatic models show that the short to medium impacts of an increase in the atmosphere's concentration of greenhouse gases will likely lead to increased warming in some areas with deep cooling in others. For example, consider the impact of the disruption of the gulf stream, the oceanic system that keeps the British Isles a comfortable temperature at the same latitude as Moscow. The unpredictability of the global climate system's response to an increase in carbon dioxide has recast the term "global warming" into its now accepted "global climate change". Certain gases contribute two-fold to climate change by simultaneously trapping reflected heat and thinning the protective ozone layer. This ozone depletion reduces the atmosphere's ability to absorb and reflect solar radiation. As a result more solar radiation is able to reach the earth's surface and potentially accelerate the climate change process.
2.2 The climate treaty of Kyoto and the Kyoto mechanisms
The negotiations which finally led to the signing of the Kyoto protocol originate in the The United Nations Conference on Environment and Development (UNCED) held in Rio de Janeiro in 1992. Also known as the 'Earth Summit' the UNCED was attended by over 100 national leaders. Amongst other initiatives, the conference established the United Nations Framework Convention on Climate Change (UNFCCC). The UNFCCC became the first major initiative for international co-operation in the area of greenhouse gas mitigation. The UNFCCC aims to stabilise atmospheric levels of greenhouse gases to prevent detrimental man-made interference with the climate - this is accomplished through a list of commitments for signatory nations, including:
1 IPPC Third Assessment Report, September 2001
2 www.ieta.org
• annual reporting of national greenhouse gas inventories
• regular disclosure and review of progress on regional greenhouse gas abatement programs
• technological assistance to developing countries that are especially vulnerable to climate change
• participation in the meetings of the Conference of Parties (COP) to the Convention.
The Convention further adopted a list of industrialised nations (Annex I) for which domestic/international greenhouse gas reduction measures were recommended and developing nations (non-Annex I) which are exempt from immediate emission reduction measures, but may participate on a voluntary basis.
After the signing of the UNFCCC a series of Conferences Of Parties (COPs) took place. The first, held in Berlin in 1995 initiated a new round of talks that sought to achieve stronger and more specific emissions reduction commitments. Overseeing their progression over the past years the parties decided that voluntary measures would not lead to the desired stabilisation of greenhouse gas build up in the atmosphere. The subsequent agreement negotiated at 'COP 3', which became known as the Kyoto Protocol, bound industrialised nations to reduce greenhouse gas emissions by an average of 5.2% below 1990 levels by the first commitment period of 2008 to 2012. Developing nations are not subject to emissions reduction caps.
The deadline for signing the Kyoto Protocol was March 1999, and by this time it had received 84 signatures. The Kyoto Protocol shall enter into force when a minimum of 55 parties that account for at least 55 % of the Annex I carbon dioxide emissions in 1990 have ratified.
Kyoto thermometer
Parties Ratified Percentage of 1990 level
100 60%
55%
50%
75
40%
55
50 30%
20%
25
10%
0 0%
Figure 1.1 Kyoto thermometer
The Kyoto thermometer indicates the progress in the ratification of the Kyoto protocol. As of now 75 parties have ratified the protocol accounting for 36% of 1990 emissions.
Non-Annex I Annex I
The Kyoto protocol not only provides for agreements on mitigation of greenhouse gas emissions. It also establishes a global market for greenhouse gas (GHG) emission reductions.
By means of the market-based Kyoto Mechanisms, Joint Implementation (JI), Clean Development Mechanism (CDM) and International Emissions Trading (IET), it becomes possible to trade emissions allowances globally. Demand will be driven by the emissions reduction commitments of industrialised and transitional countries (Annex I countries)3 JI and IET enable transactions of emissions allowances among Annex I countries . The CDM allows developing countries (non-Annex I countries) to provide Annex I countries with emissions allowances4
2.2.1 Joint Implementation
Joint Implementation (JI) refers to the opportunity of an Annex I country to meet (part of) its Kyoto commitment through investments in GHG abatement projects in another Annex I country. Such investments result in the generation of so-called ‘credits’ or ‘Emission Reduction Units’ (ERUs). Depending on the agreements made on ‘credit-sharing’ between the parties involved, these ERUs are fully or partially added to the amount of assigned GHG emissions (amount of emissions allowances available to a country, under the Kyoto commitment) of the investing country, while they are subtracted from the assigned amount of the host country. I will explain this mechanism some further through a (simplified) example. The Netherlands invests in a wind energy park in Poland. Now that Poland can get part of its energy needs from wind energy it no longer has to burn an equivalent amount of fossil fuels (coal, oil, gas). This reduces the amount of CO2 emitted by Poland by an amount of x tons of CO2. In return the government of Poland transfers part of its emissions allowances (it no longer needs because of the new wind power) to the Netherlands who can use the extra allowances to cover their own emissions. The amount of credits generated is usually an estimate of the emission reductions achieved by a JI project relative to a ‘baseline’ situation. The latter refers to the estimated level of GHG emissions that would occur without the JI project. JI projects will start generating credits in 2008, although the projects themselves may begin earlier. Definite crediting of ERUs will only occur after annual reporting requirements and other obligations have been met (Art. 6 of the Kyoto Protocol). In order to gain experience with emission abatement projects abroad, several countries have participated over the past years in a test phase of such projects called ‘Activities Implemented Jointly’5. Most JI projects concern projects in the former Eastern bloc countries.
2.2.2 Clean Development Mechanism
The Clean Development Mechanism (CDM) is defined in Article 12 of the Kyoto Protocol. Its main objectives are:
a) to encourage the sustainable development of non-Annex I countries by means of institutional capacity building and technology transfers
b) to enable Annex I countries to meet part of their Kyoto commitments cost-effectively by means of abatement projects in non-Annex I countries.
This instrument was adopted rather unexpectedly at Kyoto since it had not been part of any formal proposal during the 30-month negotiation period prior to the conference. CDM is still
3 Annex I refers to the list of industrialised countries and economies in transition which have committed themselves to an emission reduction target. The term Annex B is also used. The Kyoto protocol prescribes reduction and limitation commitments from Annex I countries as quantified in Annex B. Both Annexes are almost identical, except for Belarus and Turkey which are included in annex I but not in annex B. The Articles on JI and CDM refer to Annex I countries whereas the article on IET refers to Annex B countries. To avoid confusion I will solely refer to Annex I countries
4 Dr Josef Janssen (2002); Kyoto Flexible Mechanisms; opportunities and barriers for industry and financial institutions; CEPS working document no. 181.
5 Harmelen,A.K. van, S.N.M. van Rooijen, C.J. Jepma, W. van de Gaast (1997), Joint Implementation met Midden- en Oost-Europa; Mogelijkheden en beperkingen bij de realisatie van de Nederlandse CO2 reductiedoelstellingen in de periode 2000-2010. ECN-c---97-078. ECN, the Netherlands
very much under development and will be subject to the authority and guidance of the CoP, which has the responsibility to ‘elaborate modalities and procedures to ensure transparency, efficiency and accountability through independent auditing and verification of project activities’.
CDM has much in common with JI as both mechanisms enable Annex I countries to meet (part of) their Kyoto targets by means of cross-border investments in GHG abatement projects. The most important difference, however, is that the host countries of JI are Annex I countries, whereas those of CDM projects are non-Annex I countries (i.e. mainly non-industrialised countries which are not committed to reduce their GHG emissions). Another difference is that JI credits can be accrued from 2008, whereas CDM credits can be earned much earlier, i.e. already from 2000. CDM credits generated before 2008 can be banked in order to use them during the first budget period 2008-2012. This provides CDM projects a significant advantage compared to JI projects as it may have a substantial impact on the average costs of CDM versus JI credits.
2.2.3 International Emissions Trading
Within the context of the Kyoto Protocol, Emissions Trading (ET) refers to the ability of Annex I countries to exchange part of their emission commitment and, hence, to redistribute in effect the division of allowed emissions between them (Grubb et al., 1999). ET is not a project-related instrument, but rather a facilitating mechanism to reduce overall cost of emissions reduction.
Those countries (or companies) that can more cheaply or easily reduce emissions should be able to sell these abatements to those facing higher reduction costs. In fact, an optimal system of ET minimises overall abatement costs by ensuring that emission reductions take place where marginal costs are lowest6.
2.3 Current state of affairs
The Kyoto protocol was adopted in 1997 but has not yet entered into force since the required coverage of 55% of 1990 CO2 emissions has not been realised up until now. After fierce negotiations a compromise was reached on remaining issues at COP6-2 in Bonn. The meeting at Bonn was an encore to the meeting in the Hague (COP6-1) were parties failed understanding.
After the Bonn-agreement of July 23 2001 negotiations on remaining rules and details continued at COP7 in Marrakech, Morocco. Here the text of the protocol was finalised to make it ratifiable.
Some Parties to the Protocol have expectations that it might enter into force by the new global summit ‘Rio plus ten’ in South Africa in September 2002. This might be possible but for it to do so, the quorum of 55% of carbon dioxide from the group of industrialised countries in 1990 must still be met. The USA have pronounced they will not ratify the protocol in its current form since it is 'fundamentally flawed'. Being the biggest emitter the US stance is not beneficial to the effectiveness of the protocol. Due to their large share of 1990 emission the role of Japan and Russia is pivotal in this matter. The negations showed that Japan, Russia, Australia and Canada might be the countries that are most reluctant to sign7. The unexpected ratification of Japan on June 4 2002, however contributed to the optimism. The next Conference Of Parties, COP 8, will take place 23 October to 1 November 2002, in new Delhi, India
The Dutch government committed itself to a reduction target of 6%. Already in 1999 it decided to score 50% of this obligation on a national level and the remaining 50% abroad by application of CDM, JI and IET. The government has assigned considerable funds to the responsible ministry of Housing, Spatial Planning and the Environment (VROM) and ordered the start of implementation of CDM. Most of the reductions under the Flexible Mechanisms are expected to be covered by CDM. However, JI, being the responsibility of the ministry of Economic Affairs,
6 See chapter 5
7Asbjorn Torvanger (2001): An evaluation of business implications of the Kyoto Protocol; CICERO, december p 1
is also expected to contribute a significant share. In June 2001 the first JI contracts concerning projects in several Eastern European countries were established and signed.
In October 2001, the European Commission adopted a proposal for a Directive establishing a framework for GHG emissions trading within the European Community. Member States will grant a GHG gas permit that sets an obligation to specified installations or sites. Moreover, they allocate allowances, which can be traded between companies. In the preliminary phase 2005- 2007 the objective is to gain experience with emissions trading. In this period allowances should be allocated for free and a lower common level of penalty for non-compliance applied. The Netherlands is preparing for this system by developing a system for initial allocation of allowances and it is expected the first trials will start in the near future.
3 RESEARCH DESIGN
3.1 ECN
The goal of ECN is to contribute to greater energy efficiency, the implementation of renewable energy and the reduction of environmentally harmful emissions from fossil fuels through short and long term oriented research and development projects. Being a technology developer together with trade and industry, ECN tries to strengthen the synergy between the market and sustainability. Being an international knowledge centre in the field of energy, ECN creates, together with universities, new knowledge, and ensures the transfer of that knowledge to society. Within ECN seven priority areas have been formulated: solar, wind, clean fossil, biomass, policy studies, renewable energy in the built environment and energy efficiency.
This research will be conducted for and within the ECN Policy Studies department. ECN Policy Studies provides independent advice to governments and corporate enterprises in the area of energy and environmental issues. Innovation in the field of policy studies focuses on the enforcement of the synergy between liberalisation and sustainability. The multidisciplinary project teams aim at local, national and international consultancy using a broad range of up-to- date models and data to support the policy recommendations.
3.2 Research approach
Within the research process a few basic activities can be discerned. These basic activities are combined by de Leeuw (1996) in what he calls the ‘cock shy’ of research (de ballentent van onderzoek). This ‘research cock shy’ is a useful instrument in the choices that outline the research approach.
Measuring and observation methods Data sources Applicable concepts
Problem formulation
Method of analysis
figure 3.1 research cock shy
The problem formulation and the theoretical concepts resemble the hart of the research. The basis of the research is formed by the problem formulation, which contains the research goal, the research question(s) and the boundary conditions. The problem formulation clarifies which knowledge is sought after and in what way the researcher is to fulfil the demand for knowledge.
The applicable concepts form the theoretical basis by which the researcher develops the sought after knowledge. Theoretical concepts have to be chosen with respect to the problem formulation and vice versa. The choice of data must be made in the light of the research
question(s). Depending on the questions that need answer various data sources that shall be used are determined. Choice of data sources implies the use of certain measuring and observation methods as well as the use of the right kind of data analysis methods. Below each of these different areas of the research approach are discussed. Together the coherent decisions on each of these ‘balls in the cock shy’ form the research approach8.
3.2.1 Problem formulation
In the Kyoto protocol the industrialised countries commit themselves to the reduction of greenhouse gas emissions with an average of 5% compared to the 1990 level in the period 2008- 2012. To facilitate achievement of this aim, the Kyoto protocol provides for the so-called Kyoto mechanisms9. One of these mechanisms in emissions trading, the exchange of emission allowances (also called emission credits) between states and, on a lower level, individual emitting entities.
The European Commission submitted a Draft Directive on Emissions trading in October 2001.
With the submission of this draft directive an important step has been taken in the realisation of a system for emissions trading between individual emitting entities. At this time the draft Directive is under evaluation by the representatives of the various Member States. Within the Netherlands too, the use of emissions trading as an instrument to reduce the emission of greenhouse gases receives a lot of attention. The minister of Housing, Spatial Planning and the Environment (VROM) therefore appointed the Commission CO2-trade on July first 2000. The task of this advisory body was to investigate the desirability and feasibility of a national system of CO2 emissions trading10. At the end of October 2001 the Social-Economic Council of the Netherlands (SER) was asked by the minister of VROM to evaluate the recommendations of the Commission CO2-trade in the light of the submitted draft Directive of the European Commission11. At present the ministry of Economic Affairs, in co-operation with consulting partners and representatives from various industries, is developing an allocation plan for the Netherlands. The Draft Directive on Emissions trading requires each member state to develop a national allocation plan for initial allocation of emission allowances in a European emission trading system. In this plan, the Member State must state how many emission allowances will be allocated and how these will be allocated to the individual emitters12.
From its role as consultant and expert on climate policy development, ECN is very much interested in the emerging of an (inter)national emissions trading system. The shaping of such a system is in full progress. The basis of this research is the desire of ECN to improve its insight in the way that companies can deal with emissions trading. The knowledge ECN hopes to gain through this research does not apply to the organisation itself. Generated knowledge contributes to the knowledge development within ECN Policy Studies and could possibly be used as input for model building and recommendations on policy development. This qualifies this research as
‘policy supporting’ research. De Leeuw (1996) describes policy-supporting research as:
“Policy-supporting research has in mind delivering concrete knowledge that can be used in a specific situation by a specific customer to satisfy a portion of the total knowledge demand.”
8 de Leeuw p 87-89
9 See for more detail chapter 2
10 Final report commission CO2-trade: Handelen voor een beter milieu, Haalbaarheid van CO2-emissiehandel in Nederland, January 2002 p. 9
11 Advise SER: Groene Versie Emissiehandel , p.1, 2002
12 Ministry of Economic affairs & KPMG; allocation of emission allowances; distribution of emission allowances in an European emissions trading scheme (draft), May 2002
3.2.2 Research goal
In order to specify the portion of knowledge that is requested the research goal or goals have to be determined. The research goal answers the question13:
“Who wants to know what and why is this knowledge of interest?”
Based on this question the research goal has been formulated as:
“Providing a systematic description of the factors that influence company (strategic) behaviour in relation to the emergence of CO2 emissions trading. This knowledge product will be
produced in favour of the Policy Studies department of ECN and will contribute to the knowledge development within ECN on emissions trading as a policy instrument”
3.2.3 Conceptualisation
Under pressure of the rising attention for greenhouse effect and climate change related issues, companies in the Netherlands (and other industrialised countries) are facing new climate norms.
The apparent seriousness of the problem and the far-reaching impacts it could have herald a new
‘climate conscious’ era. Even if the Kyoto protocol is not executed in its current form after all, far reaching measures in the near future are considered. In line with this new thinking about climate, companies will have to comply with new standards. One of the challenges companies14 face in this matter are the budding restrictions on the emission of CO2 gas. Most CO2 emissions originate in the combustion of carbon rich fossil fuels to produce power and heat. Countless manufacturing processes depend on the use of these fossil fuels and almost all manufacturing companies will be affected, in one way or the other, by limitations on the use of these fuels.
The growing attention for and rapid development of new and far-reaching climate policy has consequences for companies. These developments imply changes in the business environment of a company to which it should react in order to retain a proper fit between the internal organisation of the company and its business environment. Internal organisation includes all internally directed actions and decisions on organisational design, decision making processes, control procedures, production processes etc. It is the goal of this research to map which factors companies take into account when developing a 'CO2 strategy' and how these factors influence reaction possibilities on the emergence of emissions trading and the associated tightening of emission norms.
The concept of emissions trading has been around for quite some time. It originated in the late nineteen seventies in the US as has since been used in several programs in the US. The basic thought behind emissions trading is that when a monetary value is put on emissions and emissions credits become exchangeable, emission reductions can and will take place in those places where they are most cost effective. With the emergence of the ‘Kyoto thinking’
emissions trading has gained in popularity and is generally considered a cost effective way to reduce CO2 emissions. When the Kyoto protocol is ratified the road ahead is open to the implementation of an (inter) national CO2 emissions trading system. Emissions trading has two important implications for CO2 emitting companies:
1. A limit on CO2 emissions 2. A monetary value for CO2
13 de Leeuw p.89-90
14 I use the term company here to indicate the person or (in most cases) group of persons responsible for the management of the organisation as well as the company as a CO2 emitting entity.
Freedom of choice and Latitude
The international developments on climate policy constitute a disturbance in the environment of companies. This disturbance can cause the company to become less fit to function properly within its environment. It could as well imply additional business opportunities the company can exploit. Generally the environment is taken to be everything outside the organisation as a legal entity. The environment of the company can be subdivided in two parts; the task environment and the general environment15. This coincides with Hall (1972) who subdivides the environment in a ‘general’ and a ‘specific’ part. The task environment includes organisations or persons the company has contact with on a general basis. These are customers, suppliers of resources, capital suppliers, trade associations, labour units and such groups as local residents and environmental groups. The general environment of the company is a much more vague and wider notion. The general environment includes those elements that are essential to the functioning of the company and that do not belong to the task environment. Seven elements as such can be distinguished:
• Economic factors
• The environment
• Demographic factors
• Social cultural factors
• Technological developments
• Public opinion and press
• The government
Figure 3.2 Environment
In order to react effectively to the disturbance the company has to re-balance by (additional) co- ordinating actions. This view on climate policy developments coincides with the contingency approach. The contingency approach is the movement within organisational theory concerned with the connection between environment and internal organisation. The essence of the contingency theory is “goodness of fit”. This means the effectiveness of an organisation depends on the congruence between its structure and its environment. Effectiveness here is considered as the ability to realise the goals of the organisation. This is primarily to sustain business, optimisation of results and organisational growth. In reaction to changes I assume a dynamic approach. This means the environment influences a company and the company on its part can influence its environment.
15 S. Douma: Omgevingsanalyse; syllabus omgevingsanalyse bedrijfskunde RUG Band 1; Dr. Gemser en Drs.
Maccow p. 4-34
general environment task environment
company
In their effort to comply with new CO2 emission standards companies have different options to choose from. They have a certain freedom of choice. Freedom of choice in this matter is considered a situation in which there is no complete determinism or complete voluntarism.
Under circumstances of complete determinism there is one best way of organising leaving other options irrelevant. Complete voluntarism on the other hand suggests all thinkable solutions can be implemented. In this research a situation is considered in which there are multiple options to choose from, the number of options however is limited. Freedom of choice can be seen here as the contingency to choose between options, that concern either the internal or the external organisation.16 This means that in developing a CO2 emissions trading strategy companies have to make choices. Some choices will prove more attractive than others considering certain characteristics the company has or decisions it has made in the past. This coincides with two basic assumptions from the contingency approach: " There is no best way to organise" and "Any way of organising is not equally effective" (Galbraith 1973). The contingency approach states the best way to organise is determined by the circumstances of the individual company.
The challenge companies face is to choose those options that best fit their respective situation.
The more freedom they have in choosing from available options the more chance they have in formulating an effective strategy. A useful tool to describe the amount of freedom a company has is the concept of latitude as described by Rogier (1998). According to Rogier the number of options that can be chosen provides for a certain degree of latitude. Put differently, latitude resembles the amount of freedom of choice an actor possesses. A company with a high degree of latitude can choose quite freely between available options. A low degree of latitude leaves little room to choose. The degree of latitude to react on the consequences of CO2 emissions trading is determined by the goodness of fit a company has with different CO2 abatement options. If a company has capabilities and/or characteristics that fit well with identified abatement possibilities this contributes to its latitude. The more possibilities fit with the companies' capabilities and/or characteristics the higher the degree of latitude the company has.
A company that shows an extremely low degree of latitude will ultimately be forced to buy all additional reductions on the allowance market and will be left at its mercy. Companies with a high degree of latitude will possibly be able to avoid additional CO2-costs and even gain from the described developments.
Figure 3.3 Conceptual model
In order to describe how company strategic behaviour in relation to CO2 emissions trading is influenced, the various possibilities companies have to react will be mapped. Next the factors that determine the latitude companies have shall be determined, e.g. which factors determine which options can be chosen. Latitude is not the only important element influencing strategic behaviour. The impact of the disturbance and the size of the disturbance are other important elements. The impact a prise for CO2 has on the company is determined by company
16 This view on freedom of choice is derived from Rogier: De Wisselwerking tussen Organisatie en Markt.
Latitude Company characteristics Impact of emissions trading
Environmental characteristics CO2 strategy
characteristics such as the amount of CO2 emitted and the impact of additional CO2 costs on total production costs. The size of the disturbance is determined by the emission standards that are imposed. The higher the reduction that has to be achieved the bigger the disturbance.
Companies with large exposure (large expected impact) will be more vulnerable to disturbances than companies with low exposure.
3.2.4 Boundary Conditions
1. CO2 emissions trading refers to the proposal for a system of emissions trading as described in the EU Draft Directive on Emissions Trading of October 2001. Although the Draft Directive foresees in trading of all greenhouse gasses initially only CO2 will be incorporated in the system. Emissions trading refers to trading of CO2 unless explicitly stated otherwise.
2. In this research the development of a system for CO2 emissions trading is looked at from a company point of view.
3. The research applies to companies that are emitters of CO2. Companies that can benefit from emissions trading but do not emit CO2 themselves, such as intermediates and consultants, are not taken into consideration.
4. The research refers to companies which have production facilities in the Netherlands. These companies can also be foreign-based multinationals, as long as they have production facilities in the Netherlands.
5. Since no decision has been made on the final characteristics of the emissions trading system this research is not based on a specific system design. I will indicate which aspects of the proposals are important to companies and in what way it affects their activities.
6. This research project is a final thesis for the business administration studies (specialisation Business Development) of the Faculty of Management and Organisation of the University of Groningen. The research project has a term of six months and is conducted within the policy studies department of the Energy research Centre of the Netherlands (ECN) in Amsterdam.
3.2.5 Assumptions
1. A relation between emissions of greenhouse gases and climate changes is evident. As a result companies are confronted with stringent emission norms in the (near) future.
2. Although still under negotiation emissions trading will be implemented.
3. In this research I assume that all three Kyoto flexible mechanisms are eligible for complying with emission requirements. I further assume that allowances generated under JI and CDM are interchangeable with emissions allowances under a system of emissions trading between companies as described in the Draft Directive.
4. Although a company has multiple goals it primarily strives for continuation of its activities and a value surplus.
3.2.6 Research questions
1. What is the background on the introduction of CO2 emissions trading?
2. Which (strategic) choices can be made by companies in relation to emissions trading?
3. Which factors determine the latitude within this choice range?
Sub-questions on research question 1:
1. Why is emissions trading introduced? (chapter 2).
2. What is emissions trading, how does it work? (chapter 4).
3. How does emissions trading fit within the existing policy framework in the Netherlands?
(chapter 5).
4. What is the current state of affairs regarding the plans for emissions trading ?(chapter 5).
Sub-questions on research question 2:
1. What are the implications of the development of emissions trading for companies?
2. (chapter 6).
3. What choices do companies have to make in relation to these developments?
4. Which action possibilities can be discerned?(chapter 6) Sub-question on research question 3:
1. What determines the impact emissions trading has on companies? (chapter 7) 2. Do all companies face the same challenge? (chapter 7)
3. Which company characteristics fit with identified action possibilities? (chapter 7) 4. Which considerations are important in relation to identified action measures?
5. (chapter 6 & 7).
6. What are restraining factors to the different choices that can be made (chapter 6&7).
7. How do policy developments on emissions trading influence company strategy? (chapter 7)
3.2.7 Research method
This research consists of three parts. The first part goes into the backgrounds of climate change and climate change policy development. It further explains the mechanisms behind emissions trading and describes the current state of affairs concerning implementation of a system of CO2
emissions trading. The second part is build around what I call the emissions trading decision tree. In this decision tree the various possibilities for action by companies are depicted. In order to determine which factors influence the (strategic) behaviour of companies I started by depicting the existing behavioural possibilities. In the third part I introduce the CO2 intensity – latitude matrix. Through this matrix various influencing factors are introduced and explained.
In the early stages of the research I recognised the fact that only a very select group of companies is familiar with the characteristics of CO2 emissions trading. Most companies are not up to date on the subject, do not know how it works or just do not care (they await developments). Because of the small potential research population a representative survey was considered not feasible. I choose to start off by drawing up a decision tree, which resembled the various choices a company can make in dealing with the effects of the emergence of a CO2
emissions trading system. Based on this decision tree I subsequently started to fill in influencing factors that determine the latitude companies have in pursuing various directions of choice. The concept of latitude has been introduced as a means of describing the amount of freedom companies have to choose between actions. Much latitude implies a situation in which many possibilities are feasible, little latitude means restricted action possibilities.
Part of the filling in process was in depth interviews with ‘expert’ stakeholders. These ‘expert’
stakeholders consist of representatives of large companies, consultants and representatives of ministries and industry organisations.
3.2.8 Data collection
For my data collection I rely on various studies on company behaviour in relation to energy efficiency, emissions market development studies and policy documents produced by governments and research institutions. Beside these, a number of Internet sites have been consulted.
My interviews consisted of semi-structured in depth interviews. Depending on the respondent a fixed set of questions has been presented. Based on the specific knowledge, time and benevolence of the respondent specific subjects were elaborated on during various interviews.
3.2.9 Data analysis
Analysing of obtained data is done by development of an instrument to position companies in terms of sensitivity to CO2 policy developments and countering measures latitude; the CO2
intensity-latitude matrix. Since a representative survey was not feasible no quantitative analyses of data has been done.
4 THEORETICAL BACKGROUND ON EMISSIONS TRADING
Within a CO2 trading system a settled amount of emission allowances is assigned to a company or facility for a fixed period, for example one book year. The assigned emissions can be traded between participants to the system. At the end of the period the company or facility must hold enough emission allowances to cover its true emissions. If the participant projects higher emission than it holds allowances it should acquire additional allowances or reduce its emissions internally. When fewer emissions are projected the surplus in allowances can be sold in the market. Participants who, at the end of the book year, are not able to present enough emissions allowances to cover their true emission will be penalised.
4.1 The working of emissions trading
Emission trading in itself does not reduce emission of CO2. It merely serves as an instrument to attain emission reduction targets in the most cost efficient manner. The working of emission trading can be well explained by a simple example. In meeting its required standards for CO2
emissions, facility A incurs a cost of €15 per additional tonne of CO2 emissions reduced.
Reductions are achieved by internal measures which could entail replacement of machines and engines or maybe a fuel switch. Facility B has to spend €30 per additional tonne CO2 reduced.
These two facilities may be different plants within the same company, plants owned by different companies in the same sector or even plants in completely different sectors and/or in different states.
Marginal Cost of Control ( € per Ton)
Facility A Facility B
€ 45
€ 30
€ 15
€ 0
figure 4.1 Marginal cost of control facilities A and B
Clearly the same overall reduction in emissions could be achieved at lower compliance cost by tightening controls at facility A and relaxing them at facility B. In this case the two facilities could trade emissions among themselves at a market price. Emissions in this case actually stand for emissions allowances, the right to emit a tonne of CO2.
Under a cap-and-trade system the total amount of emissions allowances is fixed. Facilities have an assigned amount of allowances, which they have to make sure cover their real emissions at the end of the year. If the assigned emissions are insufficient the facility has to reduce emissions itself or it has to acquire additional emissions allowances. As the total amount of allowances is fixed the price will be determined by the market demand. Subsequently the more costly it is to reduce emissions the higher allowance prices would be as a result of increased demand.
When I return to the example of facilities A and B we can see how each of the latter would benefit from the market for emissions allowances. Suppose the market price of an emissions allowance were €20 per tonne, and that initial allocation of allowances would be consistent with the individual emissions levels required under the inflexible emission standard (cap). Figure 5.2 shows how each of the two facilities benefits under the market.
Marginal Cost of Control (€ per Ton)
Facility A Facility B
Market Price for emissions allowances
Gains to A
Gains to B
€45
€ 30
€ 15
€ 0
Figure 4.2 Gain to company A and B
Facility A (seller) gains by reducing its emissions further than the required cap and selling its surplus allowance to Facility B (buyer). It receives €20 for the allowance but spends only €15 to achieve the reduction, a net gain of €5. On the other side facility B is able to buy the allowance for €20 and reduce its compliance costs by €30, a net savings of €10. The total savings in compliance costs (€15) is split between the buyer and the seller, which as a result both benefit from the trade.
Figure 4.2 reflects gains from the first allowance traded. Presumably there will be more gains from additional trades, to illustrate how the market sets the price and how the overall gains from trade are achieved, we can think of each facility’s marginal cost of compliance as its demand for emission allowances (NERA p 8). The cost savings realised by emissions trading are shown once more through figure 4.3 and figure 4.4. These figures show the abatement curves of facility A and B. As can be seen the more emissions are reduced the higher the costs per ton reduced.
Facility A has an original allocation of emission allowances equal to E(p). Its original emissions are E(0). At the end of the compliance period the facility must hold emissions allowances equal to its actual emissions in order to be in compliance. P resembles the market price of an emissions allowance. As facility A is able to reduce emissions at costs below the allowance market price it will reduce its emissions internally to an amount that equals its initial allocation.
The company is now in compliance. From this point on it is profitable to reduce up to the amount where marginal abatement costs17 equal the market price of emissions allowances at E(1). The surplus emissions allowances (Ep –E1) can be sold on the market thereby making a profit that corresponds to the area (ABC).
17 The costs of reducing one extra ton of CO2
Figure 4.3 Profit from emissions trading for facility A
The maximum amount of mony a facility is willing to pay for an emissions allowance is equal to what it would have to spend to reduce one ton CO2 internally (marginal control cost). As facility A reduces to a greater extend the marginal cost of control will rise as it becomes more and more difficult to realise additional CO2 reductions. Facility B has an initial allocation of E(p) as well, this means it has got enough allowances to cover emissions up until E(p). In figure 4.4 the area ABC resembles the net savings from emission trading for facility B. Since it can buy allowances at €20 from facility A it does not have to take expensive additional internal measures. Facility A will stop selling allowances when additional savings will cost more than
€20 (see figure 4.2), while facility B will stop buying when marginal abatement costs fall below
€20 (see figure 4.2). At this point the total cost of reduction will be minimised.
Emissions P
A
C
B
Marginal abatement costs
E(p) E(1) E(0)
Figure 5.4 Savings from emissions trading for facility B 4.2 System attributes
4.2.1 The cap
Of essential importance is the cap the government poses on CO2 emissions. There seem to be two options in establishing a cap; an absolute cap (cap and trade) and a performance standard rate (psr). Under an absolute cap a maximum is set to the CO2 emissions of the individual company. At the end of the book year the company has to hand in an emission allowance for every ton of CO2 it emitted during the year. A PSR-system focuses on the CO2-efficiency of the production process rather than on the total CO2 emissions. The amount of emissions allowances is determined by the standard performance rate, which is a standardised emission rate for a specific production process in terms of CO2 efficiency. This could for example be the amount of CO2 per unit product produced. The standard rate has no value without production. If production is realised an amount of CO2 consistent with the PSR can be emitted. Under a PSR-system the cap on CO2 emissions is not absolute. A company can emit as much CO2 as they like as long a they apply to the standard performance rate. If the company emits less than the PSR they earn tradable emissions allowances if they emit more they have to take additional measures. The advantages and disadvantages of a PSR an cap and trade system are described in box 4.1.
Emissions
P A
C B
Marginal abatement costs
E(1) E(p) E(0)
Marginal cost of control Marginal cost of control
Box 4.1 Advantages and disadvantages of cap and trade and PSR
Advantages and disadvantages of cap and trade and performance standard rate Cap and trade
Advantages
• A cap and trade system is straightforward and relatively easy to execute.
• Under a cap and trade system certainty exists on account of achieving the environmental (Kyoto) targets, provided that enforcement and monitoring is sufficient (uncertainty with companies)..
Disadvantages
• Undesirable effects with initial allocation of allowances (see box 5.2).
• Differences in the distribution of allowances under a cap and trade system can cause undesirable differences between countries. Internationally operating companies compete with companies in different (geographical) markets under differing circumstances. Emissions trading can influence the international competitive position through differences in allowance distribution.
• Increases in production can cause considerable tightness in the emissions budget of companies, this causes a significant rise in costs of which it is not sure it can be passed on to consumers because of elasticity in demand and low cost competitors from non Annex I countries.
• Under a cap and trade system newcomers in the market must acquire emissions allowances for their production. Considerable ‘emission space’ under the cap must be reserved for newcomers.
If newcomers have to buy their emissions in the market emissions trading becomes a significant entry barrier.
Performance standard rate Advantages
• No active initial allocation is needed. Initial allocation is determined through the PSR.
• No problems with new entrants in the market. New companies get the same performance rate as existing companies.
• Production can be increased without the need for additional measures. As long as the company complies to the PSR production can be increased.
• The government can limit total emissions by tightening the performance standard.
Disadvantages
• Without an absolute ceiling the total amount of emissions of a sector is unsure. This provides the government with uncertainty concerning compliance to national reduction targets (uncertainty with government).
• The government requires a lot of information under a PSR system. For every activity a performance standard must be derived. Besides this information on emissions per company or installation is required. The establishment of suitable PSRs for the many different existing production processes will take a huge effort.
• Transaction costs are expected to be considerably larger in a PSR system in comparison to a cap and trade system. These costs include monitoring of emissions, production volume and trade as well as the conversion of the PSR into absolute tons of CO2, the basis of CO2 emissions allowances.
• Since producers only have to buy additional emissions allowances or take internal reduction measures when their emissions are above the PSR, they will not be inclined to reduce their production levels. Reducing production does not provide them with the opportunity to sell allowances (taken that reducing production does not influence CO2-efficiency). As a result, marginally profitable and energy intensive products are less challenge under a PSR system. This could make national compliance more expensive from a national prosperity level because reduction will have to be realised on account of other (more profitable) activities.
References:
. Brouwer et al. (2001) Verhandelbare rechten voor de emissie van broeikasgassen in de Nederlandse landbouw. LEI,The Hague H.Verbruggen en O.Kuik (2001), Opties voor initiele allocatie van CO2- emissierechten, IVM, Amsterdam.
SER (2002) Report Groene Versie Emissiehandel
4.2.2 Initial allocation
Under a PSR-system the PSR determines the amount of emission allowances that have to be given to a company on basis of the total production. The (relative) cap and the allocation are both determined by the PSR. Under an absolute cap there are a number of options regarding initial allocation: auctioning, grandfathering and a performance rate.
Grandfathering refers to the free of charge allocation of allowances to installations on the basis of emissions in a reference year (or an average of several years) in the past. The choice of the reference year is important in the case of Grandfathering (see box). Enough reliable emissions data must be available for the reference year(s). The second option is auctioning. Under an auctioning allocation-system emitters decide how much allowances they need themselves. In this case the auctioning prices will be compared with the costs of internal reduction. Third option is allocation on basis of a PSR. Note that in this case a PSR is used for allocation under an absolute cap. The PSR is used for allocation purposes only. The permitted emissions equal the PSR multiplied with the expected production volume. The European commission introduces even a fourth allocation method, a technology rate18. The EU directive attempts to avoid certain disadvantages of Grandfathering by taking into account the technological potential in reducing emissions of specific installations in the free allocation of emissions allowances. Also installations are not allowed to receive more allowances than needed to cover production. This in order to avoid unauthorised government support. These allocation mechanisms have both advantages and disadvantages that are summarised in Box 4.2.
Box 4.2 (Split) Advantages and disadvantages of grandfathering, auctioning and PSR as mechanisms for initial allocation of CO2 emissions allowances.
18 SER report p.32
Advantages and disadvantages of grandfathering, auctioning and PSR as mechanisms for initial allocation of CO2 emissions allowances.
Grandfathering Advantages
• Relatively straightforward and relatively easy to implement.
• Allocation free of charge, advantage to participants in the system while they have no additional costs. Politically feasible.
Disadvantages
• Historical allocation criteria can have unjust side effects. For example, companies with high emissions in the base year (probably 1990) are advantaged while they get allocated more allowances. This does not award early reduction incentives, companies become ‘punished’
for their environmental conscious attitude in the past. This is especially a problem for Dutch companies because of extensive energy efficiency programs which took place in an early stage compared to other European countries (see chapter 5).
• New entrants have no past emissions and will have to buy allowances in the market (entry barrier).
• Through grandfathering a capital transfer to emitters takes place. As a result windfall profits arise witch can be capitalised if companies close down or relocate their production or succeed in transferring the opportunity cost of not-selling the allowances in the product price. The windfall problem is mainly a problem for the government.
Box 4.2 (Split) Advantages and disadvantages of grandfathering, auctioning and PSR as mechanisms for initial allocation of CO2 emissions allowances.
Auctioning Advantages
• Emitters decide themselves how many allowances they need. The polluter pays.
• No problem with new entrants, everybody pays the same.
• No capital transfer.
• Third parties have easy access to emissions allowances (stimulates trade).
• Auctioning provides for a reference price, which gets trading going.
Disadvantages
• Less politically feasible because of high extra costs to companies.
• Auction profits have to be kicked back to the industry; generating government income is not the goal of emissions trading. How this must be done is complicated and must meet conditions of objectivity, non-discrimination and equity
Performance standard rate Advantages
• Free allocation without disadvantages of grandfathering.
• Awards early incentives.
• Allies with Dutch policy practice.
• Possibility to avoid windfall profits by linking allocation to production.
Disadvantages
• Complexity of system.
• Huge information need.
References:
. Brouwer et al. (2001) Verhandelbare rechten voor de emissie van broeikasgassen in de Nederlandse landbouw.LEI, The Hague H.Verbruggen en O.Kuik, (2001) Opties voor initiele allocatie van CO2- emissierechten, IVM, Amsterdam.
SER report Groene Versie Emissiehandel End report comm.ssie CO2 handel
5 CLIMATE CHANGE IN THE DUTCH CONTEXT
5.1 Overview of the Dutch climate policy
Climate change can have far reaching consequences for the Netherlands. Most heard of are rising sea levels, more frequent and heavier North Sea storms, river flooding and an increase in precipitation. Small, sudden climate shifts are also possible. For example the possible diminution or total vanishing of the warm Gulf Stream could cool down the Northern-European climate by several degrees.
The threat of climate change and associated side effects became an important new factor in the national energy debate in the early nineties. Attention for energy saving in it self was not new to the Netherlands. The first oil crisis in 1973 showed that the national energy policy was very sensitive to international developments. The Netherlands depended heavily on the oil exportation and oil supply from other countries. In 1974 and 1979 the respective first and second White Papers on Energy Policy were published which aimed at a more balanced development of the demand and supply of energy. Energy conservation and diversification were the two main elements of the second White Paper. Achieved efficiency improvements were not big however and diminished after a sharp decrease of the energy prices after 1985 and the abolition of subsidies on energy-saving measures19.
Due to the strong developing environmental awareness and climate concern in the late eighties it was decided to give new and stronger impulses to energy conservation and renewable energy sources. Concerning CO2 emissions the government aimed at stabilising emissions at the 1990 level by 1994-1995. After that a reduction of 3 to 5%in the year 2000 had to be realised compared to the 1990 level. Between 1990 and 1997 CO2 emissions increased with 11% making the 2000 goals hard to realise (Uitvoringsnota Klimaatbeleid blz 25).
In 1997 the Kyoto protocol was signed leaving the EU with a reduction commitment of 8%.
After negotiations this general 8% target was redistributed under the so-called burden sharing assigning a 6% reduction commitment to the Netherlands. The Dutch government made this reduction target concrete in the Climate Policy Memorandum of 1999 (Uitvoeringsnota klimaatbeleid deel I). When releasing the policy memorandum it was expected a reduction of 50 Mt CO2-equivalents, compared to the expected 2010 level, would be needed to comply with the national reduction target. Half of this reduction, 25 Mt, shall be realised abroad through the three Kyoto Mechanisms. The other 25 Mt will have to be reduced domestically, distributed over 17 Mt reduction of CO2 emissions and 8 Mt reduction of other greenhouse gases. The memorandum on climate policy indicates which domestic policy instruments will be used to achieve these reduction goals. Firstly the so-called basic package of measures has been established, which should account for the reduction of 25 Mt. The basic package includes agreements with large energy consumers (Covenant Benchmarking, Multiple Year Agreements), subsidies, taxes as well as education and information to the general public.
Besides the basic package the government describes a set of emergency measures. These include increased energy taxes, additional emissions taxes and CO2 storage.
19 Rietbergen, Breukels, Blok (1999): Voluntary agreements- implementation and efficiency. The Netherlands’ Country Study-Case studies in the sectors of paper and glass manufacturing; University of Utrecht, december
