We study the effects of the European Union Emission Trading Scheme (EU ETS)?which was introduced in January 2005?on companies by conducting interviews in some German and UK firms. In this paper, we demonstrate that although the introduction of the EU ETS has increased awareness of the importance of efforts to reduce global warming and emission costs, it has had little influence on the companies CO2 abatement efforts during the first period.

Daisuke Ishikawa

Seiji Ikkatai

Shuichi Ohori

English

Research Papers in Economics

 
 
 
 
 
 
 
Discussion Paper No. 627 
 
“The Effects of the EU ETS on Companies: 
Research by Conducting Interviews in European Companies” 
 
by   
Seiji Ikkatai, Daisuke Ishikawa, and Shuichi Ohori 
 
 
January 2007 
KYOTO UNIVERSITY 
KYOTO, JAPAN 
http://www.kier.kyoto-u.ac.jp/index.html 
KYOTO INSTITUTE 
OF 
ECONOMIC RESEARCH 
KIER DISCUSSION PAPER SERIES  1  
 
The Effects of the EU ETS on Companies: 
Research by Conducting Interviews in European Companies   
 
 
 
Seiji Ikkatai, Daisuke Ishikawa, and Shuichi Ohori 
The Research Center for Advanced Policy Studies 
Institute of Economic Research, Kyoto University 
 
 
 
Abstract 
We study the effects of the European Union Emission Trading Scheme (EU 
ETS)—which was introduced in January 2005—on companies by conducting interviews 
i n  s o m e  G e r m a n  a n d  U K  f i r m s .  I n  t h i s  p a p e r ,  w e  d e m o n s t r a t e  t h a t  a l t h o u g h  t h e  
introduction of the EU ETS has increased awareness of the importance of efforts to 
reduce global warming and emission costs, it has had little influence on the companies’ 
CO2 abatement efforts during the first period. 
 
 
 
1. Introduction 
Since January 2005, the EU has introduced the EU ETS in order to control greenhouse 
gas emissions, including CO2 emissions; this scheme is the first of its kind in the world. 
We are primarily interested in studying how the EU ETS affects the management of the 
concerned companies, its effectiveness in reducing greenhouse gas emissions, and its 
economic effects. In this regard, we visited some German and UK companies that have 
facilities covered by this scheme and met the concerned officials in the companies to 
discuss their EU ETS introduction-related activities.   
 
 
2. The Outline of the EU ETS 
The EU is obligated to reduce greenhouse gases by up to 8% within the first 
commitment period (2008–2012) of the Kyoto Protocol. This protocol set the obligations 
for each country; however, the EU’s obligation to achieve the target as a whole could be  2  
replaced by each country’s individual obligation. Therefore, based on the burden sharing 
agreement, the EU allocated the CO2 emission reduction obligations to each country. 
The government of each country obtained the approval of the EU Commission for their 
National Allocation Plan (NAP), which decides the allocation of each facility covered by 
the EU ETS based on its domestic laws. Subsequently, the initial allocations for CO2 
emission were distributed to each facility based on this NAP. 
The EU ETS currently covers CO2 emissions from all of the larger sources in the power 
and heating sector, oil refineries, and coke ovens and the production of ferrous metals, 
cement clinkers, glass, tiles, bricks and porcelain, pulp, paper, and board—about 11,000 
installations in all. The commitment period is divided into the first phase (2005~2007) 
and the second phase (2008~2012); the initial allocation for the first phase has already 
been completed. The penalty for the failure to achieve the target  has been set as 40€ 
for the first phase and 100€ for the second phase.   
Thus, companies that have facilities covered by the EU ETS should reduce CO2 
emissions as per the initial allocation by the end of the first phase. If they fail to do so, 
they must purchase EU Emission Allowances (EUA) from the market equivalent to 
their exceeded CO2 emissions. On the other hand, companies that have achieved 
excessive CO2 emission reduction can sell them as EUAs in the market. The EUA price 
rose after the opening of the market to 30€ in April 2006;however, the price fell to 
almost half that value and has continuously decreased to a present value of less than 
10€. This is because of the prediction that the market will loosen in the first phase.   
 
3. Research Methodology 
First, we obtained a list of companies that have facilities covered by the EU ETS; we 
were supported by the Japan External Trade Organization (JETRO) in Düsseldorf. We 
then sent letters to the companies located in London and Düsseldorf requesting them to 
agree to respond to our questionnaire during a research meeting. Our main questions 
were as follows: First, how do you evaluate the introduction of the EU ETS and the 
environmental tax regarding CO2 emission reduction; additionally, what is your 
prediction regarding the EU ETS after the first commitment period of the Kyoto 
Protocol? Second, has the EU ETS changed the behavior of your company from the 
viewpoint of CO2 emission reduction activities? If so, could you show us the change? 
Third, do you believe that regulations such as the EU ETS lead to innovative 
environmental technologies and long-term increases in company profits? 
Responding to this letter, a UK and a German company informed us of their readiness 
for participation. With the kind support of the Embassy of Japan in the UK, three  3  
additional UK companies consented to the interview. Thus, a total of five meetings were 
arranged. The types of companies were glass and ceramics manufacturers (Germany), 
air terminal facility management, electric power, and steel (UK).    
The meetings were held in London and Ludwigshafen from October 16–19, 2006. 
 
 
4. Results 
(1) Company A (in Germany): Glass and Ceramics Manufacturer    
[Q 1] How do you evaluate the introduction of the EU ETS? 
・The EU ETS has made us very busy because we have to process complicated cost 
calculations and a large amount of documentation. 
 
[Q 2] Has the EU ETS changed the behavior of your company? 
・At the moment, the EU ETS has not changed our behavior significantly because we 
had already set voluntary targets to reduce energy consumption. 
・We recognize that it is important to compare the marginal abatement cost of CO2 and 
the price of emission permits. However, in effect, it is difficult to measure the 
abatement cost. The EU ETS also enhances our ability to monitor our own 
development.  
 
[Q 3] Do regulations such as the EU ETS lead to innovative environmental 
technologies? 
・We are not completely convinced of that assertion.   
 
[Other Comments] 
・Our CO2 emission allowance is 95% of the baseline (the averaged actual emissions 
from 2000–2005). 
・One of the most difficult aspects of the emissions trading in Europe is the difference in 
the schemes among the member countries. Every country has a different scheme. 
 
 
(2) Company B (in the UK): Airport Terminal Facility Management    
[Q 1] How do you evaluate the introduction of the EU ETS? 
・Our CO2 emission allowance is 85% of the baseline. We expect to have some surplus 
because the energy sources are being switched to LNG and energy-saving measures 
are being promoted. Therefore, the introduction of the EU ETS is beneficial for us in  4  
that we can sell the surplus emission permits.    
 
[Q 2] Has the EU ETS changed the behavior of your company? 
・We have voluntarily been reducing greenhouse gas emissions in order to cut costs and 
enhance our reputation. Therefore, the introduction of the EU ETS has not changed 
our behavior significantly. 
・Rather than the EU ETS, the Climate Change Levy has a greater impact on our 
company. This is because the Climate Change Levy is less uncertain than the EU 
ETS. 
 
[Q 3] Do regulations such as the EU ETS lead to innovative environmental 
technologies? 
・In the case of our company, no. 
 
[Other Comments] 
・The municipal ordinances in London stipulate that we should replace 10% of our 
energy sources with renewable ones when we extend the new terminal buildings. We 
are currently formulating a plan to address this issue. 
 
 
(3) Company C (in the UK): Power Company (Affiliated Energy Trader) 
[Q 1] How do you evaluate the introduction of the EU ETS? 
・From the point of view of our company, we are positive about the scheme because we 
can now trade another commodity.   
・The negative aspect of the scheme is the speculative investment that distorts the 
market. 
 
[Q 2] Has the EU ETS changed the behavior of your company? 
・Probably, no. This is because power companies can easily pass on the EUA costs to 
their consumers. Although this could affect the consumers, the EU ETS will not 
essentially change the behavior of power companies.   
 
[Q 3] Do regulations such as the EU ETS lead to innovative environmental 
technologies? 
・Yes, they do. For example, with this scheme, the participants are earnestly working 
toward developing  carbon capture technologies. Moreover, such R&D investments  5  
will ensure financial profits for them in the long run. 
 
[Other Comments] 
・The CO2 emission allowance for the UK power industry is 85% of the baseline. 
・The CO2 emission cap for the sector has become more severe because the power 
industry in the UK faces less competitive trade pressure. 
 
 
(4) Company D (in the UK): Power Company 
[Q 1] How do you evaluate the introduction of the EU ETS? 
・It might be somewhat difficult to reduce CO2 emissions with the EU ETS because it is 
nearly impossible to predict future carbon prices as compared to the long-term 
payouts of investments made to reduce CO2 emissions.    
 
[Q 2] Has the EU ETS changed the behavior of your company? 
・The EU ETS has changed our behavior to some extent in that we will switch fuels from 
coal to gas (and vice versa) in our plants in response to the carbon price fluctuations 
to optimize the production cost of electricity. However, this cannot be undertaken    
for new physical investments for CO2 emission reduction in the long run. 
 
[Q 3] Do regulations such as the EU ETS lead to innovative environmental 
technologies? 
・ Hopefully, yes; the carbon constraint will lead to investments in innovative 
technologies. However, that constraint will not usually bring financial profits to 
companies in the long run because these investments require capital expenditure.    
 
[Other Comments] 
・The allowance for the UK electricity sector in 2005 was 135 million tons and the actual 
emissions were 172.6 million tons. We will buy emission permits to cover the gap and 
we have no option other than to pass the cost (approximately 800 million euros) on to 
the customers. 
・We have collaborated with some universities and are now making constructive 
suggestions regarding environmental policy to the UK government. 
 
 
  6  
(5) Company E (in the UK): Steel Manufacturer 
[Q 1] How do you evaluate the introduction of the EU ETS? 
・The EU ETS is very demanding for our sector. This is because the UK steel industry is 
facing very severe international competition and cannot completely pass on the CO2 
emission reduction costs to the customers. We have already reached the point where 
we cannot make any more progress without a substantial change in technology. 
 
[Q 2] Has the EU ETS changed the behavior of your company? 
・Effectively, no. In fact, we had some tough negotiations with the UK government and 
explained to them that our investment plans had already been fixed and that we are 
facing very severe international competition. Consequently, we effectively obtained a 
100% allowance (relative to the BAU CO2 emission). This means that the EU ETS has 
not significantly changed our behavior.   
・However, the EU ETS has probably made our employees aware of the importance of 
CO2 emission reduction. The idea of pricing CO2 emissions can be included in future 
investment plans. 
 
[Q 3] Do regulations such as the EU ETS lead to innovative environmental 
technologies? 
・In the short term, no. However, the answer could be yes in the long term. The EU ETS 
by itself has not led to innovative technologies thus far. However, the scheme has 
made people aware of the importance of CO2 emission reduction. Therefore, the 
technological innovation could potentially take place in about 20 years. 
・With respect to the question concerning the company’s financial profits, the answer is 
probably no, because the costs involved in developing a new technology are very high. 
 
[Other Comments] 
・The EU steel sector cannot fully pass on the CO2 emission reduction costs to its 
customers. This is because iron is one of the most commonly traded commodities in 
the world and we have to compete with rivals that have not ratified the Kyoto 
Protocol. 
 
 
5.  Summary of Results 
After an investigation of the companies in Germany and the UK, we obtained the 
following results.  7  
The evaluations of the EU ETS differ for each type of industry; some firms feel that this 
scheme has heavily burdened them from the viewpoints of procedure and severe global 
competitiveness. On the other hand, some other firms welcome this scheme because it 
generated new trading. Further, each firm has responded to this scheme assiduously   
and it is being vigorously implemented. However, some enterprises expressed the 
concern that the price determined in the EUA market has been distorted by speculation, 
although it was recognized that the EUA price theoretically shows the marginal 
abatement cost of CO2 emissions.   
With regard to whether the EU ETS had influenced company behavior, the general 
opinion was that there was no significant influence.  The reasons for this are as 
follows: First, the amount of the initial distribution was restricted to those areas in 
which many types of businesses were located. Second, some firms can easily pass the 
abatement cost along to consumers. Third, it would be difficult for firms to make 
investments to reduce CO2 emissions by only taking into account EUA price trends, 
because it is difficult for them to forecast these trends. However, most firms agreed that 
the awareness regarding the relationship between global warming measures and 
enterprise management deepened with the recognition of the importance of global 
warming measures and the CO2 emissions cost. 
Moreover, as for whether the introduction of the EU ETS can lead to the development 
of innovative environmental technologies, most firms recognize the possibility of such 
innovation but do not expect to earn potential profits due to these technologies.   
 
 
6.  Discussion 
We now discuss the effects of the EU ETS on firms from the viewpoints of economic 
efficiency, equity, transparency, simplicity, and efficacy for environmental improvement.   
Economic efficiency 
The EU ETS was introduced as a system that efficiently reduces CO2 emissions in the 
EU region by inducing cost minimization behavior for the firms’ CO2 emissions 
abatement. However, the EU ETS actually results in a low incentive to invest in 
environmental technology and to convert new facilities, at least during the first period. 
Therefore, the incentive of the firms’ cost minimization behavior of CO2 emission 
abatement in the short run may be very low and may not act sufficiently from an 
economic efficiency viewpoint. This is because many installations received higher levels 
of initial allocations and the future trend of the EUA price is uncertain. 
  8  
Equity 
The EU ETS can ignore equity. This is because some firms are not entirely satisfied 
with the level of the initial allocation they received, while other firms need not carry out 
abatement efforts because of the excess allocations they received. 
 
Transparency 
It is thought that there was a lack of transparency in the process by which the 
governments decided the amounts of initial allocations to each enterprise in the first 
period. This may have resulted in adjustments between specific types of businesses due 
to political considerations.   
 
Simplicity 
It appeared to be fairly simple for the firms to understand the EU ETS. However, they 
expended significant amounts of time and energy to calculate the emissions levels. As a 
result, many firms experienced increased costs as a result.   
 
Efficacy for environmental improvement 
The introduction of the EU ETS generally had little effect on the firms’ behavior. 
Therefore, the effectiveness of the EU ETS on CO2 emission reduction could not 
necessarily be higher during the first period. However, we recognize that the EU ETS 
led to the enhancement of the monitoring function and the concern for the problem of 
global warming.   
 
 
7．Conclusion 
We greatly benefited by interacting directly with some of the officials in charge of the 
EU ETS in European businesses. We were able to exchange candid opinions with them, 
even though this investigation was not able to conduct many case studies. 
The EU ETS is an extremely ambitious system that uses the market mechanism. It 
appears that each country undertook a political adjustment to be the first to introduce 
and establish the EU ETS as each industrial area. Therefore, we found that the EU ETS 
has given firms major incentives to invest in CO2 emission reduction during the first 
period. However, a more severe distribution of the EUAs in the second period of the EU 
ETS (2008–2012: the first commitment period of the Kyoto Protocol) is expected to 
gradually reveal positive effects on the firms’ capital investment and so on. It is worth 
considering a UK firm’s important comment that the government’s clearly indicating  9  
the direction of a long series of environmental policies seems important in order for the 
firms to decide on environmental investments to reduce CO2 emissions. Thus, it is 
necessary to refer to the environmental policies in our countries in the future. 
 
 
Acknowledgements  
We would like to acknowledge the European firms, JETRO Düsseldorf, and the 
Embassy of Japan in the UK for their kind support and useful suggestions. All errors 
remain our responsibility.   

The Effects of the EU ETS on Companies: Research by Conducting Interviews in European Companies

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The Effects of the EU ETS on Companies: Research by Conducting Interviews in European Companies

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