Emerald Group Publishing Limited
Copyright © 2008, Emerald Group Publishing Limited
Climate Change and Emissions Trading: What Every Business Needs to Know
Article Type: Suggested reading From: Strategic Direction, Volume 24, Issue 6.
Liz Bossley, Andy Kerr. Consilience Energy Advisory Group Limited, London, 2007
The book under review is devoted to the emerging business of emissions trading and as the title indicates is a detailed guide for those who wants to understand this evolving business. International Emissions Trading is one of the flexible mechanisms of the Kyoto Protocol aimed at controlling the greenhouse gas (GHG) emissions. It is normally considered by scientists that increasing concentrations of GHGs is responsible for the climate change that poses significant threats for the society and the ecosystem. As the mitigation of GHG emissions would affect the business activities and decision-making, it is important to be familiar with the new challenges and the changing business environment. As the regulatory framework is complicated and evolving, it is not easy for business managers to appreciate the developments easily that could potentially affect their business prospects quite significantly. This comprehensive document that covers the entire gamut of the emissions trading business, puts the issues in perspective, discusses the functioning of the new market and its effects on the major polluters and provides relevant information is thus a useful reference.
The book is organised in an introductory section and six chapters although the authors preferred to use the term section instead. There are also nine appendices at the end that provide additional information on the related areas. The introductory section is a combination of prologue, overview, and a summary of what the book offers. It briefly presents the increasing global concerns related to climate change, the initiatives taken to mitigate the problem, the cap-and-trade mechanism to deal with the climate change, the European story of the emissions trading and the American efforts in this direction. Although, the introduction engaging and provides a good feeling of the materials to be covered, it would have been better to have a preface to the new edition, an executive summary and a proper introduction. The three-in-one approach does not do full justice to any of the elements.
Chapter 1 is devoted to the scientific knowledge on global warming. It presents the Intergovernmental Panel on Climate Change and its efforts in unearthing the scientific information and in developing future scenarios of climate change and its effects on the society and the ecosystem. The chapter also highlights the importance of energy in the whole climate debate. Although the chapter is titled as The Science, in reality little science could be found here. Information on the solar energy balance, the carbon cycle and the human influence on the climate change could have been useful in this chapter.
Chapter 2 presents the international legal and regulatory frameworks on climate change the UN Framework Convention on Climate Change (UNFCCC) and the developments related to this the Kyoto Protocol, mechanisms under the Kyoto Protocol, linkages between the mechanisms as well as the Asia Pacific Partnership promoted by the USA and Australia who are not signatories to the Kyoto. This is a long chapter that covers the complicated regulatory mechanisms being developed under the UNFCCC and the Kyoto frameworks. The presentation takes the textbook style, which really does not facilitate understanding of the complex systems. The proliferation of acronyms is another problem in the climate change literature. The presentation could have been made more user-friendly using charts and flow diagrams, proper use of annexes and perhaps use of a more interactive style of presentation. Chances are there that business leaders reading this chapter would not come out with a better understanding of the complex but inter-related issues. The chapter structuring could have been improved by first presenting the basics, then dealing with the markets, and, finally, addressing the issues related to the entire mechanism. Interspersing the issues at various places throughout the chapter does not allow the reader to form a complete picture.
Chapter 3 deals with the European Emissions Trading System (EU ETS). The chapter discusses the European Emissions Directive, its implementation, and the issues related to the EU-ETS including a detailed analysis of the first-phase debacle and its effects on the emissions trading market. It also presents the developments related to the second-phase of the programme that coincides with the first Kyoto commitment period of 2008-2012. This is a more manageable chapter where the message is clear: the market works but the regulatory mechanism did not work well. The over-allocation of allowances and the reluctance to impose penalties for non-compliance do not indicate good regulatory practices but there is still time to put the affairs in order.
Chapter 4 discusses the emissions trading market and considers the physical contracts, forward contracts, futures and derivatives. The authors draw a parallel to the oil market and explain the pricing differentials amongst different types of emission allowances. The chapter also discusses:
the rival sets of general terms and conditions for forward contracts;
remedies available to small players with no or limited trading capability (i.e. relying on aggregators, deciding to set prices by reference to an index or using a regulated futures exchange);
reasons for poor likelihood of emissions swap market development; and
factors influencing the prices of emission allowances.
The chapter ends with a rather downbeat note as the prices of allowances are unlikely to recover in the near future.This is a highly informative chapter and those with some basic understanding of the trading would benefit most. However, the chapter may be somewhat difficult to those readers who are uninitiated to trading basics. It would have been useful to explain the basics of:
the cap-and-trade (a term which appears throughout but has not been adequately explained anywhere);
the trading activities; and
the different types of instruments used in trading somewhere in the book (perhaps in an annex).
Chapter 5 pays specific attention to the energy sector and discusses:
how the emissions trading influences the power sector and its decision making;
how the CDM framework can be used in oil and gas production sharing arrangements; and
how the joint-venture installations can be treated in the EU-ETS.
Once again the chapter provides unique insights into these specific issues but it is unlikely that any ordinary reader without any background in the power sector or oil and gas industry would benefit from this chapter.
In Chapter 6, the authors take a look at possible future developments in the emissions trading market, including the entry of the USA into the trading market through the state-level schemes, the possibility of extending the market to retail players, voluntary participation and the weather derivates market. How these changes would affect the trading market is also discussed.
The book covers the international emissions trading well and provides some interesting discussions on issues related to it. It also provides the necessary data/information that any reader would possibly need to understand the subject. It could be a very useful supporting document for a lecture-based module but as an independent guide, it remains unconvincing despite being informative. Its traditional presentation style and lengthy discussions in some chapters without adequate supporting diagrams or charts make comprehension difficult. An index at the end would also be useful.
Nevertheless, it would prove to be a useful reference for students and academics aiming at understanding the emissions trading market. Those with some prior understanding of the energy sector and seeking to acquire knowledge about the emissions trading would also find the book valuable.
Reviewed by Subhes C. Bhattacharyya, CEPMLP, Dundee University, Dundee, UK.
This review was originally published in the International Journal of Energy Sector Management, Volume 1 Number 3, 2007, pp. 295-7.