Standard & Poor’s report suggests investment rethink by energy-intensive companies

Energy-intensive companies may have to reconsider their investment strategies if a proposal by the EU to set a tighter 30% emissions reduction target comes into force later this year. According to a report published by Standard & Poor's Ratings Services, titled Tougher European Emissions Target Could Double The Price Of Carbon And Raise Compliance Costs For Industry,* this move could push up the market price of carbon allowances significantly and potentially put pressure on the creditworthiness of carbon-intensive companies.

Before the end of 2010, the European Commission (EC) looks likely to recommend tighter control of carbon emissions across all 27 EU member states. It proposes to set an emissions reduction target of 30%, relative to 1990 levels, by 2020. This recommendation, if enacted, would replace the existing emissions reduction target of 20% agreed only last year.

"We think the tighter emissions reduction standard could create a substantially different business environment for industry in the region and increase compliance costs," said Michael Wilkins, Managing Director and Global Head of Carbon Markets at Standard & Poor's. "In our opinion, the 30% emissions reduction target could result in a steeper marginal abatement cost curve (the relationship between tonnes of emissions reduced and the CO₂ [or greenhouse gas] price) for certain energy-intensive sectors, especially the power sector.

"As a consequence, we believe these sectors may have to undertake more fundamental changes in the way they conduct their operations in order to meet the new compliance targets. This may, for instance, involve the introduction of new and more energy-efficient processes in existing production lines or, in some cases, moving production facilities outside the EU."

As the report points out, a recent draft impact assessment document from the EC estimates that the additional cost for the EU to step up to a 30% reduction target from 20% would be around €33 billion (US$ 44.3 billion) in 2020, or 0.2% of GDP. This, the assessment points out, is one-third cheaper than before the economic crisis, mainly because of a slump in carbon prices in the EU emissions trading scheme (EU ETS). Furthermore, the EC estimates the total cost of implementing the package at €81 billion, or 0.54% of GDP, which is around 20% higher than the cost of reaching a 20% emissions reduction target estimated in 2008. By comparison, according to the EC, China is currently investing almost 10 times as much as the EU in planning for a low-carbon economy by 2050. So according to the EC, even with a 30% emissions reduction commitment by 2020, compared with 1990 levels, Europe could risk being overtaken by Asia in reaping the economic benefits of developing green technologies.

The EC's tightening stance on emissions follows developments at the UN Climate Change Conference in Copenhagen at the end of 2009. At the conference, major economies from both the developed and developing world seemed to accept - some for the first time - that they may need to proactively reduce emissions in order to keep the increase in global warming to below 2 °C by 2050, compared with pre-industrial levels before 1900.

To meet targets generally accepted by the countries signed up to the Copenhagen Accord as scientifically necessary, EU member states would need to implement carbon emissions reduction targets as high as 80 - 95% by 2050, compared with 1990 levels. In this context, it is likely that the EU will move to a 30% emissions reduction target sooner rather than later. This would help bridge the gap between current emission levels and the 2050 goal.

* Copies of the report can be purchased by contacting research_request@standardpoors.com

Read the article online at: https://www.worldcement.com/europe-cis/27052010/standard_and_poor%E2%80%99s_report_suggests_investment_rethink_by_energy_intensive_companies/