The Kyoto Protocol, the international pact that fights climate change, inspired an entrepreneurial spirit among many professionals. Because its new environmental demands are generating lots of heat, Kyoto is providing a boost to companies that help other companies adapt to the new requirements. Accountants, consultants and auditors are only a few of the major players who are working together in an entrepreneurial setting in which a marketplace will allow people to buy and sell carbon dioxide. Experts agree that while some of these entrepreneurial ventures will burn out, others will gain force over the years.
“It is still too early to know if this is really a new niche in the market, or something temporary,” says Pepa Murillo Luna, economics professor in the management department of the University of Zaragoza. In her opinion, the key to determining the market impact will come after “January 1, 2005, when the European market for polluting emissions begins operations. From then on, all plants affected by the agreement will be required to have an emissions permit. We’re talking about fines of between 40 and 100 euros per ton of carbon dioxide emitted beyond the limits that are permitted… This will put a lot of pressure on companies, and they are already taking measures to comply. People could start thinking that this is probably not something temporary.”
Pablo del Río, associate professor at the University of Castilla-la Mancha, goes further. Although he is sure that companies are already taking notice, Del Rio warns that not all of the new services will continue. “Clearly, nascent markets spawn a wide range of activities that turn out to be temporary. This market is not mature, and there is a lot of demand for information and advice. Some other activities will have more continuity, such as financial services. You can already see this in the creation of the European market, which will begin to function next January 1. That market has generated a surge in many of these activities.”
From Funds to Consultancies
One such example involves the European Carbon Fund (ECF), created by the CDC (Caisse des Dépôts et Consignations), of France, and by its partner, IXIS, a French investment bank. In a pioneering venture, CDC, a financial institution controlled by the French government, launched the first carbon-dioxide financial fund, which will participate in a greenhouse gas quota market. According to Expansión, the Spanish business newspaper, 12,000 European plants will become active in this market when they need to buy or sell emission rights, in order to make adjustments in the allowances they receive from their governments. These companies are in a range of sectors – electronics, cement, steel, paper and pulp, refining, and tile manufacturing.
Gruppo Sanpaolo IMI, an Italian bank, will act as the depository institution for the ECF fund, which will invest in emission rights, credits for reducing pollution, and derivatives based on the price of carbon dioxide. The fund will have assets of €100 million, of which €25 million will be contributed by CDC. Moreover, other funds and financial institutions will be able to share in the ownership, with a minimum investment of €5 million per participant.
Moreover, Fortis Bank, in the Netherlands, has a business division called Carbon Banking, which focuses on consulting with customers about environmental policy. Its services range from evaluating the financial impact of getting onto the emissions exchange, to financing activities for reducing pollution, to developing business partnerships on ‘clean’ manufacturing plants.
The business sector that best reflects the spirit of Kyoto is carbon dioxide consulting; these advisors assess strategies that companies must develop for buying and selling pollution rights. Alongside specialized companies, the major accounting firms – Deloitte, PricewaterhouseCoopers, KPMG and Ernst & Young – are also creating environmental consulting divisions. So are the major law firms, such as Linklaters of Britain, and several Spanish firms, including Garrigues, Uría & Menéndez, and Gómez Acebo & Pombo. Moreover, top-rated management consultants, such as McKinsey and Boston Consulting Group, are beginning to offer their own climate-change services.
Del Río says, “Two sectors are going to derive direct benefits. On the one hand, as the new market expands, there will clearly be more need for information as well as legal consulting and financial services. In this sense, consultancies and law offices have a lot to gain. On the other hand, suppliers of technologies that make less intensive use of carbon will increase their market share.”
Murillo insists that there is a gold mine up ahead for “those activities that focus on developing clean and preventive technology – and renewable energy—as well as environmental auditing and consulting.” Murillo cites a study underway at the University of Zaragoza, “The Determinants of Environmental Strategy for Industrial Companies in Aragon,” in which she is participating. “The results show that some barriers make it hard for companies to adapt environmentally. These include a scarcity of clean technologies, and related machinery and equipment. There is also a shortage of information about auditing and consulting services. The Kyoto Protocol could wind up helping develop an ‘environmental supply sector’ that enables these barriers to be reduced, if not eliminated.”
Certification companies, such as BVQI, TUV Rheinland, SGS and AENOR, are another sector that can benefit from the battle against climate change. They have all carved out a niche in the new market that forces every European company to submit its emissions data to an independent process of analysis. To comply with these provisions, companies will deal with norms that are being edited by the International Emissions Trading Association (IETA). KPMG, the accounting firm, will regulate the verification of emissions.
The Economic Costs of Working Clean
The high cost of adapting these new regulations is another barrier companies must face. “PricewaterhouseCoopers estimates that in Spain, compliance with the Kyoto Protocol will have a price tag of between €9 billion and €18 billion, from 2008 through 2012,” says Murillo. “Of course, this cost will vary significantly from company to company, depending on many factors: the sector they are in, the size of their company, and their ability to adapt to new conditions…”
Although the economic impact has yet to be calculated precisely, many people warn that governments will have to help companies adapt to the new regulatory framework. “Most likely, government agencies will have to intervene and collaborate,” warns Murillo. “That’s because, beyond the various options involved in these sorts of investments, the Kyoto Protocol could require some companies to incur impossible expenditures in order to comply. In fact, PricewaterhouseCoopers estimates that applying the Kyoto Protocol is going to mean that 20% of Spain’s tile-making plants will have to shut down.”
Experts disagree about the impact of the Kyoto Protocol on corporate earnings. According to Murillo, “Some people argue that these measures will require a significant initial expenditure that cannot be recovered until the medium- or long-term. However, these people say that companies will wind up being more efficient as a result. The costs will lead to improvements in their competitiveness. Meanwhile, others say that these expenditures will only lead to lower corporate profits and a loss of competitiveness.”
The GreenBridgewith Latin America
Credits for clean investments are one option that could reduce the damage to corporate earnings. This option helps companies comply with [the demands of] Kyoto, if they collaborate on clean projects in Latin America or Eastern Europe. When a company engages in this sort of activity (known as “mechanisms of clean development”), it can get accounting credits in its home country in return for the reduced emissions that result.
One example of this collaboration is a broker of CO² emission rights, which has acted as an intermediary in a project for treating [a chemical known as] purines. The goal was to achieve a 400,000 ton reduction in methane gas, one of the pollutants responsible for the greenhouse effect in Chile. TransAlta, a Canadian utility, and TEPCO, a Japanese utility firm, collaborated in the project with Agrosuper, a Chilean food producer.
In the future, companies will be able to invest in funds that target clean investments in developing countries. The World Bank will be in charge of managing the funds.
“The new market implies a challenge, and opportunities for traditional companies,” says Del Río. “Whether or not this winds up as an opportunity for a company, it depends on the firm’s ability to take advantage of new businesses. It depends on the kind of company, and the sector it is in. In any case, traditional companies won’t have any alternative but to confront this new challenge. Many companies will play an active role, either by providing for new needs, or by demanding a new sort of service. Nevertheless, you have to wonder whether they will supply these services all by themselves. Some companies will do that on occasion, but others will subcontract them.”
When it comes to getting on the Kyoto train, Murillo doubts that traditional companies will have more trouble than newer firms. “Starting off, they might have more problems because of their more rigid structure, and the reluctance of their employees to change their work habits. However, our research (at the University of Zaragoza) shows that the age of a company does not have a significant impact on the way it behaves when it comes to environmental strategy.”