Get Involved Early in Emissions Trading Talks

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Firms can benefit from considering their role in emissions trading early to stay ahead of regulation and competition.

Jonatan Pinkse and Ans Kolk examine multinational corporations' (MNC) strategic responses to emissions trading schemes. Of 331 of the 500 largest companies in 2006, 72 were involved in the European Union Emissions Trading System (EU-ETS), 62 were considering trading, and 65 had no trading strategy.

EU-ETS: A Pillar of EU Policy on Climate Change

The EU-ETS was developed in 2005 in Europe and by 2006 was the world's most prominent trading scheme. It placed constraints on many EU companies and their subsidiaries. Other schemes included the UK-ETS, NSW, RGCI, and Chicago Climate Exchange. Credits have also been traded under the Clean Development Mechanism or Joint Implementation mechanisms of the Kyoto Protocol.

Benefits of Early Involvement in Emissions Trading

Many firms participated in EU-ETS because they faced emissions caps and non-compliance penalties. Some firms were waiting for clarity on trading rules before acting. Still, others did not want to be part of a voluntary scheme.

Regardless of their position, Pinske and Kolk found firms may benefit from considering their role in emissions trading early. Early considerations help firms stay ahead of regulation and competition.

Key Findings from 331 Companies

  • 72 firms participated in the EU-ETS (51 in Europe, 21 in North America). Many participated due to emissions caps and non-compliance penalties, and engaged in occasional trading to obtain allowances.

  • 62 firms were considering emissions trading (11 in Europe, 35 in North America, and 16 in Asia and Oceania). Most wanted more clarity on the exact trading rules before taking action.

  • 65 firms had no emissions trading strategy (12 in Europe, 44 in North and Latin America, and nine in Asia and Oceania). Firms either a) did not want to join a voluntary scheme; b) did not think their operations were energy intensive; or c) perceived administration costs of selling surplus allowances as too high.

  • Energy producers were highly involved in trading and were the most successful at shaping the EU-ETS. Active traders included E.ON, Suez, Shell and ENI.

  • Banks were highly involved in trading, considering they were not forced to participate. Banks facilitated trading since most firms lacked experience and needed financial middlemen. For example, Barclays set up the first carbon trading desk, created contracts and helped guide new players.

Implications for Managers

Consider the geographic spread of your business. Are emissions trading schemes or regulations emerging in countries where you operate?

Be aware of trading schemes and policy developments to proactively assess if and how your firm will be affected. Consider participating in emissions trading talks early in the game. A spot at the table will help you stay ahead of regulation – and the competition.

Implications for Researchers

We suggest researchers follow how firms respond strategically as emissions trading becomes more widespread.

Methods

This study looks at the strategic responses of 331 Global 500 companies using a questionnaire from the 2006 Carbon Disclosure Project. Companies are mainly from the U.S, Europe, Japan, Canada, and Switzerland. Industries include banks, oil and gas, electricity, insurance, IT retailers, telecommunication, pharmaceuticals, automotives, electronics, and utilities.

Pinkse, Jonatan, & Kolk, Ans. (2007). Multinational Corporations and Emissions Trading: Strategic Responses to New Institutional Constraints. European Management Journal, 25(6): 441-452.


 

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