Given current CO2 prices in Europe, how should companies integrate CO2 into their corporate strategies?

Published May 29, 2005

Given current CO2 prices in Europe, how should companies integrate CO2 into their corporate strategies?

Mark: The European Union Emissions Trading System (EU ETS) was launched in January 2005 - and European CO2 allowance prices are up almost 200% since the market began.. The leading news headline on Friday, May 27th, here at climatebiz.com profiled the fact that hedge funds are getting into the carbon market. Hedge funds! So it's a great question. In answering, I'm going to draw on material of mine from the just-published book Green Trading Markets: the Second Wave.

Companies have been responding to climate change policy uncertainty in several ways:

Many companies simply do not factor future GHG costs or assets into their corporate and investment decision-making. In effect, these companies are still betting (intentionally or unintentionally) that the right price forecast is $0.
A smaller fraction of companies arbitrarily choose a value (or more than one value) for GHG credits in the future, and then use that value in sensitivity cases for strategic and investment decision-making. This approach usually doesn't have much influence on the outcomes of the decision-making process.
A much smaller number of companies actually build projected GHG costs into all of their investment decision-making. Here, too, the values used are often quite arbitrary.

For most companies, it has proven very difficult to move from category 1 or 2 to category 3, although they might want to do so. The likely result is suboptimal corporate decision-making. Even companies in category 3 may not be making use of the best available approach to integrating GHG risk (or opportunity) into their planning.

The reality is that there is no "right answer" to the question of future GHG prices. Rather than trying to pick a "right answer" out of thin air, companies can benefit by reframing the question(s) they’re trying to answer:

What is the company’s economic exposure under different policy and market scenarios?
Can we usefully anticipate shifts in policy and market trends and outcomes, and thus develop an adaptive strategy?
What does it make sense for the company to build into its strategic planning for future GHG prices based on its view of the future and sensitivity to alternative policy outcomes?

Asking these questions can lead to what I refer to as a "Best Available Corporate Forecast." It may not be the “right” answer, but companies can be confident they’re acting on the basis of the best available information and that they are making decisions that are appropriate and prudent for their own situation.

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Dr. Mark C. Trexler has more than 25 years of energy and environmental experience, and has focused on global climate change since joining the World Resources Institute in 1988. He is now president of Trexler Climate + Energy Services, which provides strategic, market, and project services to clients around the world.

Got a question for our climate expert? Email Editor@ClimateBiz.com.

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Given current CO2 prices in Europe, how should companies integrate CO2 into their corporate strategies?

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