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The Carbon Market

Regulations on emission levels will play a key role in altering business decisions in the future. Currently, these regulations found within the global carbon market can be divided into two segments: compliance and voluntary. The compliant European carbon credit market is flourishing through the Kyoto Protocol and the European Union Trading System (EU ETS) schemes, but in the United States, the Kyoto Protocol was refused ratification.

Many predict, however, that a different form of a mandatory carbon reduction scheme may be implemented in the near future, especially with the recent election of Barack Obama and president of the United States (Hill, 2006). Total U. S. carbon dioxide emissions increased by 75. 9 million tonnes (1. 3%) from 2006 to 2007, reaching a grang 6022 million tonnes, making the United States currently the second highest emitter of carbon dioxide worldwide. This can be attributed to the small size of the voluntary carbon market in the United States.

However, an estimated 10 million tonnes of carbon dioxide was offset in 2006. The carbonmarket has developed substantially over the years due to leading U. S. companies such as Ford, Dupont, IBM, Motorals and American Electric Power deciding to create their own pilot greenhouse gas emissions

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trading program in 2003 – the Chicago Climate Exchange (CCX) (DiPeso 2005). This is the United States’ only cap and trade climate policy system that regulates all six greenhouse gases.

Involvement in the carbon market through this scheme is voluntary, yet many major corporations have signed onto the program in anticipation of future legal regulations. They hope to see their involvement as an opportunity to gain experience in carbon credit trading, and prepare emission reduction strategies before they are forced into regulatory control (Merrill & Jain, 2005). An example of a project under the voluntary scheme is the Regional Greenhouse Gas Initiative (RGGI), which aims to reduce emissions from power plants with a capacity of over 25MW in ten of America’s Northeast and Mid-Atlantic states (Babu, 2008).

Heinz U. S. , being a profitable and environmentally conscious corporate firm, is a potential trader in the carbon market, and would fall under the reign of both the CCX and the RGGI. Members of the Exchange made a voluntary, but legally binding, commitment to the scheme and must meet yearly targets in reducing greenhouse gas emissions. The scheme works in the following way: A government agency sets a standard of emissions and divided this allowance in terms of carbon credits among all volunteer participants.

Cap standards on different types of emissions create scarcity of carbon credits. Thus, as under the European Union Emissions Trading System, members that reduce emissions beyond their targets have surplus carbon credits which they can to sell on the market or bank for liquid assets. Companies that do not meet their targets must reduce their emission levels through development of more energy-efficient or anti-pollution technologies or reduce their polluting activities (Merrill & Jain, 2005).

Alternatively, they may purchase carbon credits under Carbon Financial Instruments (CFI) contracts. CFI are commodities traded in the carbon market, and each unit of it represents a hundred tonnes of greenhouse gases in their carbon dioxide equivalents. Heinz has already taken similar initiatives. Its Kitt Green facility reduced direct carbon dioxide emission by 5% in 2006, and there was a decrease of 366400 kg at the Dundalk facility in Ireland. Heinz has expressed interest in sustainable manufacturing.

Involving themselves in a program such as the CCX would be beneficial to Heinz, as it would contribute to Heinz’s sustainability, as well as provide experience in dealing with future regulatory schemes. The compliance segment of the carbon market is commonly branched off into the EU ETS, the Clean Development Mechanism (CDM), the main carbon offset market, and the Joint Implementation (JI) (Lewis, 2009). In 2007, their market shares (measured in trading volumes,) of the global carbon market were 70%, 29% and 1% respectively.

Shares in the EU are significantly higher as the stricter EUETS was implemented on top of the Kyoto Protocol. As EU member states join the EUETS, they agree to comply to its regulations and therefore oblige any operating company within its country to do likewise (Merrill & Jain, 2005). Opportunities offered by carbon markets have not only attracted manufacturing entities, but also financial institutions, portfolio consultants, servicing agents or intermediary traders in the market, as well as other investing organizations that find it advantageous to exploit the emerging market (Kentouris, 2009).

Pure traders can get involved in the market by buying and reselling carbon credits at an optimum time – found through consulting and structuring more complex transactions of allowance price risk for trading clients (Merrill & Jain, 2005). Multinational financial institutions such as the World Bank and the European Bank for Reconstruction and Development have entered what we call the “wider emissions trading market” by funding emission reduction projects under the Kyoto Proctol (Merrill & Jain, 2005).

Consequently, surplus carbon credits are generated which can then be traded on carbon markets. In 2008, the carbon market grew by 75%, reaching a value of $116, and is predicted to expand to 2 trillion dollars by 2020. Heinz U. S. should consider international involvement in a carbon cap and trade program to conform to the remainder of Heinz’s facilities already under carbon cap regulations. Firms’ revenues from the carbon market are increasing rapidly worldwide, generating a 116% increase of total revenues acquired by firms in 2006.

The International Energy Agency (IEA) predicted that the world’s energy needs will increase by 60% from 2008 to 2030. History of Carbon Trade Conflicts As with every form of government intervention in the market, limitations on the level of companies’ carbon emissions have raised many conflicts between industries and governing bodies. The environmental restraints placed on a firm’s value chain have been often found to either reduce productivity, or essentially lead to financial losses.

With the capping seen today, predominantly on carbon emissions, companies have devised methods of ostensible conformity; simply bypassing the environmentally detrimental segments of the value chain by moving into countries with less stringent ecological regulations. For example, with 25 member States of the European Union enforcing mandatory carbon cap-trade, businesses such as Renco and Unilever unsuccessfully attempted to evade the emissions limitations by outsourcing primary steps in production to countries such as India and China.

In 2007, Unilever was fined by the Chinese government for its illegal waste water emissions and high level carbon dioxide emissions. Renco, similarly, currently faces a $1 billion lawsuit by the EPA (Asia News, 2007). With the world rapidly taking to the “green” movement, social responsibility of companies has become a large factor in determining a consumer’s choice of goods and services. Following in the footsteps of the European Union`s EU ETS, both the United States and Japan have introduced voluntary carbon trade markets (Nelson, 2009).

Having understood the financial drawbacks of compliance with these emission caps, carbon credit trade now stands as a notable entry barrier for companies wishing to enter carbon regulated countries. Companies have been seen to either explore the markets with less stringent ecological policies or bypass elements of their value chain, and in few cases suffer the consequences. Hitachi, for example, now owns 30% less plants in the European Union than it did in 2001 (Asia News, 2007).

Though being environmentally friendly is currently the consensus of the global economy, the financial consequences of conforming to carbon reduction schemes are often underestimated. EU based Agrifem LTD, specializing in fertilizers, suffered losses of i?? 1. 3 million during the implementation of the EU ETS in 2005 and 2006. Similarly, the Aalborg Portland Group of cement, operating in Denmark, reported i?? 3. 6 million in expenses, due to participation in carbon schemes, in its financial report of 2006 (Financial Reports, 2006).

Today, the image of a company hinges on its environmental friendliness and compliance with global carbon standards. However, the compromise for an increased goodwill comes often at heavy prices. But, for most that have turned green, initial financial losses soon turn into increased revenues; and, having analyzed the corporate and operational structure of Heinz, involvement in the carbon market seems to hold much promise for return in the future.

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