The environment: Doubt about regime

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For chemicals companies doing business in Europe, the highest-profile environmental issue of recent years has been the Reach directive. But companies are also fixing their attention on another issue giving rise to regualation: climate change.

The European Union’s flagship climate change policy is about reducing emissions from energy-intensive businesses, which are responsible for almost half of all carbon dioxide emissions, through a system of carbon trading. Under the EU’s emissions trading scheme, such businesses are given a quota for the amount of carbon dioxide they may produce in a year. Those that need to emit more than their quota must buy emissions allowances from businesses with spare capacity. Allowances for the second phase of the scheme, which will run from 2008 to 2012, are changing hands for about €19 per tonne.

Putting a price on emissions in this way gives companies an incentive to cut their emissions. In the first and second phases of the scheme, running from 2005 to 2007 and 2008 to 2012 respectively, the chemicals sector has not been included as one of the energy-intensive sectors to be regulated, though some chemicals factories are included because they use their own large electricity generators.

But this could change in 2012 with the third phase of the scheme. The European Commission is considering whether to include chemicals from then.

Most big chemicals companies are publicly supportive of the aims of the emissions trading scheme, but some have doubts about the implementation.

An idea of the scale of the problem facing such companies seeking to reduce their emissions can be gained from a recent study by Merrill Lynch. It found that the chemicals sector represented 4.8 per cent of the total emissions coming from companies in the DJ Stoxx 600 index, far outweighing their market capitalisation at 2.5 per cent of the index.

Some of these gases are made up of carbon dioxide, produced as a result of companies’ energy use, but the nature of the chemicals sector also means that companies may produce greenhouse gases as byproducts of their chemicals processes. For instance, some processes produce nitrous oxide, a greenhouse gas. If chemicals companies had to buy “carbon credits” to cover all of their emissions, according to the Merrill Lynch analysis, it would cost the sector €2.9bn a year at the current price of €19 a tonne.

Merrill Lynch found that Johnson Matthey had the best profile overall for its emissions, emitting 222 tonnes of carbon dioxide equivalent for every $1m of revenue. Other particularly efficient companies, using the same measure, included Bayer and Wacker Chemie, while Syngenta was found to have made the biggest carbon reduction between 2004 and 2005.

Chemicals companies are working to cut their emissions, Merrill Lynch found. Speciality chemicals businesses had cut their emissions by 18 per cent, compared with a 5 per cent reduction on the part of commodities chemicals makers.

But Jan Zuidam, of the board of directors of DSM, says the efficiencies that chemicals companies had made could count against them in a next phase of the EU’s trading scheme. Emissions allocations have been allocated based on historic emissions.

This means, however, the companies that have reduced their emissions in the past may lose out: “Inefficient plants with higher emissions will be granted higher emissions allowances,” says Mr Zuidam.

As a result, DSM proposes a different system whereby companies should be compared with one another.

Outside Europe, chemicals companies may also face more regulation of their greenhouse gas output. In the US and Australia there are moves to bring in a federal system of emissions trading broadly similar to that of the EU.

However, the costs of emission reduction can be substantially defrayed as companies gain from efficiency in lower input costs.

Energy will continue to be a crucial environmental issue, says Mike Scimo, managing partner of Accenture’s global chemicals and natural resources practice. “The chemical industry suffers by association with the general public concern over energy company practices; given that many chemical products are either petroleum-based or energy intensive to produce” he says.

He cites plastics, which are sometimes viewed as environmentally unfriendly. But he says the industry is responding by stressing recycling and other forms of plastics and materials with a lower environmental cost.

But he warns that would-be green consumers must face up to their sometimes contradictory desires: “The reality remains that demand for plastic-based products continues to grow steadily. Consumers have generally been unwilling to pay up for environmentally friendlier materials.”

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