It's time to value CO2

Hydro Aluminium will shortly receive the first price prognoses for CO2 from the new climate gas quota trading unit in Oil and Energy.

The EU system for the purchase and sale of climate gas quotas will come into effect in January 2005. Trade in climate gas quotas is one of the instruments in the Kyoto protocol that was agreed on in 1997 to promote measures to restrict the emission of climate gases.

In the future, all producers with significant emissions of climate gases will be given an emissions quota for each year of production. It is expected that the quota for most players will be lower than their actual emissions the previous year. The full system will be in force from 2008-2012, and a number of Kyoto countries – 38 in total – are introducing a preliminary quota system in preparation.

Framework

The frame conditions for how these nations shall achieve their emissions targets are now being laid. The EU is currently setting up a quota trade system for CO2 emissions for certain industries with effect from 1 January 2005. Norway is developing an equivalent system for the process industry, which will cover all six climate gases.

Around 30 percent of Hydro’s emissions of climate gases are in Norway, and around 50 percent are within the extended EU. At present 91 of Hydro’s emissions are in Kyoto countries. “CO2 will no longer just be an environmental challenge, but also a business challenge,” points out senior vice president Lasse Nord, who is in charge of climate and environment in Hydro.

“Emitting CO2 will be expensive once the new system is in force. We have to develop the technology for reducing emissions. We also have to consider how the return on investments in new production units will be affected by CO2 costs in the future. The company needs tools for quota trading,” he comments.

Central unit

“We decided it would be best to set up an internal unit to provide support in CO2 quota trading for all types of operation in Hydro. It was a natural choice to set up the new unit in connection with the trading centre in Hydro Energy,” he adds.

The unit will build up special expertise to support Hydro’s business areas. It is also possible that it may serve external customers in the future.

Bernt Malme in Hydro Aluminium has been appointed as climate issue manager. In the near future, Hydro Aluminium will have to cover annual emissions with equivalent quotas. There are many possibilities; reducing one’s own emissions is not the only solution.

“The Kyoto agreement also offers rewards to enterprises that contribute to technological improvements for others. We believe it will be advantageous for us to buy and sell CO2 quotas. But it is also possible that we will take the opportunities available for transferring technology. Most of our metal plants have already entered into voluntary agreements. However we need to gain a clear overview of both the opportunities and risks the new climate gas rules will entail,” Malme points out.

“Energy suppliers will also be involved in quotas trade in the future. This will have indirect effects on out energy costs. It’s important that we start to prepare for this now. We will benefit directly from having a centre of expertise in Hydro Energy that can help us handle our climate gas accounts in the best way at any time,” says Malme.

Bern Malme believes that Hydro and the process industry in Norway as a whole have been at the forefront in terms of measurements and documentation of CO2 emissions and in signing voluntary agreements with the authorities. “It’s important that the authorities have taken reduction measures that have already been set up into consideration. We want to avoid regional climate policy systems that weaken our competitive edge in relation to producers outside of the Kyoto area. This is a global problem that requires global solutions,” he continues.

Complex calculations

The calculations the team in Hydro Energy will be making will be far from simple.

“First and foremost we will establish the climate gas exposure of each factory in the most cost effective way. Then we shall draw up annual reports on the balance between emissions and national authority quotas. They shall draw up reports on the relationship between quotas and emissions in regional markets. We also have to strive for good quality emissions and quota data in order to be aware of our exposure at any time. This will give us the basis for making the right commercial choices for the factories. The commercial decisions we take and when we do so will depend on the development of CO2 prices,” says Liv Rathe in Hydro Energy’s environmental portfolio unit.

Isn’t it difficult to calculate prognoses for future CO2 prices at such an early point?

“It is challenging, as there are many uncertain factors. The Kyoto protocol must be signed by Russia before it comes into force. If Russia doesn’t sign, CO2 prices will be lower. The ambitions of other countries will be lowered, and this will also affect prices.”

Isn’t it also problematic for the aluminium industry that most new projects are situated in countries that are not covered by the Kyoto convention?

“Hydro operates in international markets, where the environmental frame conditions can have major significance for the competitive situation. It is, therefore, important that as many countries as possible take part in the quota trade system. This will ensure more equal frame conditions in the markets in which we operate. An extended Kyoto market will also mean lower CO2 prices and a more cost efficient reduction of emissions on a global scale,” says Liv Rathe.

Bernt Malme adds that it is very unfortunate that the US, which is the world’s largest aluminium producer, has refused to sign the climate convention.

Hydro Energy is one of the investors in Prototype Carbon Fund (PCF). The fund has 23 participants and is administered by the World Bank. The fund was set up to acquire emission credits from climate-friendly projects in Eastern Europe or developing nations. In June the first CO2 credits will be transferred to the fund and hence to its participants. These credits are from a small hydro-electric power plant in Chile where energy production will replace electricity generated from coal.