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S&P: Industry Faces Significant Challenges In Complying With New Climate Change Regulations

Global Arab Network - - John Short

Wednesday, 23 September 2009 11:14

Emission levels and carbon (CO2) pricing will become increasingly important when assessing the creditworthiness of industrial companies, says Standard & Poor's Ratings Services in a special report on regulating CO2 emissions published today. Furthermore, says an article in the report titled "Regulating Carbon Emissions: What Lies Ahead For Europe And The U.S.," multilateral action will be key to achieving
international agreement on curbing carbon (CO2) emissions at the forthcoming U.N. Climate Change Conference in Copenhagen on Dec. 7-18. What's also becoming clear from a credit perspective is that industry on both sides of the
Atlantic may face significant challenges in complying with new climate change regulations.

"Since carbon markets largely depend on a stable, long-term regulatory framework in which to operate, the outcome of the negotiations due to take place in Copenhagen will, in our view, be crucial," said Standard & Poor's
credit analyst Michael Wilkins. "Yet, efforts to draft a new emissions-reduction regime to replace the Kyoto Protocol that expires in 2012 are proving slow."

Securing international agreement will in our view require multilateral action. First, at the domestic level, the major industrialized countries will need to identify policies they are willing to adopt. These could include a carbon emissions tax on individuals and businesses, as currently proposed in France and already in place in Sweden, Denmark, Finland, and Slovenia. Progress toward a unified approach to climate change policy will also require the support of the G-8 and G-20 forums, whose finance ministers will have to agree on common strategies at an international level. And at the multilateral level, negotiators will need to turn a high-level political mandate into a detailed treaty.

The post-Kyoto protocol could introduce binding commitments on climate change among industrialized nations and act as the precursor for the international trading of carbon. However, obtaining a consensus is a daunting task. The 17 nations that comprise the Major Economies Forum, which are collectively responsible for more than 75% of worldwide greenhouse gas (GHG) emissions, have widely divergent interests. This partially explains the increasing level of pessimism about whether an agreement will be reached in Copenhagen later this year.

In light of these concerns, says the report, the revised EU Emissions Trading Scheme (EU ETS) and climate change package is considered by some to be a balanced compromise. It allows some flexibility for industry's concerns on
carbon leakage (that is, the movement of production facilities to countries with less strict emission regimes) in the event that no U.N. international climate agreement comes out of Copenhagen. However, the new scheme also
introduces a new tighter emissions cap from 2013 and more stringent rules for the allocation and auctioning of allowances.

International agreement on emissions reduction will also depend on the support of developing countries and the U.S. As the report points out, the former are wary of harming their economic development under a new climate change regime. The U.S., meanwhile, is currently debating the introduction of its own ETS, a development that could see the carbon market grow threefold.

Other articles in the special report are:

"What Are The Implications Of The New EU Emissions Trading Scheme For European Companies?"
"Market View: EU Carbon Trading Is Off To A Good Start, But The Air Could Still Go Out Of It"
"The Potential Credit Impact Of Carbon Cap-And-Trade Legislation On U.S. Companies"
"How Cap-And-Trade Will Affect U.S. Power Markets And Merchant Generators' Profitability"
"Achieving Market Returns With Carbon Efficiency In A Cap-And-Trade World"

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