All companies with activities which may lead to carbon dioxide (CO2) emissions has now been given a quota, permitting them to emit a certain number of tonnes of CO2 per annum.
If a company emits more than its quota it will have to pay a fine.
However, if a company knows that it is likely to emit over its allowance, then it can purchase unused quota (in the form of certificates) from other companies with surplus. Likewise, if a company believes that it won't emit up to the full level of its allowance, then it may sell some or all of its surplus.
Companies may also invest in abatement technologies to reduce their emissions, and so provide unused allowance for sale; such decisions must be made as part of a wider carbon strategy which takes into account the uncertainty of the marketplace.
Overall, the scheme is intended to create financial incentives for companies to reduce their emissions below their allowances, and hence reduce overall pollution. Effectively, the scheme encourages companies to buy and sell 'rights to emit' CO2 and several marketplaces are being established for this.
Companies with emissions quotas face a number of questions:
- How much CO2 are we planning to emit?
- Do we need to buy additional quotas (or should we pay the fine)?
- How much are the fines likely to be?
- Do we have spare quota to sell? If so, when should we sell it?
- What are the hidden costs?
- Should we invest in abatement technologies? If so, how much and when?
- How are we liable if we do not trade emissions quotas?
Naturally, the answers to these questions depend on the current and future prices of emissions credits relative to the levels of fines and to the costs of abatement. Because these factors contain a high degree of uncertainty, making these decisions means taking a view on the future. Indeed, most managers would consider several views (or scenarios) of the future in making their decisions. Carbon360's carbon strategy software is aimed at supporting this activity of constructing and comparing scenarios as part of the decision-making process. Our tools empower companies to minimise their risk, their exposure to penalties and legal action while maximising their financial rewards from emissions trading.
