Healthy business for a healthier planet

With the world focused on solving the challenge of global warming, there is a danger that small- and medium-sized enterprises (SMEs) could get bogged down by rules aimed at big polluters. Last month the European Investment Bank (EIB) and KfW Bankengruppe announced a €100 million fund intended to help SMEs participate in the EU’s emissions trading scheme (ETS).

The ETS began in 2005 and allows businesses in carbon-intensive industries to buy clean-energy credits to meet carbon dioxide (CO2) reduction targets. In the second phase of the scheme, which begins next year and runs until 2012, businesses will be able to meet some of their obligations with credits from the joint implementation (JI) and clean development mechanism (CDM) programmes set up through the international Kyoto Protocol on global warming. Those programmes allow developed countries to get CO2 credits, by investing in emissions reduction projects elsewhere in the world, as a way of meeting at least some of their Kyoto obligations. CDM projects are carried out in developing countries where the Kyoto targets do not apply, while JI projects take place in countries where targets do apply, namely eastern Europe.

The EU’s ETS is mainly meant for large businesses, but catches some smaller firms as well. The carbon caps affect industries in major carbon-emitting sectors such as power generation and metal, paper and cement production. Caps also apply to any installation that burns large amounts - more than 20 megawatts - of energy. Given that the rules affect more than 10,000 installations across Europe, many medium-sized firms are among those affected. A medium-sized paper producer, for instance, would fall under the trading scheme but would have much more difficulty navigating the carbon market than a large, multinational corporation.

Buying JI and CDM credits is a complicated and expensive undertaking for an SME. Investing in these credits is expensive if done through an investment banker and entails a certain amount of risk. Credits are normally paid for at the end of the year ‘on delivery’, which means that firms have to deal with the risk that the clean energy they ordered to meet their obligation might not actually be generated, leaving them out of compliance or vulnerable to a spike in prices at the end of the year.

The idea of the EIB fund is to reduce costs and risks for SMEs. The banks are the ones taking the risk by directly investing in the CDM and JI programmes. They then resell to the SMEs options for guaranteed credits based on a sophisticated price calculation.

"If you’re RWE you don’t need that protection," says Andrew Vince, deputy head of energy and environment at the EIB, "but if you’re an SME with only a 10,000-tonne compliance obligation…you’re effectively a price-taker. We’re doing this because we want to help SMEs." At least half of the new fund must go to SMEs, or a larger share if there is enough demand. The fund will allow SMEs to buy as few as €500,000 worth of carbon credits, or even less if they buy through an intermediary participant.

Demand for credits will surely grow, but credits are not currently the biggest costs incurred by SMEs to comply with the EU caps, according to Ronald Kalwij, manager of environment and quality at Cosun, a Dutch agricultural co-operative. Set-up and certification costs are "ten times more for a small company" relative to a large one, he says. Rather than pay for expensive emissions certification, the local authorities could simply calculate C02 emissions from the gas bill, Cosun argues.

Tomas Wyns, a policy officer with the Climate Action Network, also says that set-up costs can be heavy for SMEs. "At first it can be difficult for really small businesses, especially if they have one person responsible for all environmental processes," he says, noting that setting up a monitoring protocol "can be technical and can take some time". But Wyns anticipates costs becoming more stable once the system has been up and running for a while.

Carbon trading schemes, many of them voluntary, have been tried in other contexts, but none is as far-reaching as the EU’s ETS. The mandatory caps on more than 10,000 installations follow the principle that "20% of the installations are responsible for 80% of the emissions", according to Wyns. The installations currently targeted represent about 46% of current emissions. But the scope of the programme could potentially broaden beyond power generation and the heavy industrial sectors on which the scheme currently focuses, like steel and paper.

With the potential for the scheme to broaden, SMEs hope regulators do not forget their need for simple, low-cost rules. SMEs are already benefiting from simplified rules under the scheme, which are set to get simpler in phase II, but Kalwij says that as the scope of regulations grows, it is "important that costs are lowered". New efforts to help SMEs keep costs down, like the EIB fund, should encourage both healthy business and a healthy planet.

With the world focused on solving the challenge of global warming, there is a danger that small- and medium-sized enterprises (SMEs) could get bogged down by rules aimed at big polluters. Last month the European Investment Bank (EIB) and KfW Bankengruppe announced a €100 million fund intended to help SMEs participate in the EU’s emissions trading scheme (ETS).