1. Risk Management for EU Emissions Trading Scheme Anna Kumpulainen, Dr. Tuula Pohjola Helsinki University of Technology / Lahti Centre Department of Industrial Engineering and Management Environmental and Quality Management Unit GIN, Cardiff 2.-5.7.2006

2. 2 Agenda Background –EU ETS –This research Risks (literature study) Research methods Results (empirical study) Conclusions

3. 3 Background (1/2) Kyoto protocol in 1997  legally binding greenhouse gas reduction targets (e.g. in the EU 8% compared to 1990 levels ) EU ETS reallocates the burden between the EU countries –12,000 companies –1st period 2005-2007, 2nd period 2008-2012 EU ETS CDM JI IET Kyoto mechanisms CER ERU Means of compliance: -Reduce emissions -Aquire EUAs -Aquire CERs/ERUs

4. 4 Background (2/2) Market Analysis and Risk Management of EU Emissions Trading” (MARMET) project –Helsinki University and Helsinki University of Technology + 5 Finnish companies –May2005-Apr2007 Now 1st results of the risk management research: 1.Literature study 2.Interviews 3.(Web survey) 4.(General risk management model)

5. 5 Risks

6. 6 Research Methods 18 semi-structured interviews Dec2005-Mar2006: –EU ETS operations in 2005? –Risk management strategies and tools for EU ETS? –Information gathering related to EU ETS? –Future expectations related to EU ETS and other climate policies?

7. 7 Results: EU ETS Operations 2005 16/17 got more EUAs than needed in 2005 –Good weather conditions, Finnish forest industry strike, decreased demand for steel, etc. –All companies expect emissions to increase in 2006 14/18 companies have started EUA trading –Only 2 companies have sold all surplus EUAs –Others expect slower moves to be more profitable –17/18 have centralised EUA trading in the corporation –6/18 have a single counterparty: exchange/OTC Total working hours difficult to estimate Many sources of information used Non-Finnish companies quite unwilling to comment their ET operations

8. 8 Results: Risk Management EUA allocation for 2005-2007 is generally perceived as generous  no problems with deficits yet Political risks are significant because investment pay-back periods are long 12/13 Finnish companies have a written risk management strategy –Separate or part of other risk management –11/13 have defined risk limits Non-Finnish companies unwilling to comment their ET risk management ”Low risk, moderate return” as the most popular strategy –6/13 have abandoned speculative ET –Updates can be expected 3 Finnish and 3 non-Finnish companies have invested in carbon funds; 1+2 preparing internal CDM/JI projects

9. 9 Conclusions Risk management strategies moderate  Updates expected along political decicions Results from the interviews indicative  More information from the web survey Risk management model: a tool-kit?

10. 10 Thank you! Anna Kumpulainen (M.Sc)Tel: +358 41 5458859 Tuula Pohjola (Dr.)Tel: +358 50 5113703 Email: firstname.lastname@tkk.fi Helsinki University of Technology Department of Industrial Engineering and Management Environmental and Quality Management Unit P.O. Box 5500, FIN-02015 TKK, Finland http://emu.tkk.fi http://emu.tkk.fi/eman2007 http://www.honeybee.helsinki.fi/mmtal/ye/pomar/marmet.html Organisator of the EMAN 2007 Conference!