1. Risk Management for Emissions Trading Eeva Lappalainen, Anna Kumpulainen & Tuula Pohjola Environmental and Quality Management Helsinki University of Technology (TKK)

2. June 2007Risk Management for Emissions Trading2 / 7 Research Setting Part I: To give insight into the current state of EU ETS risk management  Literature review, interview study, web-based survey Part II: To assess, develop, and construct a risk management tool for EU ETS

3. June 2007Risk Management for Emissions Trading3 / 7 EU ETS (1/2) EU Emissions Trading Scheme: Started on 1 January 2005 11,500 complying installations  Emissions must be covered with emission allowances (EUA) Compliance possible also with CER and ERU credits from CDM/JI projects Flexible Mechanisms (Kyoto): CDM = emission reduction projects in developing countries, unit CER JI = emission reduction projects in ”industrialised countries”, unit ERU IET = international emissions trading between governments, unit AAU CER ERU Abbreviations: CDM = Clean Development Mechanism CER = Certified Emission Reduction ERU = Emission Reduction Unit EUA = European Union Allowance JI = Joint Implementation AAU = Assigned Amount Unit

4. June 2007Risk Management for Emissions Trading4 / 7 EU ETS (2/2) Risk Management –EU ETS risks mainly operational or financial –Hedging vs. on-balance-sheet decisions Compliance Strategies –Internal: emission reductions (e.g. abatement) –External: more EUAs (e.g. funds, trading) EU ETS in practise –Trading through exchanges, OTC and bilaterally –Carbon funds investing in CDM/JI projects

5. June 2007Risk Management for Emissions Trading5 / 7 Findings and Discussion (1/2) EU ETS operations –HSE, operations, or trading responsible –Employees generally part-time –Cooperation with external parties common Risk management strategies –3/4 had determined a strategy for EU ETS –Included generally risk limits, responsibilities –Minimization of risks emphasized

6. June 2007Risk Management for Emissions Trading6 / 7 Findings and Discussion (2/2) Risk management practises –Majority comply by trading and abatement –Methods 44 % use portfolios 25 % construct models for EUA price –EUA trading bilaterally or through OTC Carbon Funds and CDM/JI projects –15 % invested in carbon funds, 25 % in CDM/JI –Reasons: diversification, experience, EUAs

7. June 2007Risk Management for Emissions Trading7 / 7 Summary Risk management relatively versatile –Great differences between companies –Strategies and methods still being developed –Minimisation of risks and costs central Risk management framework and tool –Help to assess, evaluate, and develop More information: Eeva Lappalainen, eeva.lappalainen@tkk.fi

8. June 2007Risk Management for Emissions Trading8 / 7 Risk Management Tool (1/3) Risk Management Framework

9. June 2007Risk Management for Emissions Trading9 / 7 Risk Management Tool (2/3) Risk Identification and Assessment

10. June 2007Risk Management for Emissions Trading10 / 7 Risk Management Tool (3/3) Strategies and Practises