Responding to the EU Emissions Trading Scheme: an empirical analysis of corporate carbon disclosure strategy

The purpose of this paper is to explore how companies that hold carbon trading accounts under European Union Emissions Trading Scheme (EU ETS) respond to the climate change by using disclosures on carbon emissions as a means to generate legitimacy compared to others. The study is based on disclosures made in annual reports and stand-alone sustainability reports of UK listed companies from 2001- 2012. The study uses content analysis to capture both the quality and volume of the carbon disclosures. The results show that there is a significant increase in both the quality and volume of the carbon disclosures after the launch of EU ETS. Companies with carbon trading accounts provide greater detailed disclosures as compared to the others without an account. We also find that company size is positively correlated with the disclosures while the association with the industry produces an inconclusive result.

The financial and environmental performance of firms exposed to the EU Emissions Trading Scheme

This thesis is an empirical-based study of the European Union’s Emissions Trading Scheme (EU ETS) and its implications in terms of corporate environmental and financial performance. The novelty of this study includes the extended scope of the data coverage, as most previous studies have examined only the power sector. The use of verified emissions data of ETS-regulated firms as the environmental compliance measure and as the potential differentiating criteria that concern the valuation of EU ETS-exposed firms in the stock market is also an original aspect of this study. The study begins in Chapter 2 by introducing the background information on the emission trading system (ETS), which focuses on (i) the adoption of ETS as an environmental management instrument and (ii) the adoption of ETS by the European Union as one of its central climate policies. Chapter 3 surveys four databases that provide carbon emissions data in order to determine the most suitable source of the data to be used in the later empirical chapters. The first empirical chapter, which is also Chapter 4 of this thesis, investigates the determinants of the emissions compliance performance of the EU ETS-exposed firms through constructing the best possible performance ratio from verified emissions data and self-configuring models for a panel regression analysis. Chapter 5 examines the impacts on the EU ETS-exposed firms in terms of their equity valuation with customised portfolios and multi-factor market models. The research design takes into account the emissions allowance (EUA) price as an additional factor, as it has the most direct association with the EU ETS to control for the exposure. The final empirical Chapter 6 takes the investigation one step further, by specifically testing the degree of ETS exposure facing different sectors with sector-based portfolios and an extended multi-factor market model. The findings from the emissions performance ratio analysis show that the business model of firms significantly influences emissions compliance, as the capital intensity has a positive association with the increasing emissions-to-emissions cap ratio. Furthermore, different sectors show different degrees of sensitivity towards the determining factors. The production factor influences the performance ratio of the Utilities sector, but not the Energy or Materials sectors. The results show that the capital intensity has a more profound influence on the utilities sector than on the materials sector. With regard to the financial performance impact, ETS-exposed firms as aggregate portfolios experienced a substantial underperformance during the 2001–2004 period, but not in the operating period of 2005–2011. The results of the sector-based portfolios show again the differentiating effect of the EU ETS on sectors, as one sector is priced indifferently against its benchmark, three sectors see a constant underperformance, and three sectors have altered outcomes.

Hitting emissions targets with (statistical) confidence in multi-instrument Emissions Trading Schemes

A means of assessing, monitoring and controlling aggregate emissions from multi-instrument Emissions Trading Schemes is proposed. The approach allows contributions from different instruments with different forms of emissions targets to be integrated. Where Emissions Trading Schemes are helping meet specific national targets, the approach allows the entry requirements of new participants to be calculated and set at a level that will achieve these targets. The approach is multi-levelled, and may be extended downwards to support pooling of participants within instruments, or upwards to embed Emissions Trading Schemes within a wider suite of policies and measures with hard and soft targets. Aggregate emissions from each instrument are treated stochastically. Emissions from the scheme as a whole are then the joint probability distribution formed by integrating the emissions from its instruments. Because a Bayesian approach is adopted, qualitative and semi-qualitative data from expert opinion can be used where quantitative data is not currently available, or is incomplete. This approach helps government retain sufficient control over emissions trading scheme targets to allow them to meet their emissions reduction obligations, while minimising the need for retrospectively adjusting existing participants’ conditions of entry. This maintains participant confidence, while providing the necessary policy levers for good governance.

The Clean Development Mechanism as ethical development? Reconciling emissions trading and local development

This paper examines the ethics of the Clean Development Mechanism (CDM) in its architecture, processes and outcomes and its potential to allocate resources to the poor as ‘ethical development’. Two specific examples of CDM projects help us to explore some of the quandaries that seem to be quickly defining operating procedure for the CDM in its efforts to bring entitlementsto the poor. The paper concludes with reflections on the normative and social complications of the CDM and closes with three key areas of further investigation.

An integrated assessment of carbon dioxide capture and storage in the UK

Geological carbon dioxide storage (CCS) has the potential to make a significant contribution to the decarbonisation of the UK. Amid concerns over maintaining security, and hence diversity, of supply, CCS could allow the continued use of coal, oil and gas whilst avoiding the CO2 emissions currently associated with fossil fuel use. This project has explored some of the geological, environmental, technical, economic and social implications of this technology. The UK is well placed to exploit CCS with a large offshore storage capacity, both in disused oil and gas fields and saline aquifers. This capacity should be sufficient to store CO2 from the power sector (at current levels) for a least one century, using well understood and therefore likely to be lower-risk, depleted hydrocarbon fields and contained parts of aquifers. It is very difficult to produce reliable estimates of the (potentially much larger) storage capacity of the less well understood geological reservoirs such as non-confined parts of aquifers. With the majority of its large coal fired power stations due to be retired during the next 15 to 20 years, the UK is at a natural decision point with respect to the future of power generation from coal; the existence of both national reserves and the infrastructure for receiving imported coal makes clean coal technology a realistic option. The notion of CCS as a ‘bridging’ or ‘stop-gap’ technology (i.e. whilst we develop ‘genuinely’ sustainable renewable energy technologies) needs to be examined somewhat critically, especially given the scale of global coal reserves. If CCS plant is built, then it is likely that technological innovation will bring down the costs of CO2 capture, such that it could become increasingly attractive. As with any capitalintensive option, there is a danger of becoming ‘locked-in’ to a CCS system. The costs of CCS in our model for UK power stations in the East Midlands and Yorkshire to reservoirs in the North Sea are between £25 and £60 per tonne of CO2 captured, transported and stored. This is between about 2 and 4 times the current traded price of a tonne of CO2 in the EU Emissions Trading Scheme. In addition to the technical and economic requirements of the CCS technology, it should also be socially and environmentally acceptable. Our research has shown that, given an acceptance of the severity and urgency of addressing climate change, CCS is viewed favourably by members of the public, provided it is adopted within a portfolio of other measures. The most commonly voiced concern from the public is that of leakage and this remains perhaps the greatest uncertainty with CCS. It is not possible to make general statements concerning storage security; assessments must be site specific. The impacts of any potential leakage are also somewhat uncertain but should be balanced against the deleterious effects of increased acidification in the oceans due to uptake of elevated atmospheric CO2 that have already been observed. Provided adequate long term monitoring can be ensured, any leakage of CO2 from a storage site is likely to have minimal localised impacts as long as leaks are rapidly repaired. A regulatory framework for CCS will need to include risk assessment of potential environmental and health and safety impacts, accounting and monitoring and liability for the long term. In summary, although there remain uncertainties to be resolved through research and demonstration projects, our assessment demonstrates that CCS holds great potential for significant cuts in CO2 emissions as we develop long term alternatives to fossil fuel use. CCS can contribute to reducing emissions of CO2 into the atmosphere in the near term (i.e. peak-shaving the future atmospheric concentration of CO2), with the potential to continue to deliver significant CO2 reductions over the long term.

It is premature to include non-CO2 effects of aviation in emission trading schemes

The recent G8 Gleneagles climate statement signed on 8 July 2005 specifically mentions a determination to lessen the impact of aviation on climate [Gleneagles, 2005. The Gleneagles communique: climate change, energy and sustainable development. http://www.fco.gov.uk/Files/kfile/PostG8_Gleneagles_Communique.pdf]. In January 2005 the European Union Emission Trading Scheme (ETS) commenced operation as the largest multi-country, multi-sector ETS in the world, albeit currently limited only to CO2 emissions. At present the scheme makes no provision for aircraft emissions. However, the UK Government would like to see aircraft included in the ETS and plans to use its Presidencies of both the EU and G8 in 2005 to implement these schemes within the EU and perhaps internationally. Non-CO2 effects have been included in some policy-orientated studies of the impact of aviation but we argue that the inclusion of such effects in any such ETS scheme is premature; we specifically argue that use of the Radiative Forcing Index for comparing emissions from different sources is inappropriate and that there is currently no metric for such a purpose that is likely to enable their inclusion in the near future. (c) 2005 Elsevier Ltd. All rights reserved.

Progress report on longitudinal and cross-sectional study of carbon disclosure strategies: evidence from UK listed companies

Global warming has attracted attention from all over the world and led to the concern about carbon emission. Kyoto Protocol, as the first major international regulatory emission trading scheme, was introduced in 1997 and outlined the strategies for reducing carbon emission (Ratnatunga et al., 2011). As the increased interest in carbon reduction the Protocol came into force in 2005, currently there are already 191 nations ratifying the Protocol(UNFCCC, 2012). Under the cap-and-trade schemes, each company has its carbon emission target. When company’s carbon emission exceeds the target the company will either face fines or buy emission allowance from other companies. Thus unlike most of the other social and environmental issues carbon emission could trigger cost for companies in introducing low-emission equipment and systems and also emission allowance cost when they emit more than their targets. Despite the importance of carbon emission to companies, carbon emission reporting is still operating under unregulated environment and companies are only required to disclose when it is material either in value or in substances (Miller, 2005, Deegan and Rankin, 1997). Even though there is still an increase in the volume of carbon emission disclosures in company’s financial reports and stand-alone social and environmental reports to show their concern of the environment and also their social responsibility (Peters and Romi, 2009), the motivations behind corporate carbon emission disclosures and whether carbon disclosures have impact on corporate environmental reputation and financial performance have not yet to explore. The problems with carbon emission lie on both the financial side and non-financial side of corporate governance. On one hand corporate needs to spend money in reducing carbon emission or paying penalties when they emit more than allowed. On the other hand as the public are more interested in environmental issues than before carbon emission could also impact on the image of corporate regarding to its environmental performance. The importance of carbon emission issue are beginning to be recognized by companies from different industries as one of the critical issues in supply chain management (Lee, 2011) and 80% of companies analysed are facing carbon risks resulting from emissions in the companies’ supply chain as shown in a study conducted by the Investor Responsibility Research Centre Institute for Corporate Responsibility (IRRCI) and over 80% of the companies analysed found that the majority of greenhouse gas (GHG) emission are from electricity and other direct suppliers (Trucost, 2009). The review of extant literature shows the increased importance of carbon emission issues and the gap in the study of carbon reporting and disclosures and also the study which links corporate environmental reputation and corporate financial performance with carbon reporting (Lohmann, 2009a, Ratnatunga and Balachandran, 2009, Bebbington and Larrinaga-Gonzalez, 2008). This study would focus on investigating the current status of UK carbon emission disclosures, the determinant factors of corporate carbon disclosure, and the relationship between carbon emission disclosures and corporate environmental reputation and financial performance of UK listed companies from 2004-2012 and explore the explanatory power of classical disclosure theories.

A longitudinal study of carbon disclosure strategy: evidence from utility, energy and mining industries in the UK

The paper investigates how energy-intensive industries respond to the recent government-led carbon emission schemes through the content analysis of 306 annual and standalone reports of 25 UK listed companies from 2004 to 2012. This period of reporting captures the trend and development of corporate disclosures on carbon emissions after the launch of EU Emissions Trading Schemes (ETS) and Climate Change Act (CCA) 2008. It is found that in corresponding to strategic legitimacy theory, there is an increase in both the quality and quantity of carbon disclosures as a response to these initiatives. However, the change is gradual, which reflects in the achievement of peak disclosure period two years after the launch. It indicates that the new legislations have a lasting impact on the discourses rather than an immediate legitimacy threat from the perspective of institutional legitimacy theory. The results also show that carbon disclosures are an institutionalised practice as companies in the same industries and/or with same carbon trading account status appear to imitate and adopt the industry’s ‘best practice’ disclosure strategy to maintain legitimacy. The trend analysis suggests that the overall disclosure practice is still in its infant stage, especially in the reporting of quantitative and monetary items. The paper contributes to the social and environmental accounting literature by adopting both strategic and institutional view of legitimacy, which explains why carbon disclosures evolve in a specific way to meet the expectation of various stakeholders.

Evaluation of a photosynthesis-based biogenic isoprene emission scheme in JULES and simulation of isoprene emissions under present-day climate conditions

We have incorporated a semi-mechanistic isoprene emission module into the JULES land-surface scheme, as a first step towards a modelling tool that can be applied for studies of vegetation – atmospheric chemistry interactions, including chemistry-climate feedbacks. Here, we evaluate the coupled model against local above-canopy isoprene emission flux measurements from six flux tower sites as well as satellite-derived estimates of isoprene emission over tropical South America and east and south Asia. The model simulates diurnal variability well: correlation coefficients are significant (at the 95 % level) for all flux tower sites. The model reproduces day-to-day variability with significant correlations (at the 95 % confidence level) at four of the six flux tower sites. At the UMBS site, a complete set of seasonal observations is available for two years (2000 and 2002). The model reproduces the seasonal pattern of emission during 2002, but does less well in the year 2000. The model overestimates observed emissions at all sites, which is partially because it does not include isoprene loss through the canopy. Comparison with the satellite-derived isoprene-emission estimates suggests that the model simulates the main spatial patterns, seasonal and inter-annual variability over tropical regions. The model yields a global annual isoprene emission of 535 ± 9 TgC yr−1 during the 1990s, 78 % of which from forested areas.

Quantifying the effects of perturbing the physics of an interactive sulfur scheme using an ensemble of GCMs on the climateprediction.net platform

Aerosols from anthropogenic and natural sources have been recognized as having an important impact on the climate system. However, the small size of aerosol particles (ranging from 0.01 to more than 10 μm in diameter) and their influence on solar and terrestrial radiation makes them difficult to represent within the coarse resolution of general circulation models (GCMs) such that small-scale processes, for example, sulfate formation and conversion, need parameterizing. It is the parameterization of emissions, conversion, and deposition and the radiative effects of aerosol particles that causes uncertainty in their representation within GCMs. The aim of this study was to perturb aspects of a sulfur cycle scheme used within a GCM to represent the climatological impacts of sulfate aerosol derived from natural and anthropogenic sulfur sources. It was found that perturbing volcanic SO2 emissions and the scavenging rate of SO2 by precipitation had the largest influence on the sulfate burden. When these parameters were perturbed the sulfate burden ranged from 0.73 to 1.17 TgS for 2050 sulfur emissions (A2 Special Report on Emissions Scenarios (SRES)), comparable with the range in sulfate burden across all the Intergovernmental Panel on Climate Change SRESs. Thus, the results here suggest that the range in sulfate burden due to model uncertainty is comparable with scenario uncertainty. Despite the large range in sulfate burden there was little influence on the climate sensitivity, which had a range of less than 0.5 K across the ensemble. We hypothesize that this small effect was partly associated with high sulfate loadings in the control phase of the experiment.

The development of a new dust uplift scheme in the Met Office Unified Model

Aeolian mineral dust aerosol is an important consideration in the Earth's radiation budget as well as a source of nutrients to oceanic and land biota. The modelling of aeolian mineral dust has been improving consistently despite the relatively sparse observations to constrain them. This study documents the development of a new dust emissions scheme in the Met Office Unified ModelTM (MetUM) based on the Dust Entrainment and Deposition (DEAD) module. Four separate case studies are used to test and constrain the model output. Initial testing was undertaken on a large dust event over North Africa in March 2006 with the model constrained using AERONET data. The second case study involved testing the capability of the model to represent dust events in the Middle East without being re-tuned from the March 2006 case in the Sahara. While the model is unable to capture some of the daytime variation in AERONET AOD there is good agreement between the model and observed dust events. In the final two case studies new observations from in situ aircraft data during the Dust Outflow and Deposition to the Ocean (DODO) campaigns in February and August 2006 were used. These recent observations provided further data on dust size distributions and vertical profiles to constrain the model. The modelled DODO cases were also compared to AERONET data to make sure the radiative properties of the dust were comparable to observations. Copyright © 2009 Royal Meteorological Society and Crown Copyright

Biogenic nitric oxide emissions from soils: impact on NOx and ozone over West Africa during AMMA (African Monsoon Multidisciplinary Analysis) - Modelling study

Nitrogen oxide biogenic emissions from soils are driven by soil and environmental parameters. The relationship between these parameters and NO fluxes is highly non linear. A new algorithm, based on a neural network calculation, is used to reproduce the NO biogenic emissions linked to precipitations in the Sahel on the 6 August 2006 during the AMMA campaign. This algorithm has been coupled in the surface scheme of a coupled chemistry dynamics model (MesoNH Chemistry) to estimate the impact of the NO emissions on NOx and O3 formation in the lower troposphere for this particular episode. Four different simulations on the same domain and at the same period are compared: one with anthropogenic emissions only, one with soil NO emissions from a static inventory, at low time and space resolution, one with NO emissions from neural network, and one with NO from neural network plus lightning NOx. The influence of NOx from lightning is limited to the upper troposphere. The NO emission from soils calculated with neural network responds to changes in soil moisture giving enhanced emissions over the wetted soil, as observed by aircraft measurements after the passing of a convective system. The subsequent enhancement of NOx and ozone is limited to the lowest layers of the atmosphere in modelling, whereas measurements show higher concentrations above 1000 m. The neural network algorithm, applied in the Sahel region for one particular day of the wet season, allows an immediate response of fluxes to environmental parameters, unlike static emission inventories. Stewart et al (2008) is a companion paper to this one which looks at NOx and ozone concentrations in the boundary layer as measured on a research aircraft, examines how they vary with respect to the soil moisture, as indicated by surface temperature anomalies, and deduces NOx fluxes. In this current paper the model-derived results are compared to the observations and calculated fluxes presented by Stewart et al (2008).

Space heating and hot water demand analysis of dwellings connected to district heating scheme in UK

To achieve CO2 emissions reductions the UK Building Regulations require developers of new residential buildings to calculate expected CO2 emissions arising from their energy consumption using a methodology such as Standard Assessment Procedure (SAP 2005) or, more recently SAP 2009. SAP encompasses all domestic heat consumption and a limited proportion of the electricity consumption. However, these calculations are rarely verified with real energy consumption and related CO2 emissions. This paper presents the results of an analysis based on weekly head demand data for more than 200 individual flats. The data is collected from recently built residential development connected to a district heating network. A methodology for separating out the domestic hot water use (DHW) and space heating demand (SH) has been developed and compares measured values to the demand calculated using SAP 2005 and 2009 methodologies. The analysis shows also the variance in DHW and SH consumption between both size of the flats and tenure (privately owned or housing association). Evaluation of the space heating consumption includes also an estimation of the heating degree day (HDD) base temperature for each block of flats and its comparison to the average base temperature calculated using the SAP 2005 methodology.

Impact of anthropogenic heat emissions on London's temperatures

We investigate the role of the anthropogenic heat flux on the urban heat island of London. To do this, the time-varying anthropogenic heat flux is added to an urban surface-energy balance parametrization, the Met Office–Reading Urban Surface Exchange Scheme (MORUSES), implemented in a 1 km resolution version of the UK Met Office Unified Model. The anthropogenic heat flux is derived from energy-demand data for London and is specified on the model's 1 km grid; it includes variations on diurnal and seasonal time-scales. We contrast a spring case with a winter case, to illustrate the effects of the larger anthropogenic heat flux in winter and the different roles played by thermodynamics in the different seasons. The surface-energy balance channels the anthropogenic heat into heating the urban surface, which warms slowly because of the large heat capacity of the urban surface. About one third of this additional warming goes into increasing the outgoing long-wave radiation and only about two thirds goes into increasing the sensible heat flux that warms the atmosphere. The anthropogenic heat flux has a larger effect on screen-level temperatures in the winter case, partly because the anthropogenic flux is larger then and partly because the boundary layer is shallower in winter. For the specific winter case studied here, the anthropogenic heat flux maintains a well-mixed boundary layer through the whole night over London, whereas the surrounding rural boundary layer becomes strongly stably stratified. This finding is likely to have important implications for air quality in winter. On the whole, inclusion of the anthropogenic heat flux improves the comparison between model simulations and measurements of screen-level temperature slightly and indicates that the anthropogenic heat flux is beginning to be an important factor in the London urban heat island.