Gordon Boyd doesn't see eye to eye with a lot of other CFOs. That's because the finance chief of Drax, a UK power generator, is a fan of the European Union's Emission Trading Scheme (ETS). The two-year-old mandatory program aims to mitigate global warming as cheaply as possible by imposing strict limits on carbon-dioxide emissions, and has created a pan-European market for companies to trade pollution allowances. (Currently the U.S. trades sulphur-dioxide emissions, but not carbon-dioxide emissions.) While few would dispute the worthiness of the EU's objective, many finance chiefs don't share Boyd's enthusiasm for the business case supporting the ETS.
Drax is one of the most active participants in the ETS. It operates the largest coal-fired plant in Europe — a 4,000-megawatt power station in northern England, which emits around 21 million tons of carbon dioxide annually while providing 7 percent of Britain's electricity. In the first six months of last year, Drax exceeded its allowance by 4 million tons, forcing it to buy extra permits in the market at an average price of about $36 a ton.
The outlay hasn't hurt Drax's profitability — EBITDA in the first half of 2006 more than tripled the figures posted a year earlier, in part because it passed along the cost of its carbon emissions to customers. And as the EU intended, reducing carbon emissions now factors heavily into the company's investment decisions, creating a rationale for spending on marginal efficiency gains "that benefit both the company and the environment," says Boyd.
Skeptics argue that the power industry has it easier than many other industries targeted by the ETS. Unlike utilities, for example, Europe's steel sector competes against companies from outside the EU, which aren't subject to anything like the ETS in their home countries; passing along carbon dioxide–related costs to its customers isn't an option. ETS proponents, however, counter that companies in sectors like steel can help themselves by, for example, selling their unused permits rather than letting them expire, as many are currently doing.
Granted, Europe's ETS has had teething problems. But the past two years offer important lessons for American CFOs, whose companies could be facing similar "cap and trade" emissions schemes sooner than they might think. The fortunes of Boyd's company provide proof that there's a first-mover advantage for those that get a grip on the burgeoning carbon economy.
Janet Kersnar is editor-in-chief of CFO Europe.