Corporate influence on EU climate policy

In Europe, the Kyoto Protocol was initially given a cautious welcome by the oil giants. European industry had been most concerned with the EU carbon/energy tax proposed in 1992 and its potential consequences for European competitiveness. The shift in focus to flexibility mechanisms took care of the most controversial aspect of EU climate policy. European industry generally favours the Kyoto Protocol and mandatory compliance systems. UNICE (Union of Industrial and Employer's Confederation of Europe) - representing 34 industry and employer's federations from 27 European countries - supports the Kyoto Protocol and emissions trading and states that 'a fundamental requirement for trading is an effective international compliance regime. An effective compliance regime will be simple, predictable, transparent and equitable.' (UNICE, 2000)

BP and Shell accept the problem at hand as defined by the IPCC. In 1997, Shell's Group Managing Director Phil Watts maintained that the oil industry has 'the privilege of being part of the solution' to this problem (Watts, 1997). The same year, Shell declared that the Group's coal assets were to be sold out (completed in 2000), and Shell established a fifth core business - Shell International Renewables - with an investment plan of US$0.5 billion over the next five-year period. Both Shell and BP explicitly support the Kyoto Protocol and have adopted specific targets for in-house GHG reductions: Shell, for example, aims to reduce its GHG emissions by 10 per cent from their 1990 levels by 2002. Both companies have - in addition to investing in energy efficiency, decarbonization of fuels and renewable energy - launched internal GHG emissions trading systems in order to reach their goals. BP launched a pilot system in 1998 that was extended to cover all 150 business units worldwide in 2000. Shell initiated its STEP (Shell Tradeable Emissions Permit) System in 2000, which is currently used by businesses representing 30 per cent of the GHG emissions from the Shell Group's operations.

As discussed below, these pioneering initiatives have had consequences for a number of compliance-related issues. BP and Shell have voluntarily led the way by setting an example in corporate GHG reporting and verification as well as by developing emissions trading schemes that have served as a model for the UK and the EU.

GHG reporting and verification

To ensure that the numbers that governments use to demonstrate compliance are real, GHG emissions reporting and independent verification are critical. Moreover, mandatory reporting and verification is a precondition for emissions trading. The IPCC has developed guidelines for national GHG emissions inventories. These inventories use national activity data rather than data from specific facilities. The system is based on common standards using common source, sink and fuel categories in six major sectors. There are, however, important links between national and corporate systems as to the types of GHGs included, the methodology used for estimating emissions and baseline years (Loreti et al, 2001).

BP and Shell have been instrumental in developing the Greenhouse Gas Protocol Initiative, aimed at promoting internationally accepted GHG accounting and reporting standards for companies. Both companies have contributed to the development and testing of the standards. In 1998, the World Business Council for Sustainable Development (WBCSD) and the World Resources Institute (WRI) developed the protocol initiative. The protocol is based on a multi-stakeholder partnership of business, NGOs and governments (World Resources Institute, 2002).

BP and Shell have also been the frontrunners in this field at the US Pew Center (see the concluding section) by verifying GHG emissions data by third parties (Loreti et al, 2001). The purpose is for each company to demonstrate progress toward its own GHG emissions targets, support emissions trading and build stakeholder confidence. Reports on GHG emissions as well as the verification results are available at their websites. In the case of BP, verification was conducted by several consulting, verification and financial auditing firms. These efforts were in turn supported by an independent expert panel including green groups, representatives from governments, academia and the UN (World Resources Institute, 2002).

A growing number of companies have shown interest in emissions verification as a consequence of BP's and Shell's activities. Even ExxonMobil has decided to report carbon emissions.18 The example set by BP and Shell is important since mandatory GHG reporting and disclosure is seen as the first essential step to addressing climate change. Moreover, these companies have shown the way for public authorities. Mandatory reporting on GHG emissions has led to a heated debate between Democrats and Republicans in the US Senate related to the proposed energy bill.19 In the EU, comprehensive mandatory reporting of annual environmental and social reports - extending far beyond climate policy - has been proposed for companies with over 250 employees. This initiative has, however, met resistance from EU business organizations arguing that European firms are too diverse to have a single • • 20 reporting requirement.20

Emissions trading in the UK and the EU

Reporting, verification and the consequences of non-compliance constitute crucial elements of one of the first CO2 emissions trading systems in operation. The scheme forms part of the UK Climate Change Programme, which was launched in November 2000 and aims to go well beyond the UK's commitment to reduce GHG emissions by 12.5 per cent below 1990 levels under the EU's burden-sharing arrangement for Kyoto compliance. Shell and BP have been instrumental in developing the scheme by leading the way in pioneering in-house trading systems, and both companies have taken on significant reduction targets within the scheme (Table 9.1). It is quite illustrative that Chris Fay, who previously headed the Royal Dutch Shell subsidiary Shell UK, has been appointed by the UK authorities to promote the trading scheme. No US-based oil companies with operations in the UK participate.

The trading scheme is voluntary and open to all corporations operating in the UK. At an auction held in March 2002, 34 companies took on emissions reduction targets in exchange for a financial incentive worth UK£215 million over the five years of the scheme. The auction was considered a success: emission reduction targets for 2006 added up to more than four million tonnes of CO2e (carbon dioxide equivalent), representing about 5 per cent of the planned savings between 2000 and 2010 under the UK Climate Change Programme. On average, the targets represent an 11 per cent reduction from companies' baseline emissions.21 Participants can cut GHG emissions in-house, or by buying or selling carbon allowances.

Table 9.1 Oil industry participants in the UK emissions trading scheme22

Reduction target for Incentive Gases other than

2006, tonnes CO2e payment, £1000s CO2

BP 353,500 18,866 Methane

Shell UK 438,750 23,416 Methane

All 34 participants are required to report emissions in order to demonstrate compliance with their targets. Detailed reporting guidelines on principles, annual emissions and baselines must be followed by the corporations. These guidelines draw upon the IPCC procedures and practice. Moreover, emission inventories must undergo a process of verification before being reported to the UK government. The UK Accreditation Service (UKAS) has drawn up a list of verifiers and will be assisting the verifiers before granting accreditation.

Compliance is defined as sufficient allowances to cover total emissions during the previous compliance period for each participant. Participants must thus be able to demonstrate at the end of each annual reconciliation period that they are in compliance. During the initial stage, non-compliance (i.e., the failure to hold sufficient allowances) will have the following consequences: the non-payment of the financial incentive, and a reduction in the number of allowances allocated for the next compliance period. The UK government intends to introduce legislation after Parliament has accepted the compliance regime as legally binding. When the statutory compliance regime is in place, non-compliance will - in addition to non-payment and the reduction of allowances - lead to a fixed financial penalty for each tonne of CO2e emitted for which a participant did not hold an allowance (DEFRA, 2001). Thus, voluntary participation in the UK emissions trading scheme indicates that corporations supporting emissions trading also accept mandatory reporting, independent verification and a legally binding compliance regime that includes penalty sanctions. BP and Shell have explicitly warned against any voluntary trading system, arguing that voluntary systems will lead to low stability and predictability.23

In 2000, the EU established the European Climate Change Programme (ECCP) to 'drive forward EU efforts to meet the targets set by the Kyoto Protocol' (ECCP, 2001, p3). With its multi-stakeholder approach, the ECCP serves both as an instrument for ensuring progress in the implementation of EU climate policies, and as a vehicle for participation by industry in the process. The EU has adopted an emissions trading directive as the core element of the ECCP. BP and Shell have acted as 'key drivers' in the development of the EU emissions trading scheme (Christiansen and Wettestad, 2002, p12).

The emissions trading directive pays due attention to common monitoring, reporting, verification and enforcement. European industry generally supports the directive. According to the Secretary General of the EU employers' confederation, UNICE, 'This provides European business with the certainty it needs to begin planning for emissions trading which starts in January 2005'.24 'Non-compliance is to be dealt with by a financial penalty that is sufficiently high to ensure that it makes no sense for an operator not to go out and buy from the market a sufficient number of allowances to cover the installation's actual emissions' (COM, 2001, p14).

The European Petroleum Industry Organization (EUROPIA) is composed of 21 oil companies and represents the downstream activities (including refineries) of the oil industry within EU institutions. In the early 1990s, EUROPIA was one of the most aggressive opponents of the climate policy of the EU, particularly the carbon/ energy tax (Skjsrseth, 1994). Today, EUROPIA welcomes the EU emissions trading directive as a learning exercise towards an international system under the Kyoto Protocol. EUROPIA also supports a 'sound and transparent' monitoring system, but makes penalties for non-compliance conditional upon whether the system is binding or voluntary.25 There are two main reasons underlying the change in the position of EUROPIA: first, the change in the climate policy of the EU and its Member States; second, the change in the strategies of Shell and BP.26 UNICE supports the proposed EU directive as well as a 'learning by doing' process in the period before 2008. In a detailed position paper on the EU proposal, UNICE had no comments on monitoring, reporting and verification requirements. Concerning enforcement, UNICE supported financial penalties, but recommended changing the wording in the proposed directive to avoid unnecessary uncertainty (UNICE, 2002).27

The proactive strategy of BP and Shell has affected emissions trading and compliance systems in the EU. The mechanisms whereby influence has been exercised can be understood in terms of the companies' ability to exert influence, mainly by taking unilateral action that served to set an example for other corporations as well as public authorities. BP and Shell have exploited new market opportunities in renew-ables and have voluntarily taken on a leading role in corporate reporting, verification and emissions trading.

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