Emission allowance origination and trading : How does it affect ABB and its Group Treasury Operations?

Abstract: The purpose of the thesis is to determine how ABB’s treasury department (GTO) should respond to an increasing awareness and interest in the carbon credit markets. Emission caps have been introduced on national levels and also for certain industries in Europe as a consequence of the Kyoto Protocol. This allows for trading of certain carbon credits as well as for the creation of new credits. ABB is a company which has many solutions for efficient energy use; solutions that aim to reduce electricity cost and in the prolongation also emissions. The awareness of the carbon market is growing within ABB, but no carbon credit generating projects have been completed and the initiatives are scattered. The thesis describes the Kyoto Protocol and its implementation within EU, the markets available for trading by companies as well as what instruments and derivatives exist. With the underlying regulations described an empirical study of ABB’s involvement is conducted. The study shows that ABB has few installations with emissions caps and that the potential for generating new credits as a way to increase profit is quite big. However, there have been no carbon generating projects registered up to this point and there are many barriers to overcome before ABB receives any carbon credits.To ensure a thorough analysis, a model of factors affecting ABB’s carbon credit involvement is formed. The model is based on the available literature on the subjects organizational performance, transfer pricing, project- and financial risk and risk management.GTO’s immediate response should be to set up a pool to which subsidiaries with compliance requirements are to send their carbon credits. The pool will then redistribute the credits so that each subsidiary’s needs are fulfilled and finally settle the net remainder on the open market. A unit independent of GTO, called Group Carbon Operations (GCO) in the thesis, should be formed in the near future with responsibility to actively follow the progress of CDM pilot projects and to facilitate their implementation. Depending on the outcome of these pilot-projects ABB can then either, in case of a negative outcome, quickly end the direct CDM involvement and reach closure or, in case of a positive outcome, further develop the GCO department to profit from ABBs involvement in the CDM market. In case of a positive outcome, the GTO should be further involved regarding risk handling and internal pricing.