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policies for fighting global warming, experts said in December 2006; and
˜Carbon capture could be demonstrated technically viable within 5“10 years
but there™s still no commercial incentives™, said Harry Audus, general man-
ager of the International Energy Agency (IEA) Greenhouse Gas Research and
Development Programme (˜ “Clean” coal seen in 5“10 years, but costs high™,
Reuters Norway: 8 December 2006).


Carbon finance
A case study of a market-based solution to carbon emission is that of carbon
finance and trading of permits. With political positions evolving, the likelihood
is that a form of a global emissions trading system will be in place within the
next few years. There are two categories of countries involved in carbon credit
trading and finance:
Developing countries, which do not have to meet any targets for GHG reduc-
tions. However, they may develop such projects because they can sell the
ensuing credits to countries that do have Kyoto targets; and
Industrialised countries, which include the richest nations of the world and
countries in transition from centrally planned to open market economies.
They are part of the Protocol™s Joint Implementation (JI) mechanism.
Part E “ Case Studies of Business Risks
530



Trading carbon credits
To implement the Kyoto Protocol, a ˜cap and trade™ system is being established.
Under these systems, companies are obliged to match their greenhouse gas
emissions with equal volumes of emission allowances.
Governments initially allocate a number of allowances to each company.
Any company that exceeds its emissions beyond its allocated allowances will
either have to buy allowances or pay penalties. A company that emits less than
expected can sell its surplus allowances to those with shortfalls.
Companies or countries will buy these allowances as long as the price is
lower than the cost of achieving emission reductions by themselves.


Demand for carbon credits will grow
The demand for carbon credits is expected to grow for the following reasons:
Because of projected shortfalls and higher relative carbon abatement costs, it
is anticipated that OECD countries will fail to meet their Kyoto target by
2012. The higher relative emissions abatement costs in these countries mean
that they will find it attractive to buy carbon credits generated elsewhere;
Private companies in industrialised countries will increasingly be subject to
˜cap and trade™ mechanisms, such as the EU Emission Trading Scheme which
started on 1 January 2005 (although this will initially cover only 50% of emis-
sions). The EU scheme is separate from the Kyoto Protocol but the ˜Link-
ing Directive™ of 2004 allows a European company to buy Kyoto Protocol car-
bon credits to comply with their obligations under the EU Emission Trading
Scheme; and
Governments will also have to buy carbon credits because the ˜cap and trade™
mechanisms will initially only apply to a fraction of each state™s economy
and governments are responsible under the Kyoto Protocol for meeting their
countries™ targets. OECD governments and European companies subject to
the EU Emission Trading Scheme will therefore be the main buyers of carbon
credits.


Low-cost carbon credits available
The idea behind carbon trading is that firms that can reduce their emissions at
a low cost will do so and then sell their credits on to firms that are unable to
easily reduce emissions. A shortage of credits will drive up the price of credits
and make it more profitable for firms to engage in carbon reduction. In this way
the desired carbon reductions are met at the lowest cost possible to society.


The business opportunity from carbon trading
With the creation of a market for trading carbon dioxide emissions within
the Kyoto Protocol, it is likely that London financial markets will be the centre
Chapter 20 “ Climate change “ air pollution risk 531



for this potentially highly lucrative business; the New York and Chicago stock
markets would like a share (which is unlikely as long as the US rejects Kyoto).
The European Union™s European Union Greenhouse Gas Emission Trading
Scheme (EU ETS) began operations on 1 January 2005.
Twenty-three multinational corporations have come together in the G8
Climate Change Roundtable, a business group formed at the January 2005 World
Economic Forum. The group includes Toyota, Ford, British Airways and BP. On
9 June 2005 the Group published a statement stating that there was a need to act
on climate change and stressing the importance of market-based solutions. It
called on governments to establish ˜clear, transparent, and consistent price sig-
nals™ through the ˜creation of a long-term policy framework™ that would include
all major producers of greenhouse gases.
Examples of the growth of this sector are:

Climate Change Capital, the boutique investment bank, has raised $1 billion
for a fund designed to profit from the growth of the carbon market, the largest
amount raised by a private institution to date. The investors include Dutch
pension funds ABP and PGGM and Centrica, the energy company; and
Italy™s biggest utility Enel aims to earn millions of greenhouse gas reduction
credits in 2007 through investments in China and India under the Kyoto
Protocol™s Clean Development Mechanism (CDM), a senior Enel manager said
recently (˜Enel earns emissions credits in China™, Reuters India: 8 June 2006).
˜We are talking about credits worth several million tonnes of CO2 emissions
(per year)™, said Fabrizio Barderi, head of Enel™s Strategies and Sales Analysis
Department.


The Clean Development Mechanism (CDM)
The CDM lets rich countries earn credits by investing in green projects in
poor countries, where it is often cheaper to achieve reductions. Although
Chinese projects are awaiting authorisations from the United Nations CDM
board.
The credits will be valid for use in Europe™s emissions trading scheme,
which caps industry™s CO2 output and is the centrepiece of the bloc™s effort
to meet its Kyoto Protocol commitments.




Carbon issues
Most of these gases are emitted from the energy sector, where capital investments
last for decades. Private firms are unlikely to invest adequately in advanced tech-
nologies to cut their emissions unless they believe that limits will become suffi-
ciently strict as governments get serious about slowing global warming.
There is no clear plan for Kyoto™s successor. The Kyoto Protocol itself does
not offer an effective framework. The US has pulled out and has yet to offer an
Part E “ Case Studies of Business Risks
532



alternative strategy for slowing global warming. Canada and Japan have formally
joined the Kyoto treaty, but neither nation has yet offered a workable plan for
meeting its Kyoto commitments. Only the European Union is implementing a
scheme that will yield compliance with its Kyoto obligations. But a system that
attracts only Europe is unlikely to exert much leverage on global emissions, as the
EU accounts for only 15% of the world™s total emissions. Moreover, the limits on
emissions enshrined in the Kyoto agreement exclude developing countries,
which account for nearly half of the world™s GHG emissions. (China alone is
responsible for 12%.) Because they are more populous, these countries™ per
capita emissions remain much lower than that of the industrialised world.
Since the baseline for all carbon trading calculations is the level of 1990
emissions, polluting countries such as Russia and the US automatically own
vast amounts of carbon credits, and therefore own the ˜right™ to spew out most
of the world™s pollution. In contrast, developing nations own almost none of the
rights to the atmosphere, as their carbon emissions were negligible in 1990.
This means that in order to develop its economy, these countries must buy car-
bon credits from rich, heavily polluting countries. Any system which allows
those countries to cause the climate change problem to continue to pollute, and
at the same time bars desperately poor countries from providing basic services,
must be considered inequitable and fundamentally unjust.




The Kyoto Protocol
Kyoto obliges 35 industrialised nations to cut emissions to 5% below
1990 levels by 2008“12. Although the US is not a signatory to the agree-
ment more than 330 US cities have endorsed the Kyoto Protocol, in a
grassroots support for its aims. The Kyoto Protocol has the following
characteristics:

* There is a divide between the interests and obligations of developed
and developing countries;
* Developed countries currently account for more than half of the green-
house gas (GHG) emissions;
* The Kyoto Protocol in force as of 16 February 2005 seeks to reduce GHG
emissions blamed for global warming;
* The Protocol provides the means to monetise the environmental bene-
fits of reducing GHGs;
* The Protocol has created a market in which companies and governments
that reduce GHG gas levels can sell the ensuing emissions ˜credits™;
* A new currency is emerging in world markets;
* Money is set to exchange hands for pollution; and
* Carbon credits are poised to transform the world energy system and
thus the world economy.
Chapter 20 “ Climate change “ air pollution risk 533




A new international climate change agreement designed to replace the
Kyoto accord when it expires in 2012 could move a step closer with the
publication of the Intergovernmental Panel on Climate Changes™ (IPCC)
most current 4th Assessment Report.




Useful web links
* A summary of the IPCC™s Fourth Climate Change Report focuses on new
literature on the scientific, technological, environmental, economic and
social aspects of mitigation of climate change:
http://www.resourcesaver.org/file/toolmanager/Custom
O16C45F78472.pdf
* The business resource for climate management, ClimateBiz is at:
http://www.climatebiz.com/sections/toolsresources.cfm
For information on the Clean Development Mechanism visit:

* www.carbonneutral.com
* www.climatecare.org
* www.carbontrust.co.uk
For information on carbon dioxide emissions trading visit:
* www.chicagoclimateex.com
* www.europeanclimateexchange.com
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21
UK corporate governance: reforms in
the wake of corporate failures and
the Enron case study
UK corporate governance:
21 reforms in the wake of
corporate failures and the
Enron case study

CHAPTER OVERVIEW
This chapter summarises the development of corporate governance in the
UK. The overview has regard to corporate failures that have occurred and,
in particular, to the Enron case study. Comments are also made bearing in
mind the book™s overall theme of sustainable risk management.
In the UK the corporate governance framework has evolved through:
* Systematic study of each aspect of corporate failures that have occurred
in the UK by committees set up by government and various regulatory
bodies;
* Their prescribing the Code of Best Practice; and
* The adoption of their recommendations in listing rules.
In this chapter some discussion refers to the hypothetical situation that
Enron had taken place in the UK instead of the US. It is analysed to assess
whether the UK™s corporate governance framework would have been able
to prevent it. An analysis of the UK™s various reforms which have been
affected post-Enron then follows, that is:
* The legislative approach of the UK in the form of the Companies (Audit,
Investigations and Community Enterprise) Act 2004 and the proposed
Company Law Reform Bill; and
* Its traditionally followed approach of comply or explain codes.
In particular, the provisions of the main instrument which regulates corpor-
ate governance, the Revised Combined Code 2003, are discussed. At the end
of this chapter the provisions of the Company Law Reform Bill 2005, which
affects corporate governance, are mentioned in brief to show the shift in
approach of the UK from self-regulatory to legislative. (Further comment on
aspects of due diligence and corporate governance can be found in Due
Diligence and Corporate Governance 2004/2005 by Dr L. S. Spedding.)
It should be noted that a comparative analysis covering US reforms
post-Enron occurs in Chapter 22 with a view to assessing the risks posed
by a new era of stricter governance standards in the context of a sustain-
able approach to business risk management.
Chapter 21 “ UK corporate governance: reforms in the wake of corporate failures and the Enron case study 537



Corporate governance and sustainable risk management
When reviewing the aspects of sustainable risk management, which have been
considered in earlier chapters, it is evident that poor corporate governance
has been a crucial cause of corporate failures. On the other hand, corporate
successes have been due to good corporate governance and good strategy,
especially in transactions such as mergers. These conclusions have been reached
in SERM case studies, as well as in various reports of corporate commentators
and advisors. Significantly they were also two of the main findings of a report
Enterprise Governance “ Getting the Balance Right published by the International
Federation of Accountants and the Chartered Institute of Management Accounting
(CIMA) (the CIMA Report).


The CIMA Report: Enterprise Governance “ Getting the Balance Right
This report looked at 27 international case studies “ 11 outstandingly suc-
cessful companies and 16 failures “ by analysing literature such as inquiries
and newspaper articles. It then rated factors behind success or failure for
each company in a number of matrices which revealed some clear similar-
ities. Failures studied include Ahold, Enron, WorldCom and Vivendi.
Successes included Tesco, Southwest Airlines and Unicredit Group in Italy.



The CIMA Report analysed corporate governance facts in relation to well-
known organisations that had been noted for their success or failure inter-
nationally. One key consideration was the culture of the organisation (see also
Chapter 12) that affects also its brand and reputation (see Chapter 9). The analy-

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