Giuseppe Montesano is head of environmental policy at Italian power company ENEL.
He was speaking to Daniela Vincenti-Mitchener.
Do you think we have the right policy framework for companies to comply with the EU's 2020 commitments on emission cuts?
The present policy framework based on the EU ETS [Emissions Trading Scheme] has the advantage of letting companies included in the mechanism choose the most cost-effective ways to reach the targets within available options.
This would not happen, for example, with a carbon tax, which would not be capable of guaranteeing compliance with emission targets.
What is not right, in our opinion, is that there is no real perspective on what the regulatory framework will look like in the longer term, a necessary condition to activate the massive investments which would really be capable of substantially 'decarbonising' our economy.
What is also not right is that in the shorter term, until a global carbon market is established, policies are dramatically limiting the use of offsets like the carbon credits generated by the CDM, thus preventing emission reductions and low-carbon technology transfer to developing and emerging countries.
These conditions are also expected to increase compliance costs for companies and, in the case of power sector, this is likely to be reflected in electricity prices.
What's missing? What else could be developed to create a level playing field?
According to the recent report of the European Environmental Agency on GHG [greenhouse gas] trends and projections, the full implementation of the planned additional measures is expected to bring EU-27 domestic emissions down to 14% below 1990 levels by 2020, thus potentially delivering almost three quarters of the EU's unilateral 2020 commitment through domestic measures.
It should be noted that this reduction will come exclusively from the sectors covered by the EU ETS. To reach the target, governments should therefore focus on reducing emissions from other sectors, such as transport, residential and agriculture, by putting in place policy frameworks to share the reduction effort equally.
A level playing field should be created by implementing a real global approach. This could also be achieved by allowing for more flexibility to achieve the target.
Domestic policies should be accompanied by open access to international offsets, like CDM or a successor mechanism based on sectoral crediting, while of course taking care of the sustainable development of countries where credits are generated. In addition, auctions of ETS allowances should be transparent, thoroughly harmonised across the EU and possibly centralised to avoid competitive distortions.
If no global deal is reached in Copenhagen, how is this going to impact on power companies like ENEL?
A global agreement is a pre-requisite for a global carbon market, which is in turn the condition to set a CO2 price, which is what allows companies to create value by lowering their emissions.
A failure in Copenhagen would have consequences for investments in low-carbon technologies. We don't think that a fully-fledged agreement will be achieved, but Copenhagen will not be a failure if key elements are established to make it possible to progressively link regional systems, also through the use of a common 'offset' commodity.
We strongly support this and responsible companies like Enel are very keen to see clear signals which would allow them to further develop and deploy innovative solutions on renewables, CCS, nuclear and energy efficiency, also through smart grids and electric vehicles.
If the EU does not manage to secure equally strong emission reduction targets from other developed countries, do you think it should still go for a 30% reduction as advocated by the European Parliament? Do you think that would penalise European companies or encourage them to take the lead in moving towards a low-carbon economy? Why?
The EU position is to go for the 30% target if other developed countries commit themselves to comparable reductions, and economically more advanced developing countries contribute adequately according to their responsibilities and respective capabilities.
In such circumstances and with public policies in force aimed at pushing promising, innovative technologies toward competitiveness, we believe there are great opportunities for a company like ours.
It is however important that targets are placed in a perspective which takes into account the time that is needed to develop and deploy the most effective solutions.
If targets are too stringent in the short term without allowing for adequate offsetting mechanisms, the result may be to force solutions which are not optimal in the long run, both in terms of costs and emission reductions.
Do you see a trend of companies being more ambitious in cutting emissions than they are required to be under the legal framework?
Leading companies in the energy sector are constantly committed to operating efficiently, and this means using less fuel and therefore cutting emissions regardless of legal requirements. In addition, Enel has the ambition of being a good citizen of the world while creating value for its shareholders.
This is why we believe that a regulatory framework which creates value for emission reductions can offer enormous incentives to companies to maximise their efforts.
On the contrary, it often happens that top-down politically-imposed targets are counter-productive.
As an example, caps allocated to power companies in the first phase of the EU ETS were not directly linked to environmental performances and penalised companies like ours, distorting competition without rewarding real emission reduction efforts.
Power firms will have to buy 100% of their emissions rights at auction under the revised ETS. How are you preparing for this? Do you see this as a sufficient incentive to invest in low-carbon technologies?
We believe that auctioning is the best solution to avoid the distortions that were experienced in the first phase of allocating allowances, even if we had proposed a gradual introduction to provide for a smooth transition to the expected significant impacts on electricity prices. We believe that the ETS provides a clear incentive to invest in low-carbon technologies.
However, in order to accelerate the learning curve of promising solutions, we strongly advocate that auction proceedings be used to fund the development of power technologies such as CCS or innovative renewables.
The ETS only covers 40% of emissions. What system do you favour for tackling the majority of emissions? Perhaps a more sectoral approach?
A sectoral approach is a very broad concept. It could be applied within the EU to identify the best way to give value to CO2 emissions. In certain cases this may mean an extension of the ETS, in others the introduction of alternative policies capable of activating existing abatement potentials.
These can be, for example, standards in buildings or incentives to electric transportation. What is important is that every sector contributes its fair share.
The EU is pushing for an OECD-wide cap-and-trade system. What's your stance on this? How do you see this being implemented practically?
Enel believes in the capability of a global carbon market to allow for more efficient and effective allocation of capital to abatement opportunities and help keep costs for capped companies more manageable.
Such an ultimate objective can be reached stepwise by progressively linking regional markets. The EU vision can help advance towards this direction, but we believe that an extremely effective contribution would be an agreement on internationally-governed offsetting mechanisms in Copenhagen which guarantee a continued direct involvement of private entities.
Let's not forget that private entities have delivered approximately 85% of the emission reductions achieved since the Kyoto Protocol entered into force.