Risk Management for Emissions Trading
Eeva Lappalainen, Anna Kumpulainen and Tuula Pohjola;
Helsinki University of Technology, P.O. Box 5500, FI-02015 TKK, Finland
E-mail: eeva.lappalainen@tkk.fi
Abstract: Increasing threat of climate change has
introduced several international mitigation efforts. Some of
these efforts, mainly emissions trading schemes, have also
instituted obligations and limits on companies. Because of
this, the risks and uncertainties facing companies have
increased, requiring careful control. This paper addresses
the strategies and practises for risk management related to
EU ETS, as well as suggests a tool kit that helps companies
choose and assess appropriate EU ETS risk management.

Among efforts to mitigate climate change is the EU
Emissions Trading Scheme (EU ETS) obligating major
emitters in the EU area to cover their carbon dioxide
emissions with tradable allowances (EUAs) [1]-[3].
Because of the scheme new challenges are facing
companies. They are now required to set up monitoring
practises, to observe EUA market trends, and to
incorporate costs of emissions into their accounting.
Additionally, companies’ investments are affected by the
short-term market risk and volatility. Uncertain climate
policy, on the other hand, enhances companies’ longterm
business risks [4]. These challenges are substantial:
companies need to manage them.
This paper aims to map the state of risk management
within companies complying with the EU ETS, and to
find differences between traditional and EU ETS risk
management. The main focus is on the strategies and
practises of risk management. Additionally, the paper
presents a tool kit that will assist companies in their EU
ETS risk management.
The state of risk management was mapped through a
web-based survey sent to 192 companies in the EU area.
Data from the 47 approved responses were analysed with
content analysis (qualitative data) and by forming shares
and distributions of quantitative data. Additionally, a
literature review of the main literary works related to
emissions trading and risk management was conducted.
The proposed tool kit was built based on the survey and
literature review results.
The survey results revealed a great degree of variety in
companies’ EU ETS risk management strategies and
practises. Generally, nearly all respondents considered
managing risks to be important; 75% had established an
own EU ETS risk management strategy and 10% used
their general strategy. These strategies usually outlined
responsibilities and the nature of EUA trading.
The level of EU ETS risk management activities,
though, differed between companies. Only half of the
companies managed their risks by using portfolios or by
constructing market models. Practises concentrated
mainly on minimizing the impact that the scheme has,
and on following the basic compliance strategies –
internal abatement, EUA trading, and investments in
emission reduction projects or carbon funds – available.
The suggested tool kit helps companies assess their
situation related to the EU ETS and choose the most
suitable strategies and practises for their operations.
[1] European Commission (EC), EU Action against Climate Change.
EU Emissions Trading – An Open Scheme Promoting Global
Innovation, Brussels, Belgium, 2005, 24 pgs.
[2] United Nations Framework Convention for Climate Change
(UNFCCC), Caring for Climate – A Guide to the Climate Change
Convention and the Kyoto Protocol, Kyoto, Japan, 2003, 33 pgs.
[3] European Union (EU), “Emissions Trading Scheme (EU ETS)”,
online material, 2007.
[4] Kaminski, V (ed.), Managing Energy Price Risk. The New
Challenges and Solutions, 3rd edition, Risk Books, UK, 2004, 700

Full Paper (.PPT format, 106.0 kb)

All Submissions
8:00 AM-8:00 PM, Friday, June 15, 2007, Oral

The Ontario, Canada 2007 Meeting