Challenges and opportunities of a post-Kyoto mitigation regime: a survey of the European electricity sector

Abstract

This paper empirically shows how the uncertainty associated to the absence of a mitigation regime which follows the United Nations Framework Convention on Climate Change Kyoto Protocol (UN FCCC Kyoto Protocol) is affecting investments in abatement activities in the EU electricity sector and, thus, future emissions levels. Based on a survey of EU electric utilities, it identifies the most likely post-Kyoto scenarios considered by them and how they are coping with such uncertainty in their investment decisions. It is found that firms react differently to such uncertainty and adopt different strategies to cope with it, diversifying their emissions control activities. Although most companies foresee post-Kyoto compliance regimes with emissions trading systems, they differ in their perceptions of the form that a post-Kyoto regime could take and are, thus, positioning differently to face such regime. The particular features of each company and the country where they operate affect their perception of the uncertainties, their position regarding a possible post-Kyoto regime and their inclination to carry out mitigation activities. Complying with Kyoto (and, eventually, post-Kyoto) targets significantly influences the investment decisions of European electricity companies. Uncertainty about a post-Kyoto regime may already be affecting investments in mitigation activities in the electricity sector. Therefore, significant progress has to be made in the definition of a post-Kyoto regime. It is urgent to define and agree internationally the emissions reduction objectives and the mitigation instruments that will be accepted for compliance, ensuring continuity of the international emissions trading system foreseen in the Kyoto Protocol.