Strategic early options under an emerging emissions trading scheme : implications for US Nitric Acid Companies

Within the next years, new greenhouse gas emission allowance trading systems will emerge in various countries, such as in the United States, Australia, Japan and New Zealand, opening different strategic early options for companies that will most likely receive a reduction cap under new national emissions reduction regulations. Strategic early options represent corporate actions that might pro-actively include emissions reductions or counteractively exclude emissions reductions prior to the emerging obligatory cap-and-trade system. This work identifies as strategic early options: - the participation in an early action program of any emerging national cap-and-trade system, - emissions reductions under federal offset programs of exiting cap-and-trade systems, - the realization of offset credits in the voluntary market and - no early emissions reductions. Risks and opportunities result from strategic early options themselves, as well as from their interaction with the emerging emissions cap-and-trade system. The work defines five key company, policy and market factors in order to best possibly analyze a company's exposure to policy and market developments: 1. the early emissions reduction portfolio, 2. allocation procedures, 3. design of an early action program, 4. emissions credit standards and regulations, as well as 5. prices of emission allowances and offset credits. The five key factors will be combined to a framework for strategic early option analysis representing a comprehensive tool for risk and opportunity assessment. According to the analysis in this thesis, business is able to combine the presented early options and choose between four basic environmental strategies for best positioning under an emerging emissions trading system. The strategic choice depends on the mentioned risks and opportunities that are assessed through the framework of strategic early option analyses. If a company faces neither risks nor opportunities, it might choose the indifferent basic strategy of "wait and see" adopting a rather passive approach to save recourses. When only facing risks and no opportunities it might better follow a defensive strategy, under which it will not consider any early emissions reductions. The innovative basic strategy of only reducing part of its emissions will diversify early actions and may be best applicable, if a company faces risks and opportunities under a cap-and-trade scheme. In case of only having opportunities, the company might choose the offensive strategy of focusing on early reductions before trading starts. It is assumed that the US nitric acid industry will be obligated to reduce the side product of its chemical processes nitrous oxide emissions under a future US federal emissions cap-andtrade system. The trading program will most likely start between 2012 and 2014. Nitric acid companies are able to realize advantages and reduce their exposure to risks before trading begins by adopting one of the four basic strategies. The assessment of risks and opportunities through the framework of early option analysis within the different emissions markets and in the context of the emerging US trading scheme reveals that nitric acid companies are best positioned by structuring their existing early emissions reductions portfolio into one group of nitric acid facilities in which emissions will be reduced early and into one group of facilities in which emissions will not be reduced, thus adopting the innovative basic environmental strategy.