ABSTRACT
The emergence of carbon emissions trading has been important in increasing the strategic relevance of climate change for business: companies had to respond and develop strategies on how to deal with this new market-based policy instrument. Emissions trading has predominantly been implemented in the form of a cap-and-trade system: companies get a limited amount of allowances to emit greenhouse gases (GHGs), but are allowed to trade these with other market participants. This is an appealing approach, first because it gives carbon a price. It thus translates the adverse impact of business on the global climate into financial figures, enabling companies to take account of climate change in business and investment decisions (Egenhofer, 2007; Hoffmann, 2007). Secondly, even though a cap is put on emissions externally, emissions trading is a market-based instrument that does not stipulate by what means companies should stay within the limit. As a consequence, companies have flexibility in complying with a regulatory scheme based on emissions trading, which enhances incorporating carbon management activities into overall strategy (Kolk and Pinkse, 2005a). And, lastly, emissions trading creates a whole new financial market. This market for carbon is strongly linked to other commodity markets – for example, oil, coal and gas – and the price of emissions allowances also has an impact on sourcing policies of energy. As a result, managing climate change is not only the domain of environmental managers but also starts to involve those with expertise in financial and other commodity markets.
