Emissions still the burning issue -


The Climate Group's Australian director, Rupert Posner, asks whether emissions trading is a good deal for Australian business.
Climate change is the issue of the day. Some of the consequences include rising sea levels, more extreme weather events, water shortages, changing disease vectors and millions of refugees.
It's more than just a potential environmental crisis - it's a burning political and economic issue, with global business frequently cast as fanning the fire.
The reality is that over recent years, as a scientific consensus has emerged and legislation has evolved, climate change has become a boardroom issue for many companies.
Of course, there are some who have stuck their heads in the sand but there are also many others who are leading the way on cutting energy use and developing low carbon products and services. Often they are discovering new business opportunities as a result.
One thing, in particular, that the business world is being asked to buy into is emissions trading. This is one of a relatively new breed of market-based environmental policy instruments aimed at reducing emissions of carbon dioxide and other greenhouse gases as cost-effectively as possible.
Emissions trading remains a mystery to most companies. So what relevance does it have for the majority of people doing business? And, is a market-based solution really the answer to this potentially devastating environmental problem?
The concept of emissions trading is simple. Emitters of greenhouse gases are given an allocation of allowances (the number of tonnes of greenhouse gases they are allowed to emit over a particular time). At the end of the period the company must have sufficient allowances to match all its emissions. If a company is likely to generate more emissions than the number of allowances it holds, it faces two choices: invest in reducing its emissions at the source or buy allowances from another company that has met and gone beyond its targets, and therefore has allowances to sell.
If increasing numbers of companies choose to buy allowances to pollute rather than reduce their emissions directly, then the cost of the allowances goes up, making investment in emissions-reducing technologies more financially attractive. The economic principle is that by setting a market price for carbon we get emissions reductions at minimum cost. Sounds good so far.
But critically, for an emissions trading scheme to actually deliver on its environmental objective and encourage sufficient investment in low-carbon technologies, the allocations made to industry must be significantly below business-as-usual levels and set over a time frame consistent with investment decisions. What we have seen recently in the European Emissions Trading Scheme (EU-ETS), which was developed to help the European Union nations meet their targets under the Kyoto Protocol, was a "long" market where more credits were allocated than were needed. When the numbers were finally revealed in the last week of April the market all but crashed, with carbon prices losing more than half their value in the course of five days. Testament to the robustness of this fledgling market is that trading continued despite this knock.

In Australia there are some concerns over competitiveness - that without similar schemes in countries we compete with for trade, there is no level playing field.
However, it's equally apparent that an increasing number of companies, realising that emissions trading or some other greenhouse measure is inevitable, support strong government action. The thinking goes that if companies are going to have to make changes anyway, better that there is a stable framework within which to plan.
In a recent report prepared by The Climate Group and the UK Business Council for Sustainable Energy, looking at business views on international energy and climate policy, many of the companies surveyed stressed that they would prefer louder, clearer, longer-term policy signals to increase confidence and make investment decisions easier. This position was also supported by the Australian Business Roundtable on Climate Change.
In terms of emissions trading, this means a concerted effort from European governments to provide an allocation for the next trading period (2008-2012) that will support the developing market. Centrica, owner of British Gas, said: "We would support the biggest possible cuts in allocations". It also means governments clearly communicating their commitment to maintaining a trading regime in Europe, whatever happens on the broader international stage, and looking for ways to link into regional trading initiatives if the Kyoto Protocol does not ultimately deliver a solid international trading system.
But what does this mean for Australian businesses? Apart from those in the electricity business in NSW, Australian businesses largely have not had to worry about emissions trading. So should they forget about emissions trading and get on with running the business?
Firstly, it's worth noting that the European scheme is likely to be extended over time to cover a wider range of sectors, and if you are investing in Europe you need to know about this. And recently, California Governor Arnold Schwarzenegger signed an agreement with British Prime Minister Tony Blair to explore ways to link their carbon markets. Australian states also are examining an emissions trading scheme, and the current debate on low greenhouse gas technology is putting more focus on emissions trading as an effective driver for investment in these technologies.
While waiting for the policy framework to evolve, there is another critical factor to consider. With increasing mentions in the press, the profile of the climate issue is heading skywards. Individual awareness is growing and consumers will increasingly expect the businesses whose products and services they buy to be taking positive action.

In other words, even for those companies that are not yet covered by legislation or included under any particular trading regime, there are still major opportunities associated with being an early adopter. Understanding your emissions profile, reducing those emissions and communicating this effectively is increasingly becoming an opportunity for brand differentiation.
Take HSBC and Sky TV, for example, who recently became the first bank and media company in the world to go carbon neutral (reducing their net carbon emissions to zero). They achieved this not just by improving energy efficiency and buying green power but also by purchasing "offsets" to compensate for their remaining carbon footprint.
Offsetting is basically the process of purchasing emissions reductions made elsewhere (from a renewable energy project in the developing world, for example), to count against those of your own emissions, which are too difficult or expensive to tackle directly. It's an option already available to those participants in the regulated market of the EU-ETS and Kyoto. But the blossoming voluntary market demonstrates the increasing number of companies that want the benefits of flexibility when taking steps to reduce emissions. And because it is a voluntary market, Australian companies can participate.
So, the balance of evidence clearly demonstrates that, if emissions reductions are on the cards for the long term, then so-called "flexible mechanisms" are good for business. Understanding how they work opens up new opportunities for cost-effective climate strategies and will leave executives well prepared for future policy developments.
However, trading and offsetting systems need robust, credible frameworks to create the confidence and stability that are required to make them work over the long term. It is early days for emissions trading, with inevitable hiccups, but over time a global scheme will evolve.
It is likely that ultimately we will have to rely on a wide range of policies, some more flexible than others, to achieve the end goal of avoiding dangerous climate change and the catastrophic economic losses that would certainly entail. But one thing is near certain. Carbon is now money and more and more of us are going to be counting it.
The Climate Group works to catalyse leadership among governments and companies to address the challenge of climate change and has teamed up with the World Economic Forum and the International Emissions Trading Association to develop a global Voluntary Carbon Standard for trade in emission reductions.