Implications for business as pressure grows on Australia to pursue more aggressive emissions reduction targets

01 May 2015Archived News Helen Wetherell Climate Change Matters

With the repeal of the carbon tax in 2014, many may have believed that carbon has diminished as a risk management issue. Energetics argues that Australian businesses must assess the impact of global and domestic developments as they unfold over 2015, understand the possible impacts, and determine the most appropriate course of action in order to manage their shifting risk profile. 

Scarcely a day passes without media commentary discussing the increasing pressure on the Australian government to do more to address climate change.  Up until this year, advocacy for climate action has largely come from environmental and scientific groups, investor organisations and industry associations. However in 2015 activism is strengthening as nations declare targets and commitments ahead of the December UN COP21 negotiations in Paris. 

Calls are being made for Australia to drive deeper emissions cuts with stronger targets, policies and programs. 

2015 and the road to a new global climate change agreement

Widely referred to as ‘the road to Paris’, the 21st meeting of the Council of Parties (COP) to the UNFCCC, aims to establish a new global climate change agreement.  The 34 participating countries are required to publish their INDCs (Intended Nationally Determined Commitments) before assembling for December’s negotiations.  China and the US have already published their INDCs, and together with other nation states such as the EU and Brazil, have directly challenged the Australian government through the tabling of a range of questions about the efficacy of Australia’s current policies, the perceived weakness of the national 2020 target and concerns about targets beyond 20201.   China noted Australia's industrial emissions increased by more than 30 per cent between 1990 and this decade, and it was relying on accounting rules that reflected changes in emissions from the land to give it a chance to meet its targets2.  Australia has not yet supplied answers to the questions. 

Competing realities? Major trading partners announce climate action commitments

The questions posed by nations such as the US and China, follow the publishing of those countries own INDCs, which point to more aggressive climate change action.  Commitments include:

  • China will cap CO2-e emissions by 2030 and increase the proportion of energy consumed from non-fossil fuel sources to 20% over the same period.  It is also introducing carbon pricing nationally by 20163.

  • US will reduce emissions by 26-28% below 2005 levels by 2025, with a longer term objective of reducing emissions by 80% by 2050.

  • EU has a target to reduce greenhouse gas emissions by 40% by 2030 (relative to 1990 levels)4.

The influence of the two largest economic powers on the political will for change should not be underestimated. Including the European Union, post 2020 targets representing 55% of the current global emissions profile have been announced.

Pressure from within

In response to the stated intentions of these large nation states, Australia’s Climate Change Authority, which provides “independent expert advice on Australian Government climate change mitigation initiatives5”, issued a report recommending a 30% emissions reduction target below 2000 levels by 2025.  Such a target is deemed appropriate if Australia wishes to be on an equal footing with other economies. The report also states that such a target pave the way for cuts of between 40% and 60% below 2000 levels by 20306.

This recent statement by the CCA follows a number of major government policy announcements, all occurring within March and April:

  • The release of the Energy White Paper

  • The development of a draft design for the Safeguard Mechanism

  • An issues paper distributed by the Department of Prime Minister and Cabinet’s taskforce responsible for the review of Australia’s emissions reduction targets beyond 2020.  The paper forms part of a public consultation process.

These three announcements have been criticised by a range of commentators.  The Energy White Paper made little more than passing reference to climate change, while the Safeguard Mechanism design consultation paper did not discuss any future role for driving emissions reductions to achieve national targets, a function it has the potential to fulfil.  The fact that the review of targets post 2020 has been given to the group within the DP&MC, rather than the CCA, which operates independently of government, is of itself raised as a point of concern. 

There has also been loud opposition to the government’s intended cut to the Renewable Energy Target (RET), and the delay in making a final decision. 

Aside from climate change advocacy groups we have also seen concerns raised by industry groups such as the Energy Supply Association of Australia which, in response to the release of the Energy White Paper stated, “The impact of climate change policy is integral to shaping the strategic direction and bankability of the industry.  Energy use is the largest single contributor to greenhouse gas emissions in Australia.  Attempts to reduce our carbon footprint at least cost have been hindered by the proliferation and constant turnover of government policies.  Changes to climate policy have already had a material impact on the energy industry,” CEO Matthew Warren said.  He went on “from stop-start carbon pricing to home insulation to failing renewable energy policy. Now is not the time to ignore the problem.7"

Energy giant AGL8, in its new climate policy says it will close all its existing coal-fired power stations by 2050 and apply a carbon price to every capital expenditure decision on its electricity generation assets. It will also continue to invest in new renewable and near-zero emission technologies.

In an appendix that deals with public policy, AGL says "it is important that governments set both binding and aspirational medium and long-term emission reduction targets". The appendix says AGL supports "the use of both regulatory and market-based policy mechanisms".

Following the money

The UN has backed the worldwide trend towards fossil fuel divestment.  In a statement made in March, the UNFCCC supported the efforts of around 180 organisations9 to divest.   These organisations span universities and colleges, city councils, religious institutions, foundations and high profile institutions such as the Rockefeller Foundation, medical associations and environment funds.

Energetics’ Senior Consultant Emma Fagan recently wrote a paper titled “Integrating Climate Change into Investment Decision Making”.  In that paper she discussed the global ‘Divest Invest’ movement which she describes as “forcing institutional investors to not only consider the risks associated with their current asset portfolio, but also to consider the appropriateness of their broader investment risk management approach”.  

She further explains, “Historically climate change has not been considered as a separate investment risk, it has been rolled into the management of any Environment, Social, Governance (ESG) considerations. Management of ESG risks is established practice across most financial institutions – however there is increasing pressure on investors to consider climate change as a separate and distinct risk factor”.    

The importance of accurate data, transparent reporting and the disclosure of carbon risks

Just last week BP faced shareholders at their Annual General Meeting in London who overwhelmingly supported a special resolution requiring BP to provide more information into the impact on assets under a low carbon future.  Last week also saw an Australian superannuation fund join 62 other institutional investors (with nearly US$2 trillion under management) in co-signing a letter to the US Securities and Exchange Commission (SEC) requesting investigation of ExxonMobil, Chevron, Canadian Natural Resources and other oil and gas companies for a perceived failure to properly disclosure ‘material carbon risks'10.

How should business respond?

The best risk management approach is preparedness and transparency.

Be prepared

Assess and consider:

  • The financial and non-financial climate change-related risks that may face your asset portfolio.

  • Undertaking peer benchmarking to determine how your company performs against your direct competitors.

  • Developing a climate change management strategy and  corporate position which addresses identified risks.

  • Ensure that you have an associated communications and response plan to ensure consistency in public messaging. It will also streamline the reporting processes for both voluntary and involuntary schemes.

Be transparent

In addition to developing a dedicated climate change policy, there are a number of existing investor confidence programs that can be used to boost the sustainability profile of your company.  Again, there are a number of responses that your business could consider:

  • Benchmarking will assist in identifying programs that will have the greatest impact in building a sustainable, proactive brand. Engage with voluntary reporting schemes and programs (such as CDP, DJSI etc.)

  • Prepare a communication and response plan to engage and inform stakeholders, including via your sustainability/annual report.

  • Implement changes to internal processes (such as the processes for evaluating investment decisions) to ensure sustainability and climate change risks are appropriately managed.

Foonotes

[1] A compilation of questions to – Australia, exported 1 April 2015 by the UNITED NATIONS FRAMEWORK CONVENTION ON CLIMATE CHANGE, http://unfccc.int/files/focus/mitigation/the_multilateral_assessment_process_under_the_iar/application/pdf/sbi42_australia_questions_web.pdf.

[2] Morton, A and Arup, T: “China and other big emitters challenge Australia over its climate change policies”, SMH, 20 April 2015, http://www.smh.com.au/federal-politics/political-news/china-and-other-big-emitters-challenge-australia-over-its-climate-change-policies-20150420-1mnqt3.html

[3] Parkinson, G: “China plans $65bn carbon market – at around $18/tonne”, ReNew Economy, 12 September 2014, http://reneweconomy.com.au/2014/china-plans-65bn-carbon-market-at-around-18tonne-48911.

[4] Cook, S: “US, China and the Road to Paris”, Energetics, 22 December, 2014, http://www.energetics.com.au/insights/latest-news/climate-change-matters/us,-china-and-the-road-to-paris.

[5] Climate Change Authority: http://www.climatechangeauthority.gov.au/.

[6] CE Daily. “Climate Authority calls for 30% cut by 2025”, 22 April 2015, http://www.cedaily.com.au/nl06_news_selected.php?act=2&nav=10&selkey=52890&utm_source=instant+email&utm_medium=email&utm_campaign=Instant+Email+Article+Link.

[7] Media release, ESAA: “White Paper Fails to Address Climate Change Policy”, 8 April 2015, https://www.esaa.com.au/media/white_paper_fails_to_address_climate_change_policy.

[8] CE Daily:  “AGL calls for binding emissions reduction targets”, 17 April 2015, http://www.cedaily.com.au/nl06_news_selected.php?act=2&nav=10&selkey=52882&utm_source=instant+email&utm_medium=email&utm_campaign=Instant+Email+Article+Link.

[9] Fossil free, divest from fossil fuels: http://gofossilfree.org/commitments/.

[10] CE Daily: “Companies under new pressure to disclose carbon risks”, 20 April 2015, http://www.cedaily.com.au/nl06_news_selected.php?act=2&nav=10&selkey=52885&utm_source=instant+email&utm_medium=email&utm_campaign=Instant+Email+Article+Link

 

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