Business heat on carbon trading

09 Jul 2009Archived News Energetics in the News

PUBLISHED: BRW Magazine, by Kath Walters - Jonathan Jutsen, Founder and Executive Director, Energetics Pty Ltd talks about the issues sustainability managers are facing with the new laws on greenhouse emissions.

Delays to the implementation of carbon pollution laws will make it harder to force companies to take action. This uncertainty is only part of the problem.

Sustainability managers have been tearing their hair out trying to persuade chief executives to focus on new laws on greenhouse emissions, but the global financial crisis has taken priority, consultants say.

“Sustainability managers say they have been trying to tell top management to do something, and have been told to sort it out themselves,” the executive director of consulting firm Energetics, Jonathan Jutsen, says.

Now these managers face a bigger hurdle. The year-long delay to the start date of the emissions trading scheme – the Carbon Pollution Reduction Scheme – until July 1, 2011, will make the case for action harder to press. “A delay takes away a sense of urgency, but most companies recognise that it is on the way,” Jutsen says.

The lack of leadership will come at a cost. Many companies are already so far behind schedule in complying with new rules that they will need a lot of help – and will have to spend a lot of money – to catch up.

For example, there has been no change to the requirements for companies to report emissions under the existing National Greenhouse and Energy Reporting Act 2007, which applies penalties directly to chief executives. The first reporting date falls within months, on October 31 this year.

A survey of 151 Australian businesses by accounting firm PricewaterhouseCoopers, Carbon Ready … Or Not, found that 22.5 per cent of companies have done nothing to prepare and 15.2 per cent have no idea whether the NGER Act applies to their companies. Only 23.8 per cent say they are comprehensively prepared. “The chief executives of half our respondents could not answer the survey questions themselves,” the report notes.

Uncertainty about the rules is part of the problem. The Carbon Pollution Reduction Scheme legislation is currently stuck in the Senate, which deferred its vote on the CPRS legislative package until August. The original start date proposed for the CPRS, July 1 next year, has been pushed back, to July 1, 2011. In addition, the federal government has set a fixed price of a lower-than-expected $10 for each carbon credit that it sells, which can be freely traded thereafter.

The Senate may not pass the Bill, but business doesn’t care in terms of its preparations. Companies expect a scheme and are beginning, slowly, to build the framework of the carbon economy, PwC’s sustainability and climate change partner, Andrew Petersen, says.

There is also good news in the delay: more time to prepare, more time to implement, more time to cut emissions rather than trade in carbon credits and more time to learn how to manage the rating system while the carbon credit price is fixed, an emissions trading specialist at consulting firm Booz & Company, Rob Fowler, says.

Leaders need to get up to speed on two separate legislative obligations, the National Greenhouse and Energy Reporting Act 2007 and the yet-to-be-finalised Carbon Pollution Reduction Scheme.

The first reporting period under the NGER Act ended on June 30. This means that companies which are required to report must have recorded all the relevant data during the 2008-09 financial year and must report it by October 31.

Plenty of companies will have no data or will have missed important parts. “It is not just energy emissions,” Jutsen says. “There are a whole range of other sources of greenhouse gases: refrigerants, waste dumps and carbon dioxide and methane emissions.”

If leaders find themselves unable to comply, Fowler advises notifying the Department of Climate Change immediately, then getting the right advice to find solutions.

From July 1, many more companies must report under the NGER Act. Over the first four years of the Act, the threshold of emissions or energy used will fall, capturing more companies each year. The Department of Climate Change website has a self-assessment calculator for all those who have to report under the Act, which is up to date for the latest threshold data.

Companies that are NGER compliant are reaping an unexpected bonus, Jutsen says, by scrutinizing their energy bills more carefully. “We are implementing information management systems for 20 public companies within the top 200 [by market capitalization on the Australian Securities Exchange], he says. “On average, the cost savings from processing and verifying energy bills had been 1.2 per cent, which for these companies is double the whole cost of the information management systems.” The mistakes uncovered include continued billing from former sites, double billing, and billing from incorrect information.

Preparing for the Carbon Pollution Reduction Scheme is a more difficult task since its final form has yet to be decided. As soon as the current legislation is passed – if it is – a new asset class, forestry offsets, will be created, Petersen says.

Government auctions of carbon credits will start before 1 July 2011, he says, but the actual date is not yet known.

However, Fowler says the delays generally give companies a better change to carefully develop their strategy.

The first step in solving the compliance problem facing companies is to determine whether to manage the CPRS in-house or to outsource the whole problem. “How will they split up their activities between internal abatement – cutting their emissions if possible – primary or secondary auctions, or outsourcing their compliance?” Fowler asks.

The more greenhouse gases that companies covered by the CPRS emit, the greater their obligations. Companies covered by CPRS are those with attributable emissions above a government-set threshold. For those with the biggest obligations, hiring, training and resourcing in-house teams make sense.

Companies with lower obligations can outsource their obligations through compliance products that banks and other financial services are developing to meet this market need. “I will probably go to my own bank, which already understands my risk profile, and ask them to write me a compliance product,” Fowler says. “For a certain price, fixed or indexed, it will guarantee that on a certain day, just before I have to comply, I receive all the necessary documentation.” These products are available in Europe but not in Australia yet.

A strategy is useless without the capability to implement it, which is the next challenge facing leaders. This means understanding the CPRS auction process, the international market and the technical side of reducing internal emissions, Fowler says.

The PwC report notes that “carbon risk is becoming part of the investment lexicon and rating agencies and banks are demanding companies provide data on their greenhouse gas emissions”.

The global carbon market was worth an estimated $US118 billion in 2008, up from $US31 billion in 2006, a report by the World Economic Forum at the Copenhagen climate initiative in January states.

Companies need to examine the “value implications” of this change in depth, Fowler says. For big companies that manage the CPRS in-house, questions arise such as should they sell that capability to other companies, what are the implications for marketing, branding, supply chain and competition, and what new products are in development to meet new markets.

Petersen says leaders must practice telling their stakeholders the story of value to their companies. Starting to report actual emissions is the first step.

Cost of the crunch
The impact of the global financial crisis on preparations for the Carbon Pollution Reduction Scheme

01 Making changes to processes is easier when companies have downtime to implement efficiencies and are not running at 120 per cent.

02 Essential technical skills have been in short supply; companies are now more likely to find they need expertise.

03 The drive for cost savings involves actions identical to the drive for emissions reductions.

04 The capital needed to make changes and achieve savings is scarce, although stimulus packages have helped some companies.

Source: Booz & Company

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