Can carbon compliance deliver sustainability

01 Dec 2008Archived News Energetics in the News

By Mary Stewart, Tanya Fiedler and David Mitchell. In a flurry of activity, companies and Governments are preparing for the launch of Australias first emissions trading market the Carbon Pollution Reduction Scheme (CPRS).

 

Will compliance within a carbon market limit companies from building a true sustainability vision?

In a flurry of activity, companies and Governments are preparing for the launch of Australia’s first emissions trading market – the Carbon Pollution Reduction Scheme (CPRS). Though this activity is an important step to becoming a sustainable company, as the costs of carbon pollution are accounted for and factored into decision-making, it is easy for many companies to lose sight of the desired end-game. Similarly, policy makers can also be distracted from ensuring a final design of complex and tradeable permit schemes can deliver on its policy goals.

There is no doubt that the CPRS is a major milestone for carbon regulation. However, there is cause for concern about developments in the policy process, including the impact that the final design of the CPRS will have, and the focus in corporate Australia on the details of who wins and who loses from the CPRS. The focus on minutiae of the market and how to avoid its impact may be drawing attention away from the broader sustainability transition that a modern company needs to make.

Yet this is still an exciting time for Australia’s climate change response and, if companies engage with the CPRS in a far-sighted and proactive manner, Australia has the potential to deliver the solutions which the rest of the world is looking for. The CPRS has the potential to be the most broad-based and comprehensive trading scheme to be introduced to date. If the CPRS policy makes it through the rocky period of opposition and concern to become an effective scheme, Australia will be in the position to take its place at the forefront of industrial development globally. Companies that take advantage of this change, and work out how to make it work for them, will be world leaders.

Challenges in designing a carbon pollution reduction scheme

It is important to acknowledge from the outset that designing an effective tradeable permit scheme is not a simple exercise. Governments around the world are struggling with similar design and implementation challenges as Australia. In the Inter-governmental Panel on Climate Change’s major 2006 review of climate mitigation policies, it noted that tradeable permit schemes are inherently difficult to design and keep on track in terms of achieving stated policy outcomes.

The ultimate test for the CPRS is what role it can play in turning around Australia’s spiralling energy consumption, currently growing at 2% per year every year. Before the CPRS is in effect, Australia’s energy consumption will have increased by 6% relative to today.
There are three major challenges for the design of the CPRS and the extent to which it can have an impact on Australia’s growing energy consumption, and related emissions.

  • The target that is set for the scheme has a direct impact on the effectiveness of the scheme as an emission reduction policy – if the target is not ambitious there will be an oversupply of permits and it will not drive change.
  • The level of any price cap set is important because the CPRS should send a price signal that changes investments and behaviour – a price cap that is set too low will act like a carbon tax that companies just pay to pollute above the scheme’s target.
  • The final coverage of the scheme is broad in ambition, but there is no guarantee that this will come to fruition – some analyses suggest that only around 40% of our current national emissions will receive the full price signal from the CPRS.

Despite the concerns expressed about the impact of the CPRS on business costs, it is important to acknowledge that the price signal sent may not be one that many businesses see and then act on. For example if the price of carbon reaches $30 a tonne this would lead to a 30% increase in the price of electricity. This is certainly significant but many companies have seen this kind of electricity price volatility in the last few years, and it has not led to a rush to become more energy efficient. For the majority of Australian businesses, a 30% increase in the price of electricity will see energy costs, which are currently 6% of total business costs, rise to 7-8% of total business costs.

Responses to the design of the CPRS

Responses to the development and design of the scheme have been numerous and variable. Hundreds of submissions have been made by organisations in response to the Government’s Green Paper. Much of this interest can be attributed to the uncertainty associated with the development of the scheme. Until the scheme is finalised it is easy to focus on the elements which have not been confirmed, as opposed to determining how to tackle what needs to be done.

Recently released Treasury modelling indicates that the total effect of the CPRS on the Australian economy will be limited. In reviewing the responses of different parties to the development of the scheme it is easy to recognise the following typical responses to change:

  • Stage One – Deny that change will happen;
  • Stage Two – Ignore the call for change;
  • Stage Three – Lobby to protect current positions;
  • Stage Four – Pay lip service to the need for change;
  • Stage Five – Work out how to game the system, but just keep doing what we do now;
  • Stage Six – Get angry and fight the change;
  • Stage Seven – Accept the inevitable;
  • Stage Eight – Embrace the vision and revel in the opportunities which it represents; and
  • Stage Nine – Can’t understand what all the fuss was about it is just the way that we do business.

We can see all of these stages in Australia at present, with an emphasis on the third and fifth stages. Of some concern is that people are looking at short term compliance as opposed to longer term sustainable outcomes and business opportunities.

Of greater concern are those companies and industries which are caught at the fifth stage, working out how to undermine the system. The European emissions trading experience showed how important robust data is to the credibility and maintenance of a tradeable permit market. But the data is what very few people track and even less understand.

It is clear and concerning that it is possible to play with the National Greenhouse and Energy Reporting Scheme (NGERS) rules that will underpin the data for the CPRS. The NGERS rules require each liable party to define their facilities and what they have control over. It may be possible to play with this process of definition and data collection to limit exposure to the CPRS. Questions that may be asked are – is it possible to demonstrate that there are no facilities over which the company has operational control? Should the company inflate the uncertainty of its data in its response to NGERS and gain more free permits?

Is compliance enough for the future?

It must be recognised that the environment is the fundamental basis for life on earth and substantial degradation of that environment will affect quality of life. Yet the world’s current financial system does not allow us to adequately price environmental degradation or damage. This has led to the continued assumption that humans can continue to degrade the environment as there is no explicit cost.

Thought the CPRS will put a price on carbon, the typical business response to this is to focus on the reduction of CO2-e emissions, and perhaps an even tighter focus on energy consumption only. While reducing carbon emissions is clearly important to avoid significant damage to the environment, focussing only on carbon emissions has the potential to obscure broader sustainability aspects.

This narrow focus of environmental effort is not adequate. If due concern is not paid to broader sustainability considerations the potential exposure of an organisation to risk is significantly increased. For example, considering the supply chain and knowing whether there are potential civil rights abuses, access to water and other exposure risks is important. Companies need to be measured in their response to the CPRS to ensure that they are driving towards a sustainable outcome, and not just a carbon sensitive one.

The objective of the CPRS is to deliver continuous emission cuts to meet Australia’s target of 60% reduction by 2050. The mechanism being employed is that of increasing costs and therefore it is natural that many companies baulk at this new policy. However, the CPRS also allows for an alternative operating environment in which different avenues are opened to those companies willing to look beyond a compliance approach. It would be better to take a more strategic approach and determine how the CPRS might add value, as opposed to only being a cost impost.

A vision for the future

Successful companies will be those that focus on outcomes and not outputs, they will be the companies that aim to deliver a service which society values, as opposed to a product which might change value over time. This is analogous to how the banks engaged with the internet, using the new technology to fundamentally change how they engaged with their customers.

To begin this change, a company must view its product differently. A mining company should not be one which is good at digging up resources, but should be good at supplying the raw materials desired by society. As society changes what it sees as valuable the mining company needs to change with them. Alternatively a mining company could see itself as being very good at managing large amounts of non-homogenous materials, and become a waste management company as well.

A coal mining company could see itself as an energy steward in a carbon constrained world; a car company could redesign itself as a specialist in individualised transport; and a company which sells washing machines could view itself as the provider of clean clothes.
By focussing on the service which the company delivers, as opposed to the products which it sells, the company will view its position in a future carbon constrained economy, and a globally sustainable environment and society, differently.

The carbon constrained future also offers new business opportunities. There are enormous opportunities for companies repairing degraded environments and abating carbon, and for companies that generate power from renewable resources.

A carbon constrained future does not need to be an energy constrained future. As technologies progress, energy will be decoupled from carbon emissions. Lower impact energy will mean that many environmental problems can be solved as it requires an investment of energy to clean water, remediate soils and clean air. There will be financial incentives to repair the environment.

The future is challenging because it has not happened yet, it can be changed and moulded. Companies that look to the future with a clear understanding of where they are starting from, and a desire to change, will be able to make a difference and deliver considerable financial outcomes. A sustainable company will pay attention to a carbon constrained economy, but will not be limited to this environmental aspect only. It will create a vision of itself and where it wants to be in the future and move towards this with purpose.

Dr Mary Stewart, Principal Consultant, Sustainability
Mary is a chemical engineer who has worked in decision making for sustainable development for more than ten years. Before joining Energetics in 2005 she was a research fellow in the Department of Chemical Engineering at the University of Sydney.

Mary has worked as both Principal Consultant to the mining industry, and Principal Consultant Sustainability. Mary is a recognised international expert on Life Cycle Assessment as it applies to resources and is an expert in developing carbon footprints.

Tanya Fiedler, Senior Consultant
Tanya consults primarily in the area of Carbon Markets and Strategy. Tanya recently completed a Masters in Environmental Management at UNSW, receiving the 2007 EIANZ Prize. Central to her Masters was research carried out in partnership with the Centre for Energy and Environmental Markets on carbon market design. Tanya provides advice on the liabilities, risks and opportunities arising from involvement in existing and emerging programs such as the National Greenhouse and Energy Reporting Act, 2007, the Australian Emissions Trading Scheme, the European Emissions Trading Scheme, the Kyoto Protocol and voluntary schemes and standards. Central to this work is the development of greenhouse gas footprints and inventories.

David Mitchell, Senior Consultant
David has an extensive background in strategy, entrepreneurship, early stage commercialisation and innovation. He has over 20 years experience in biotechnology and personal experience of founding new ventures both in Australia and Switzerland. Most recently, David has developed strategic technology plans in CSIRO, worked to identify spin-out opportunities and managed a substantial research program in bioinformatics. David holds a PhD and a Master of Entrepreneurship and Innovation.

 

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