Carbonated commerce

01 Sep 2008Archived News Energetics in the News

Published: AFR Boss Magazine by Mike Hanley - Energetics Pty Ltd is mentioned as a specialist consultancy.

 

Environmentally savvy companies have a leg up in the emissions trading scheme. Here’s who’s getting in on the action as the new carbon economy takes shape

Carbon trading might be the most significant economic shift in Australian industry since we swapped shells for paper. Slowing the “big emission” culture of commerce will take all of government and industry’s might – the sort of all-out effort seen only once in a generation.

“Green” aspirations aside, carbon trading means the creation of an imaginary, parallel economy – swapping something that doesn’t exit (tones of carbon not emitted) – alongside the “real” economy of things and services.

It means putting a price on something that hasn’t ever been price-checked, generating carbon dollars where none previously existed. It also means fundamental shifts in strategic business models, accompanied by sweeping change-management challenges.

But before a single gram can be traded, an entire infrastructure has to come about – and a bevy of consultants, technicians, financiers, strategists plus a new breed of carbon professionals are all moving into what will become the next boom industry. Welcome to carbon town.

An emissions trading scheme means big changes, and where there is change there is no shortage of change-management gurus. Michael Porter, the doyen of strategy thinking, has in recent months turned his attention to the strategic implications of carbon costing. The impact on companies will be twofold, he says.

First, organizations will need to understand where the carbon costs in their operations lie and change their business models accordingly. Second, they will need to understand their exposure to the risks of climate change – shifting patterns of rainfall, more frequent and severe storms, reliability of energy and water supplies, infrastructure and prevalence of infectious diseases.

A company that has an intricately desgined just-in-time inventory system that is heavily reliant on cheap transport may find that this way of operating is no longer cost effective in an economy that charges for carbon.

Porter says that, in common with all change, the opportunity goes beyond the operational to the strategic: “Some firms, in the process of addressing climate change, will find opportunities to enhance or extend their competitive positioning by creating products (such as hybrid cars) that exploit climate-induced demand, by leading the restructuring of their industries to address climate issues more effectively, or by innovating in activities affected by climate change to produce a genuine competitive advantage.”

FOOTPRINT SIZE

Australian emissions are estimated to be about 450 million tones annually. Even at a relatively modest carbon price of $20 a tonne (the EU is pricing carbon at about $43 a tonne at the moment), that adds up to a starting point market of $9 billion worth of carbon, much of which will be traded, launching in just a few years. And then there are the international opportunities. With international trading possible under the Kyoto Protocol – using clean development mechanisms and joint initiatives – the potential market for carbon abatement is immense.

Before you can trade carbon you have to be able to measure it, but measuring emissions is a complex business. Internationally the debate is led by the Greenhouse Gas Protocol, which provides an accounting framework for many of the greenhouse gas measurement and reporting schemes around the world.

Since July 1 this year, corporations that emit more that 125 kilotonnes of CO2 equivalent a year (about 29,000 cars worth), or use or produce more than 5090 terrajoules of energy, must register and report using the National Greenhouse Accounting Factors and Guidelines, which provide methods for calculating greenhouse emissions from the energy, industrial process and waste sectors.

In Australia, the big accounting firms are developing significant practices around the art of measuring and auditing carbon. Many of these practices are business development initiatives, looking to profit from the huge amount of accouting and change business that will come their way in a few yeas. And there will be plenty of work to be had. According to Andrew Ptersen, a partner in the sustainability & climate change practice at PricewaterhouseCoopers in Sydney, the amount of change that has taken place since the introduction of the carbon trading system in Europe in 2005 is immense.

“There is a huge lack of preparedness in Australian industry around their strategies for a low-carbon economy,” says Petersen. “In Europe the winners were those who had assessed the impact and had taken abatement action, had mapped their carbon liabilities and got out of carbon-heavy activities, and who had started the process of switching before carbon was priced.”

DISCLOSE IT

Carbon is now a corporate governance issue and boards have been alerted that it is likely to be a disclosure issue. Information on the raw numbers – the amount of company carbon liabilities and assets – is in great demand from investors and other stakeholders.

Global institutional investors have banded together under the banner of the Carbon Disclosure Project, a not-for-profit that has collected emissions data from 3,000 companies this year, including more than 50 from Australian companies such as AMP, Foster’s and Wesfarmers.

The CDP has 385 signatory investors, including Merrill Lynch, Goldman Sachs, Morgan Stanley, AIG, Barclays and HSBC. Rupert Murdoch, Bill Clinton and Angela Merkel appear on the project’s homepage in video endorsements.

In Australia, the CDP is supported by the Investor Group on Climate Change, representing institutional investors with close to $500 billion in funds under management, including Colonial First State and Goldman Sachs JBWere. It pressures Australian companies to disclose their carbon liabilities and to prepare for a low-carbon world.

With all this disclosure, there is plenty of work generating and analyzing greenhouse data, and this has spawned a whole class of specialist consultancies. Companies such as CarbonView, Emissions Logic, Energetics, and Environmental Resources Management stand ready with their carbon meters and clipboards.

TRADING PLACES

The launch of a carbon trading system will require a completely new trading infrastructure – a trading platform, legal and settlement services, auditing and compliance requirements.

The government has set up and advisory panel that includes more than 25 companies offering consultancy, legal, systems, and carbon science services. Baker & MacKenzie, whose climate change practice is headed by Martijn Wilder, is there, as is Booz Allen Hamilton, engineers URS, and Access Economics.

Also there is Tradeslot, selected for its expertise in providing electronic markets for trading commodities and government assets. It also operates a carbon management system called CarbonNavigator. Chief executive Jesco d’Alquen and co-founder Anthony Du Preez have expertise in creating high-value private electronic markets. Tradeslot was recently selected to develop the federal Department of Climate Change’s auction platform for carbon trading. The firm has previously developed the auction platform for forestry licences, which yielded the Victorian government a major increment in its monetary yield.

D’Alquin says it will be critical for the federal government to get the trading platform right: “In getting one of these things to go live you need to think about the legal environment, contracts, offer and acceptance, settlement, and all the issues around that. Real deals are being done here, and their success will be determined by the effectiveness of regulation and how they reflect government objectives.”

GET OFFSET AND GO

The market for carbon offsets – financial instruments that represent reductions in greenhouse gases – may eventually be worth $1 trillion, but they have a long way to go. In 2006, according to the World Bank, $5.5 billion worth of carbon offsets were purchased to help companies comply with emissions reductions targets, but just $91 million was spent on personal offsetting – people buying certificates to offset their air travel and the like.

Nonetheless, with the slow but steady uptake of pollution reduction schemes across the globe the market is growing fast, and attracting its fair share of capital and attention from the worlds of industry, investment banking and venture capital. Most of the major banks have carbon arms, with an ever-proliferating array of carbon-linked financial instruments for trading and investment.

In February this year, UBS launched a proprietary “greenhouse index” that combines changes in the weather – a proxy for global warming – with actual emissions data.
Investors can bet that global warming will accelerate or decelerate, potentially getting rich as hurricanes blow through Florida and the U.S stymies carbon limits.

Macquarie Bank, too, has stepped into the carbon arena. It invests in renewable energy, advises companies on carbon abatement strategies, and is developing its own over-the-counter and exchange-traded carbon instruments with financial engineers and trading company Financial & Energy Exchange Group.

The global head of Macquarie’s Climate Change investment team, Oliver Yates, has garnered the expertise of scientist and former Australian of the Year Tim Flannery in designing rainforest projects for carbon offset and sequestration.

The broad idea is to save rainforests from deforestation – one project in Kalimantan in Indonesia, for instance, is protecting the habitat of 600 orangutans in order to sell the carbon offsets to Australian industry – or plant new forests to create carbon sinks, and with them, carbon credits that can be traded.

There is a real economy of projects underlying this frenzy of speculation, and plenty of investment muscle behind it. Climate Change Capital has more than $1.6 billion under management, financing emissions reductions schemes. Run by former Baker & Mackenzie Climate Change leader James Cameron, the firm provides investment-banking services for “investment opportunities created by the low-carbon economy”. Much of this will be spent in the alternative energy space, the source of what many are saying will be the next big investment boom.

Cameron also has a seat on the board of General Electric’s “ecomagination” subsidiary, the company’s $14-billion environmental services arm.

STRATEGIC CHANGE

Forest Reinhardt, Harvard Business School’s business and environment thinker, argues that the carbon economy can be more of an opportunity than a risk, but that it will take big thinking to take advantage. “Success in a carbon-constrained world will be determined not by short-term balance sheet effects or efficiency initiatives but by innovation, management acumen, and leadership,” he says. “The companies that have seized the big opportunities in changing economic landscapes have been those with bold visions of the future, not necessarily those whose hard assets seemed to position them best for success.”

It’s a message not lost on some of our leadership community at least. Steve Sargent, head of General Electric in Australia and New Zealand, told an American Chamber of Commerce lunch last month: “For us, we look at [climate change] as the biggest business opportunity of the century … We expect to see about $US23 billion to $US25 billion of revenue from solely environmentally friendly technologies by 2010.”

Among Australian companies targeting the emerging business opportunities globally are engineering and services firm WorleyParsons. Peter Meurs, who heads its EcoNomics division said recently: “We are at a tipping point here … Companies who make the first investments are going to do very well.”

With all this change, there are plenty of experts popping up to help you mind the message. According to BlogPulse, a monitoring tool developed by Neilsen, on July 24, a random day, 3.25 per cent of all blog posts contained the words “carbon economy”. Communications agencies are busily building businesses that track what is said about your company online and tailoring responses. Clearly, the carbon economy is flourishing.

 

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