The Carbon Rush

02 Jul 2007Archived News Energetics in the News

PUBLISHED: Fast Thinking Magazine - By Felicity Carter - Cheryl Bowler, Principal Consultant - Carbon Markets, Energetics Pty Ltd talks about early carbon trading action in Australia's State-based schemes.


Is there gold in them there clouds? Felicity Carter tries to find out if every cloud – even a carbon one – has a silver lining.

Carbon trading, carbon offsets, carbon entrepreneurs. Whether you’re a climate change sceptic or not, is now irrelevant, because anxiety about carbon emissions is beginning to change the way business is done.

But the growing carbon economy is yet to be underpinned by firm international frameworks and standards, making it difficult to predict exactly how the sector will evolve. So, given that the thinking about climate change and its consequences changes from week to week, what can business and investors know for certain? Fast Thinking went looking for answers.

Carbon trading

To say that carbon trading is in its infancy would be an exaggeration. It’s still gestating, in Australia at least, though the worldwide value of carbon trading in 2006 hit US$25 billion. It’s unlikely there will be a national trading scheme in Australia before 2011, because the State and Federal governments can’t agree on reporting standards. But that doesn’t mean carbon trading isn’t coming.

“There is action going on already under the current State-based schemes, as well as in the carbon markets,” says Cheryl Bowler, principal consultant for Energetics. She points to schemes already operating like the NSW Greenhouse Gas Reduction Scheme (GGAS), which sets reduction targets for electricity retailers. “What’s likely to happen is the price of electricity will go up when there’s a carbon price signal, so planning in advance is a good thing.”

In some ways, some aspects of carbon management will be easier to plan without a national trading scheme in place yet, because it gives business and government time to learn from other people’s mistakes. The EU, for example, adopted a “cap and trade” system, in which each member state was given a cap that limited emissions, plus a number of credits representing the right to emit a specific amount of carbon. The price of carbon permits soon collapsed.

“That’s purely a result of supply outstripping demand for credits, because the EU set their caps too low,” says Bowler. “The market was in surplus.”

But according to a Washington Post report of 9 April, the trading system has had other unintended consequences, like a sharp increase in EU electricity prices – and windfall profits for utilities. And some manufacturers have dropped local suppliers, choosing to import cheaper materials from countries that don’t have the costs of greenhouse legislation compliance.

Other key considerations will be how to deal with imports from countries that don’t price carbon, who calculate carbon inputs differently, or who flat out lie about carbon content. But this doesn’t mean companies should wait for the government to get its act together, because another unintended consequence of tackling carbon can be a leap in profitability, according to Alan Tate from Cambiar, a climate change strategy consultancy.

“BP, who’s one of our clients, announced it was going to reduce carbon emissions by something like 10 per cent over a period of time,” he says.

“Not only did it meet its target years before its self-imposed deadline, but in doing so it saved $600 million.” He repeats the figure again for emphasis. “So often what we’re talking about in reducing emissions is modernizing plant equipment. What you often find is that it’s much cheaper to run.”

Carbon barriers

Another reason not to be complacent is that companies who don’t manage their carbon risk could face international trade barriers if their products don’t meet local carbon standards.

“The most advanced country in the world on climate change is the United Kingdom where the government is devolving responsibility on carbon down to individual,” says Tate. “Soon every British person will not only have a credit card, they’ll have a carbon card which will entitle them to emit a certain amount of carbon per year.”

In fact that’s not certain, as the carbon card is the subject of a feasibility study commissioned by Britain’s Environment Secretary David Milibrand, who has suggested it might come into effect around 2013. There are also formidable implementation obstacles to overcome, not least of which is working out how such a card could be administered. But there are signs that carbon barriers are being erected: Tesco, the UK supermarket chain, announce in January that it would declare carbon content on product labels. This could strike a serious blow to Australia’s agricultural sector, particularly with regards to products like wine, because of the carbon produced by shipping.

“One of the steps the wine industry could take, which the coal industry is contemplating, is seek to make your product carbon neutral,” says Tate. “You offset any emissions that are created, so you can calculate the amount of greenhouse emissions when you transport the bottle of wine from Australia to the UK,”

Making money from offsets

A carbon offset reduces or neutralizes carbon emissions by generating carbon credits. Planting trees can soak up carbon, or investing in renewable energies can earn carbon credits. The cynical view is that carbon offsets are the modern equivalent of buying indulgences, letting you salve your conscience without changing your lifestyle. But it’s also a potential money-spinner, because you can sell your surplus of carbon credits to participants in the NSW Greenhouse Gas Abatement Scheme.

The companies who offer carbon services are certainly flourishing. Take CO2 Australia, now listed on the stock exchange, which offers a mallee eucalypt tree planting service. You or your company can calculate your carbon emissions using CO2’s handy website live emissions calculator, and then “dial up the level of offsets that you want,” explains Andrew Grant, managing director.

Which sounds simple enough. Except what’s to stop CO2 or a similar company from selling the same lot of trees to multiple people?

“Our projects are accredited in either one of two ways,” says Grant. “One is under the NSW Greenhouse Gas Abatement Scheme, where you’ve got government approval and the certificates are audited by government. We’re also accredited under the Federal government’s scheme. They’re independently audited.”

But how many mallees can they plant? Australia, after all, doesn’t have an endless supply of arable land and much of what’s available is used for food crops.

“We’ve cleared eight million hectares since settlement,” says Grant. “It would take a long time to exhaust that.”

And what of the evidence that it’s tropical rainforests, rather than other types of forest, that are needed to offset global warming?

“All trees absorb carbon dioxide,” says Angela Tillier, spokeswoman for WA’s Men of Trees. “And if we can plant enough in time we could make marginal land more productive.”

She agrees with Grant that Australia has plenty of land for tree planting, without impinging on croplands. “Native oil mallees help farmers with land because they help reduce wind and soil erosion. If they’re planted at optimum widths, farm machinery can go between the rows quite easily, so you’re not planting out a whole paddock. The shelter belts often increase the land productivity.”

Her organization is also concerned with biodiversity, and so plants different tree species, depending on what naturally exist in the area. “There are multiple environmental benefits, because the trees will help with other issues like soil erosion, salinity and habitats for local species,” she says.

Grant says that not only is the offset business growing rapidly, it’s potentially the most exciting area of the economy. “It has the same characteristics of the tremendous communications breakthroughs. It’s a sustainability revolution.”

Might we see a carbon bubble in the future, then, just as we did with the first technology boom?

“I can’t see any potential for an overreaction in terms of emission reductions,” he says. “People are agitating for a 30 per cent reduction in emissions in 2020, but even given all the initiatives we’ve created to date, it’s still resulted in a net emissions growth as a nation. We’ve only just put our toe in the water.”

Profiting from catastrophe

If climate change is even fractionally as dramatic as predicted, the balance sheets will need to be rebalanced, a fact that’s not gone unnoticed. Insurance companies are now wondering whether they should insure buildings along vulnerable coasts. Coal companies worry about where they’ll store emissions. And pharmaceutical companies are secretly hoping for a boom in tropical diseases.

The world’s largest banking organization, Citigroup (now called Citi), has analysed the likely impact of climate change on Australia’s top 100 companies. Its 2006 report, Climate Change and the ASX 100, identifies potential winners and losers. Elaine Prior, Citi director and senior analyst and one of the report’s authors, says climate change could have two important impacts on companies. One is the physical consequence of doing business in a change climate and the other is the cost of carbon emitted by the company as part of its business.

“Although a number of companies are already taking carbon price into account, it’s hard to estimate what sort of carbon price one should consider,” says Prior. “But I was surprised at how much companies were already doing this. I think because it’s in the newspapers every day.”

According to the report, carbon winners are those companies engaged in alternative energy, sustainable property, recycling, and innovative financial institutions. These include Investa Property, Origin Energy and Lend Lease.

“Potential winners are property companies that have the opportunity to benefit from energy savings initiatives,” explains Prior. “Another area is recycling, because that tends to be less energy intensive than primary production. Some of the financial institutions will also find opportunities to participate in carbon credits.”

The tactfully-named “at risk” companies, on the other hand, include such blue chip companies as Woodside, Zinifex, Caltex and Rio Tinto. “I just want to put some context around ‘at risk’,” says Prior. “They’re companies I see as potentially having challenges to overcome. It doesn’t mean they’re not dealing with the issue, but it means the risk is an inherent part of their business.”

So resource and energy companies – particularly those associated with coal – that produce emissions as part of their business, are necessarily at risk, as are companies that need water for agricultural inputs or industrial use.

“Although the droughts may be cyclical, they’re still going to produce a growing focus on water efficiency,” says Prior. “Companies with exposure to lower lying tropical areas are at risk, because of storm surges and cyclone damage. Another potential is for insurers to get caught out by catastrophes.”

So how is an investor to determine the sort of drag that carbon will put on a company? Prior advises looking at company sustainability reports, where carbon information should be available. “It’s something that companies will be disclosing more now that it looks like it’s a tangible factor that poses risks or opportunities.”

Prior says that responses to climate change have the potential to grow the burgeoning carbon sector. “Renewable energy and carbon offsets would be growth areas and there would be a lot of different business opportunities for consulting.”

Cambiar’s Alan Tate agrees. “Australia has some enormous advantages,” he says. “We’ve got a highly educated population with a history of innovation, plus great potential in geothermal and solar energy. These are great advantages.”

So it’s true. There is money in dirt. Or, more specifically, in dirty air.

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