A Climate of Uncertainty

Friday, October 1, 2010 - 08:48

Despite the current impasse over the way forward, climate change policy and related national legislation remain vital matters for organisations. The link between the decisions that businesses must consider, and the considerations of ongoing emissions reporting, remains strong.

In this article, Alexander Stathakis, Senior Consultant at Carbon House Pty Ltd, and Dr Martina Linnenluecke, lecturer and climate change researcher at UQ Business School at the University of Queensland, discuss how Australian climate policy developments are affecting business. They consider how the task of reducing greenhouse gas emissions presents businesses with both challenges and opportunities, and offer some ways for them to respond.

Research at UQ Business School shows that there is a growing expectation among Australian organisations that the Federal Government will introduce policies aimed at reducing greenhouse gas (GHG) emissions, thus reducing uncertainties for businesses.

Whatever your position, climate change is no longer a niche environmental concern; it has become a central issue for domestic economic and environmental policy.

Overseas, many governments have already put stringent climate policies in place. Leading the way is the EU, arguing that early and drastic cuts in GHG emissions are required to avoid unmitigated climate change. The EU is well on the way to achieving its target reductions of at least 20 per cent by 2020. In 2008, the EU's emissions stood 11.3 per cent below 1990 levels.

In Australia, climate change and reporting requirements have been surrounded by much uncertainty. Currently, there is a delay in the introduction of a Carbon Pollution Reduction Scheme (CPRS) until after the Kyoto-commitment period finishes in 2012.

In the absence of a CPRS, companies still need to comply with several national and state-based emission and energy consumption reporting requirements, even if these do not necessarily provide a strong policy signal or incentives for emission reductions.

Australian policy and corporate responses

To date, the most prominent international effort to reduce GHG emissions has been the Kyoto Protocol, which established specific legally binding national GHG reduction targets for industrialised countries.

Participating industrialised countries are required to meet GHG emissions-reduction targets by 2012. If a country fails to do so, the United Nations Framework Convention on Climate Change Enforcement branch will require it to make up the difference between its emissions and its assigned amount, plus an additional deduction of 30 per cent, and suspend the eligibility to make transfers under emissions trading.

As companies are major contributors to global GHG emissions, they will have to play a significant role in helping to achieve the protocol's reduction targets.

While Australia has ratified the Kyoto Protocol and made pledges to reduce emissions in the not legally-binding Copenhagen Accord, there is uncertainty around what instruments are to be used to actually achieve the necessary emission reductions, and what implications these instruments have for various business sectors.

There has been much debate around the CPRS, which was shelved by the Federal Government until 2013 due to lack of support in the Senate. It is understandable that the debate has largely focused on who should or will bear the economic burden. However, it is critical that business understands how climate change will affect both their own companies and the business environment in which they operate.

Climate change seems generally to be accepted as an important strategic issue for organisations. However, the absence of a clear policy signal in the form of economic incentives to achieve emission reductions has led to a 'wait-and-see' approach by many Australian companies. This means that carbon management and reporting are often not built into long-term decision-making.

Existing reporting requirements

Should new international emission reduction commitments emerge from the international UN climate change negotiations in Cancun, Mexico, later this year, more stringent legislation may be expected to follow suit.

In Europe, carbon taxes are already imposed in Denmark, Finland and Sweden. The European Union Emissions Trading Scheme, covering more than 12,000 installations, shows that governments are willing to put a price on carbon to achieve emission reductions.

Doing so has granted European companies an advantage in the event of a worldwide emissions trading scheme (ETS), as well as realising emission reductions, low-carbon product development, and better cost management.

For businesses, the delay of an Australian ETS has not shelved reporting liabilities already in place at national and state levels: the National Greenhouse and Energy Reporting System, the Energy Efficiency Opportunities Program, Queensland's Smart Energy Savings Program, the Environment and Resource Efficiency Plans in Victoria, and New South Wales's Water and Energy Savings Action Plans initiative. However, these programs often focus on reporting requirements, rather than provide a clear policy for achieving emission reduction goals.

The question now is whether - in the absence of a strong policy signal - business can take advantage of the opportunities inherent in assessing the energy and emission intensity of products and services.

Emissions and business decisions

It is generally agreed that starting with a verifiable and auditable inventory of sources and types of emissions (for example, establishing a carbon footprint) is an essential and effective first step in identifying the overall carbon intensity of business operations. This strategy can be harnessed to account for environmental impact and prioritise emission reduction opportunities.

An emission inventory improves an organisation's understanding of the key drivers affecting emissions through assessing the relationship between emissions and business metrics. It also enables organisations to identify their current exposure to climate change related risks, in particular those from policy measures aimed at reducing emissions in a carbon-constrained economy.

Most important, however, is the relationship between emissions auditing and reporting, and how this has an impact on businesses' decision-making.

Climate change represents a major business risk, and without a complete picture of their organisations' emission inventory, decision-makers cannot fully assess and manage that risk. An emissions inventory provides organisations with the means to identify emission-intensive processes and products as well as recognise related improvement opportunities.

It provides the basis of an assessment of abatement options and costs to the organisation, and supports the development of more effective technologies and performance measures. Organisations may then re-evaluate, for example, their procurement policies, service delivery, or manufacturing processes.

Corporate emissions reporting

The task of quantifying the type and volume of emissions produced by a particular company, site or process is an inherently technical undertaking.

It requires the organisation to identify the sources and types of emissions, set calculation approaches, collect data and choose the appropriate emission factors, apply the relevant calculation tools, and roll the data up to the corporate level. A high-quality, transparent, and standardised approach is particularly important to the accuracy and credibility of an emissions profile.

In order to effectively measure, collect and report emissions data, a monitoring and reporting plan must be implemented. This constitutes detailed, complete and transparent documentation of the monitoring methods, and should ideally contain monitoring requirements, specify methodologies and their frequency, as well as articulate strategies for data acquisition and quality management.

The final emissions report should, in addition to the inventory itself, contain a description of events and changes that have an impact on reported data, such as any acquisitions, divestitures and/or upgrades to technology and changes of reporting boundaries, as well as any new calculation methodologies applied.

Monitoring the situation

Despite its current dormancy, businesses should not dismiss the prospect of emissions trading in Australia altogether. Rather, an ETS should remain on the radar to avoid another 'surprise' and the necessity to undergo another lengthy consultation process.

Through a sophisticated approach to emissions reporting and management, organisations may even reduce their liability in a low-carbon economy. The current absence of an ETS in Australia should not lead to any slackening of corporate emissions reporting, or the reverse of investments in low-carbon, low energy-intensive products, services and processes.

Organisations are also facing increased pressures to report their GHG emissions from various stakeholders, such as regulators, investors, clients and even consumers. For most businesses, regulatory compliance and reporting on schedule to mandatory federal and state programs is of utmost importance in order to avoid financial and/or criminal penalties.

It is difficult for governments to determine the amount of change possible at the lowest cost possible for every business in Australia. In reality, businesses only have one real option: going beyond mere compliance, taking a proactive stance and developing more effective and innovative solutions, lest they stifle their investment appeal for fear that future policies introduce new, tighter regulations for which they are unprepared.

Proactive organisations will leave lagging climate policy behind, create financial value and differentiate their business and products to gain competitive advantage in the face of an increasingly regulated future.