When the world’s climate negotiators meet in Copenhagen this December they will be working on binding emissions reduction targets, not voluntary targets. In the Kyoto Protocol non-signatories suffer few direct consequences. The challenge for the negotiators is putting the teeth into the concept of binding targets for the countries that do not sign on the dotted line. While there is much debate around Copenhagen’s intended and likely outcome, one conclusion is already clear – trade between countries will be influenced by a successful COP15. By the same token, companies with operations in those countries will feel the heat from international climate legislation before they feel the heat from global warming.
The mechanics would run as follows. If a steel exporting country does not accept binding targets then a steel importing country that has ratified the agreement may resort to “border tax adjustments” raising the landed price of steel from the exporting country which is outside the international climate change treaty. Rumour has it that this potential challenge to free trade has stalled the Doha Round of world trade negotiations. The implication for business is clear: moving products from carbon unconstrained economies to carbon constrained economies will attract additional costs. The system is meant to be self balancing in that it prevents companies from moving their production to non-compliant nations and it pressures these nations to join the international climate change agreement.
Thus, an intended result of COP15 is that international trade in energy or carbon intensive products will move closer to bundling carbon dioxide emissions into product prices. But the story for business does not end there. Companies must also pay attention to how legislation develops within countries. The Australians have brought the phrase “trade exposed industries” into modern climate change parlance by tailoring the impact of cap and trade legislation by industry. If Australian coal has a price disadvantage in China because the Australian cap and trade scheme increased costs, then the same trade imbalance arises as in the non-compliant nation scenario. The challenge is to balance the urgent need for more global consistency around climate change measures, with such national priorities as power access and energy security.
With both national and international regulatory uncertainty still prevalent, how should business respond? The recent communiqué signed by business leaders and addressed to the negotiators in Copenhagen shows the first basic step is being made: “engage in the debate.” Many of these companies, including ERM’s clients, will have delegates in Copenhagen, but the real question for all interested parties is about preparing for potential outcomes - from COP15 and subsequent COPs thereafter.
Assuming a carbon constrained operating mode for signatories to international climate change policy, it’s not hard to see how carbon intensity will become a competitive advantage or disadvantage, just like the cost of technology or branding. As more companies understand this we are seeing the need for a fresh perspective in such areas as product strategy, energy efficiency, climate change strategy, and execution. Base camp for a growing number of our clients is the need to carry out some kind of assessment of climate change risks and opportunities – debit side flood risk, for example, balanced against credit side product innovation. With energy prices again climbing and carbon legislation beginning to bite, a company with a higher emissions factor per unit of sales will notionally lose market share. While negotiators in Copenhagen may achieve relatively little, companies should not waste the opportunity to future proof their operations in this department.
Clearly, the shift to a carbon constrained world is not happening overnight. Just as the internet took time to emerge as a major influence in travel, finance, information services and other sectors, so too the low carbon economy. Hindsight shows that the winning internet strategy was to really understand how a new, open communications protocol could impact each step in a company’s value chain. Foresight says the winning strategy for the low carbon economy will be similar, but this time one has to look at the entire product lifecycle, not just the processes inside the factory fence or along the direct value chain. This can be equally relevant to a mining company at one end of the supply chain and the supplier of new, energy efficient lap top computers at the other.
Classic strategy dictates that one takes decisions in the face of uncertainty with the highest strategic degrees of freedom. In layman’s terms this means invest in operating systems to rapidly react to oil price changes instead of locking into operating assets for a target price of $62 per barrel. In the face of COP15 and national cap and trade uncertainties what does this mean climate change strategy? He with the most accurate understanding of his emissions and how to reduce them at different price signals wins.
In simple terms, this means polish up your GHG inventory or carbon footprint, prepare and rank possible emissions reduction projects, start analysing the full life cycle of your products from raw materials through disposal, and look at what it would take to offset your emissions in part or in full. Resources can and should be mobilised in one or more of these areas, not just because Copenhagen is around the corner but as part of an innovative, proactive strategy on climate change.