Friday, 21 September 2012

Mandatory Carbon Reporting: What's the Big Deal?

There are just 26 days left before the 17 October  close of Defra's Mandatory Carbon Reporting consultation.

As I mentioned in a previous blog post, the formal requirements are not particularly detailed. Many of the biggest companies are already reporting their greenhouse gas emissions via the Carbon Disclosure Project and what is more, Mandatory Carbon Reporting, unlike the EU ETS and CRC, does not attempt to put a price on carbon or mandate reductions.

So why would Defra go through all the trouble?

In a phrase, climate change. The British Government made history with its 5-year carbon budgets, which established a path to an 80% emissions reduction target by 2050.

The most powerful tool in the Government's current arsenal is the EU Emissions Trading Scheme. Participating installations are responsible for approximately 48% of the country's emissions, but the low carbon price reduces incentives to invest in longer term reduction measures.  Similarly, the Carbon Reduction Commitment Energy Efficiency Scheme (CRC-EE) targets firms responsible for 10% of the country's emissions but energy represents on average 3% of these company's costs.  For these companies, the £12 carbon price in the CRC is rarely enough to justify massive energy reduction investments.

Note that the EU ETS and CRC schemes combined do not cover 58% of the UK footprint due to double counting. Most of the large companies covered by the CRC purchase energy from ETS compliant utilities. The ETS works to drive supply side reductions while the CRC drives demand side reductions.  The problem is that those reductions aren't coming fast enough.

Mandatory Carbon Reporting gives the Government a third arrow for its quiver. According to the latest CDP report, the subset of FTSE 350 companies that voluntarily report their emissions had a combined Scope 1 and 2 footprint of over 487 million tonnes CO2e for their worldwide operations. This is remarkably close to the UK's national carbon footprint total of 470 million tonnes CO2e.  Broadening this to the 1,000 or more firms covered under Mandatory Carbon Reporting would give a combined footprint considerably larger than the entire country. The emissions covered under Mandatory Carbon Reporting, then, are potentially several times larger than any other carbon reporting measure in the Government's arsenal.

Here's where it gets interesting. Defra's Impact Assessment for the draft Mandatory Carbon Reporting consultation estimates that firms will achieve a 4% emissions reduction simply by improving their footprint reporting.  In other words, they assume that forcing the Board and investors to pay attention to the company's footprint will lead to carbon savings, without requiring carbon caps, taxes, or mandated technology measures.  Of course, not all of those global emission reductions can be counted against the UK's carbon budget, but with so many of the largest emitters covered under Mandatory Carbon Reporting, these "easy" reductions will make a material contribution to Government carbon saving efforts.

In addition, the current reporting proposal is only the first step. In 2015 Defra will review the programme with an eye to broadening it to cover every large company in the UK, public and private.
 And should the need arise for a cap and trade system or carbon tax covering these companies at some point in the future, Defra will already have their emissions data at the ready.

Even though Mandatory Carbon Reporting looks like business as usual at first blush, its wide net makes it a very big deal indeed.

Tuesday, 18 September 2012

Carbon Clear's Autumn Breakfast Briefings: Telling the Story

There are only two days to go before the launch of Carbon Clear's autumn Breakfast Briefing series. A good deal of thought went into these sessions, and I like to think they come together to tell a compelling story.  Here's how they fit together.

The first session, on 20 September, will cover the UK Government's new Mandatory Carbon Reporting legislation, which I blogged about a few weeks ago.  I'll be joined at that session by my colleague Vincent Reulet and by Mardi McBrien, MD of the Carbon Disclosure Standards Board.

We'll be talking about why the Government is pushing for mandatory carbon reporting, how this new requirement fits in with other carbon reporting efforts like the EU ETS, the Carbon Disclosure Project and the Carbon Reduction Commitment Energy Efficiency Scheme (CRC), and how companies can both comply with this legislation and use it to gain competitive advantage.  Should be an informative and dynamic event.

A few weeks later, on 2 October, we will be talking about what I sometimes refer to as Carbon Offsetting 2.0.  After the first wave of carbon offsetting in the mid- to late-2000s, there was a lull.  Now, a new crop of companies, from Microsoft to Marks & Spencer, are announcing carbon neutrality programmes.  We'll be discussing how this new round of carbon offsetting differs from the first, and how other companies can benefit.

Then, on 17 October we will be unveiling our Carbon Maturity whitepaper.  Our crack team of consultants has pooled decades of accumulated experience working with over a hundred companies to develop a model of corporate carbon maturity.  We've found that companies at each stage of the maturity curve share certain characteristics and encounter similar obstacles before moving on to the next level.  This applies to both their internal carbon management activities and their carbon offsetting initiatives.  Delegates at this briefing will learn how the carbon maturity model works, and how to benchmark their companies' performance against other businesses.

The breakfast briefing series, then, tells a story.  We start with carbon footprinting and show how it can go from being a burden to a source of competitive advantage.  We then move on to carbon offsetting and show how it has evolved to become a source of real business value for the largest companies.  And then we describe how companies around the world are developing increasingly sophisticated carbon management programmes that deliver benefits for management, employees, investors and the wider community.

I think that's a story that every company should hear. Join us, and help tell the story.

Thursday, 13 September 2012

Who's Afraid of Low Carbon Prices? Part 3: Not Australia

Last week I attended a briefing at the Australian High Commission in London.  The Victorian Government (the Australian state, not the 19th century ruler) hosted a session for carbon market participants to present the latest updates to the country's ambitious greenhouse gas cap-and-trade scheme.

The Australian carbon pricing initiative begins as a straightforward carbon tax, set at A$23 (€19), indexed to inflation and payable by the largest 500 or so industrial polluters.  European carbon allowances, by contrast, were trading below €8 yesterday. That price difference initially attracted howls of protest from industry lobbyists.

From July 2015, however, Australia switches from a carbon tax to a cap-and-trade scheme linked to the EU-ETS.  That means Australian companies will be able to buy European credits (EUAs), and to an extent UN-issued CERs to comply with up to 50% of their carbon reduction obligations.  Similarly, Europeans will be able to buy Australian Allowances to satisfy EU abatement requirements.

The EU-Australia linkup is not a marriage of equals, however.  The EU is directly responsible for 11% of global greenhouse gas emissions, while Australia emits just 1.5% of the global total - about the same as the United Kingdom.  The additional supply of relatively cheap EU allowances is expected to dwarf the additional demand for allowances generated by Australia's emissions-intensive firms.  If the business-as-usual EUA price remained at €8 in 2015 and all else being equal, we should expect the carbon price for the linked systems to equalise much closer to the EUA price - somewhere around €9.30.

This analysis indicates that linking the two carbon trading schemes might cut the Australian carbon price in half.  In reality, the EU expects the carbon price to rise by 2015, but still much lower than the Australian carbon tax level.  Isn't that bad news for Australia? Surely we need high carbon prices to drive emission reductions?

That might be true if the Australians had magically built a dome over their country and were the only people affected by the carbon emissions.  The reality is that Australia's greenhouse gas emissions contribute to climate change across the planet.  Similarly, the CO2 from a Polish or American power station adds to the global atmospheric buildup contributing to droughts and flooding in Australia.

Global atmospheric circulation means that an emission reduction anywhere helps the climate everywhere and vice versa.  If we need to save 1 million or 1 billion tonnes of CO2, it doesn't matter too much where that savings happens.  What is important for climate change is that this savings happens sooner rather than later.

As I discussed in an earlier blog post, the emissions trading scheme is a price discovery mechanism that helps us identify the most cost effective emissions reduction opportunities across the entire scheme.  So a relatively low carbon price for a combined Australia-EU trading systems means there are significant opportunities to reduce green house gas emissions with minimal economic impact.  It means the Australian Government can make its contribution to curbing global climate change even cheaper and faster than before. The market can work, and that's a good news story.

It also means that there are still major carbon reduction opportunities that we (including Australia) are not pursuing.  And that's bad news.  One analysis says that global greenhouse gas emissions need to peak by 2015 and then decline year on year if we are to limit average global temperature increases to a damaging but not wholly catastrophic 2 degrees.  A low carbon price means we continue to fight this battle with one arm tied behind our collective back.  It means governments are still failing to set sufficiently ambitious targets to set us on a path towards a low-carbon future.