Green Tax or Growth Strategy?
23 November 2006 Chris Bowden
The relationship between business and energy is already rocky after years of volatility and price hikes. Now companies are being asked to add the burdens of addressing climate change to their energy woes. Or are they? Chris Bowden, CEO of Utilyx, looks at the business opportunities presented by sustainable energy use.
The scientific debate about climate change has been won. The planet and its atmosphere are warming up, human activity is a major factor and, once the damage is done, there can be no turning back.
But now the economic argument is equally irrefutable. Sir Nicholas Stern's review on climate change presents, in 600 pages of meticulous detail, a financial justification for taking climate change seriously.
His vision of extinguished species, flooded cities, rampant disease and millions of fleeing refugees, familiar to activists, has been given a price tag for the first time. Stern suggests that the cost of action now will be 1% of global GDP; but inaction could be as high as 20%. The result: a global recession the likes of which we have not seen since the crash of 1929 plunged the world into debt-ridden hyperinflation and political extremism.
The unambiguous message from Stern is that we have no alternative but to take immediate action on a worldwide scale.
GOVERNMENT OR MARKET?
However one of the problems that needs to be overcome is that, until now, the government has relied on big carrots dangled in strange ways to encourage a more sustainable approach to energy consumption. Hence, R&D grants have been given to very specific projects, which have narrowed the field of study and focused attention on unconfirmed potential solutions, rather than letting the market work and deciding what the big winners will be.
However, among its other conclusions, Stern's report, which bills itself as a pro-growth strategy, crystallises the possibility of a market-driven approach to addressing climate change. If the problem is addressed within the context of market forces, rather than simply the imposition of regulation, the possibility that tackling climate change will deliver business benefits is opened up.
So, although government clearly has a role to play, particularly in the setting of targets and coordinating activity, tackling the problem is not the sole responsibility of our elected representatives and international bodies. After all, businesses and individuals alike contribute towards the problem, and can, therefore, contribute to the solution. We are already seeing the positive effects of market mechanisms in this area.
CONTROLLING CARBON EMISSIONS
The EU's Emissions Trading Scheme (EU-ETS) was established to limit the amount of carbon emitted in each country, by allocating the amount that could be produced by large energy consumers. Organisations that overstep their emissions target have to pay the penalty.
There are benefits for those who cut their emissions: they are entitled to sell their remaining allocations, or carbon credits, to over-producers. This incentive gives significant advantages to those organisations that cut their carbon emissions.
The EU-ETS has certainly had teething problems in its first phase – but these have been political in nature. It has, however, succeeded in creating a market for carbon and it now seems likely that it will be extended to a wider geographic area, incorporating smaller firms and major polluters currently exempt from its strictures - most notably aviation. Provided that allocations are managed appropriately, this will be a prime example of market forces driving the agenda.
Of course, there are forward-thinking business leaders who have seen climate change in the context of market forces for some time. They know that consumers and investors are looking for a more sustainable corporate approach to carbon emissions.
Weeks before the Stern review was published, Mervyn Davies, chief executive of Standard Chartered Bank and a director of Tesco said, "You won't survive in business if you are not environmentally responsible. Climate change has reached a tipping point and the question for companies is 'are they doing enough'?"
This sentiment is reiterated by James Murdoch, chief executive of BskyB, who pointed out in September that, "Corporations should be involved in the climate change debate. The issue cannot be simply left to governments or supranational bodies. Tackling risk in one's business strategy is what business leaders are supposed to do."
That this issue of stakeholder influence is not confined to large conglomerates is demonstrated by a recent Ipsos Mori poll of public attitudes to corporate responsibility. It shows that people believe the top priority for companies over the next few years should be concern for the environment.
Climate change and the opinion of informed consumers therefore presents CEOs with a new set of demands. Two further factors make this challenge particularly acute: firstly, it is an area which, until now, has fallen far outside the remit of the CEO, who may be more comfortable dealing with the constraints that time, information and finance place on the business. And secondly, scrutiny is being applied by an increasingly well-informed and active audience.
However, it is not just consumers, customers and prospects who will be applying the pressure from now on. As always, investors are looking for companies that respond to the challenges of the future, and can exploit these to their own advantage today. There is simply no economic or strategic justification for being left behind on environmental initiatives.
COST CENTRE OR GROWTH STRATEGY?
On the contrary, the immediate need to address climate change presents business opportunities. As Sir Nicholas points out, reducing carbon emissions and increasing sustainable use of natural resources could become one of the biggest growth industries, generating around £20bn of business globally by 2050.
Despite this, in the immediate aftermath of the Stern report's publication there were voices of resistance, both to the report's findings and to the leaked thoughts of Environment Minister, David Miliband, on relatively mild 'green' taxes. In fact, reading through certain responses to the Stern review, one could be forgiven for thinking that business was being asked to shoulder an unbearable burden.
In particular, the prospect of these unconfirmed taxes dominated the headlines of a number of respected broadsheets and broadcasters alike – even before publication. If these headlines are truly representative of the business community's opinions on the matter then, the majority still regards the fight against climate change as an enormous money sink, absorbing financial resources at every turn.
But this is not necessarily the case. The consequences of Stern are likely to be a combination of taxes and incentives, targeting and monitoring. But investing in measures that reduce carbon emissions can result in significant dividends, and not just in terms of CSR-related goodwill. Rather than looking at 'going green' as a cost centre, companies can change the way they operate some of their core processes and reap major cost savings and improved efficiencies as a result.
The real question therefore, is not whether to do something, but what to do, when and how.
FINDING A STARTING POINT
We already have most of the answers to these questions. In his film, An Inconvenient Truth, Al Gore argues, "we already know everything we need to know to effectively address the problem of climate change." The problem is disseminating this information: there are plenty of options, some more appropriate and some more costly than others.
CEOs looking for a quick-fix, one-size-fits-all policy to reduce carbon emissions are destined for disappointment. There is no universal set of enviro-actions that are equally applicable to all organisations.
What can be said is that any attempt to address climate change will require effort. But it doesn't necessarily require a leap into the unknown: photo-voltaic technology, which is used in roof panels for supplying electricity, has been with us for ten years; solar-powered heating and wind-generated power has been with us for 20.
Of course there are other long-term changes to be made. This summer's heat wave produced a drastic overnight spike in energy prices as the effect of powering air conditioning kicked in. This vicious circle of rising heat and increased oil and power consumption to counter its effects is clearly unsustainable.
We need to start looking at alternative methods of building design, such as thermal slab that uses the properties of the building material – concrete – and the daily use of the building to naturally heat and cool the premises.
KNOWLEDGE IS POWER
In the meantime, there are certain principals that every company needs to apply. First of all, it is essential that any organisation is aware of its starting position by understanding and measuring current energy consumption.
A significant number of multi-site organisations still have metering and billing problems that are the result of incorrectly correlated data between them and their supplier. In these circumstances deciding what to improve, and measuring results, is rendered much more difficult.
From here an organisation can accurately calculate the true size of its carbon footprint, and how it is generated – whether through heating, use of electricity or transportation. If the major sources of carbon emissions are fleet cars, for example, converting to vehicles powered by more efficient and less polluting bio-ethanol may be the key action. If it's heating, using alternative fuels can make a major contribution towards cutting the size of the carbon footprint.
And finally, education and communication are key, to ensure that even minor changes are adopted throughout the organisation, and that all relevant bodies are involved.
Change needs to happen from the top down and examples set at all levels. But the informed, active consumers can also be found in the organisation's own workforce – finding climate change champions in each department, and listening to their feedback can be invaluable.
It is certainly possible, if not necessarily cost efficient or 100% accurate, to undertake these initial assessments in-house. However, delivering real results by choosing appropriate technologies and making changes to working practice depends on expertise. There can be hidden costs and indirect carbon emissions to consider.
For example, calculating the full extent of a corporation's carbon footprint is more complicated than it may at first appear. Converting to gas may look more environmentally sound than relying on electricity generated at coal- or oil-fired plants. But the emissions involved in production, processing and distribution can add tonnes of CO2 to the final total. So much so that Transco, the UK's national gas transporter, produces more than 200,000t of CO2 each year.
Then there is the issue of carbon offsetting. This is a very popular method of achieving carbon neutrality, where investments are made in carbon sinks – such as forest areas – that will absorb the same amount of carbon that a company produces through its normal activities. Energy experts will point out that while this has some benefit in the short term it is, like buying energy from a green supplier, essentially paying someone else to sort out the problem.
GET TO THE CORE OF THE PROBLEM
The fact is, that anyone can offset their carbon emissions if they throw enough money at the problem. But in reality it is little more than green washing – disguising the real problem with a veneer of environmental activism. As a long-term solution it is flawed: it is an expensive approach to sustainability, does nothing to reduce emissions, and doesn't deliver the innovation that steals a march on the competition.
Micro-generation is ultimately cheaper – and a major economic investment. Ultimately, carbon offsetting does little to change the way we approach energy consumption.
The fact is climate change is not going away. Business, government and individuals all have a role to play in the essential reduction of carbon emissions. But what will set one organisation apart from its competitors, attract investment and satisfy a fundamentally non-loyal customer base is its attitude to this responsibility.
Richard Branson stands as an ideal example. By committing to finding an alternative method of fuelling Virgin's fleet of planes he has raised brand recognition, taken the lead in the debate, will cut his operational costs - and has left the competition standing.
If a company sees the need to tackle climate change purely as a burden – that is exactly what it will become, and the business will lose ground. On the other hand, with the right help and in-depth knowledge, combating climate change can be the necessary spur to adopting efficient, sustainable and highly competitive business practices.