The Current Climate
The Current Climate. It’s a vital responsibility for the future and can’t be ignored, but who should take the lead on tackling global warming? The Climate Group’s Steve Howard and Sophy Bristow consider the options.
Climate change is now widley recognised as the greatest environmental threat facing the world. Arguably, it takes us beyond our typical understanding of what an ‘environmental issue’ actually is, because if climate change continues unchecked then it is not just the natural world, but the political, economic and human landscape that will be irreversibly and devastatingly altered. Surely then, someone must step up and take responsibility for protecting us from this fundamental threat?
Government responsibility
The knee-jerk reaction is that this must be a role for government. After all, isn’t the whole purpose of government to act for the greater good of its citizens? As an issue, climate change can feel so distant that individuals lack the sense of threat needed to take direct action. Furthermore, the investment cycles of the market are currently too short-term to automatically take global warming into account. In short, it seems as though this is the very type of issue that governments were designed to tackle – they can act on the bigger picture and in our long-term interests.
Of course, the problem here is that the time horizons of climate change also expand beyond the average democratic government term. Still, in the UK we are already seeing a political consensus emerge, with all three main political parties pinning their green credentials to the mast and putting climate change at the heart of the policy agenda.
Global policies
In fact, all around the globe the regulatory framework is starting to evolve. The best-known initiative is the Kyoto Protocol, an international agreement covering 164 countries globally and 55% of the world’s greenhouse gas (GHG) emissions. It commits ratifying countries to reducing their carbon emissions over fixed periods of time. However, political progress is also being made in many other contexts. Various US and Australian states as well as several world cities are developing robust policy frameworks to address the climate issue. In July this year, Florida’s Governor Charlie Crist announced a range of targets, including one to reduce emissions of greenhouse gases by 80% by 2050 on 1990 levels. This followed on from California’s AB 32 bill, signed last year by Governor Schwarzenegger, which puts a cap on California’s GHG emissions and creates a clear path for a market-based system and other mechanisms to bring the state’s emissions back down to 1990 levels by 2020, a 25% reduction.
One of the possible regulatory approaches for meeting the target set out in AB 32 would be to introduce a ‘cap and trade’ system. Indeed, the emergence of emissions trading, which puts a price on carbon, is one of the strongest trends in tackling greenhouse gas emissions. Trading systems enable participants to reduce emissions at the least cost, giving them the option to buy reductions from elsewhere when their own abatement costs are high. The European Union Emissions Trading Scheme (EU ETS), the highest profile example, traded over ¤19bn in 2006.
There are many other similar schemes evolving. The Regional Greenhouse Gas Initiative in the US, for example, brings northeastern and mid-Atlantic US states together to reduce emissions from electric power generators via a regional trading scheme. In the UK there are plans to extend emissions trading beyond those companies that pass the threshold for the EU ETS, and also to launch a compulsory domestic scheme for energy users with electricity bills exceeding £500,000 a year, which would cover organisations as diverse as Tesco, BBC and Birmingham Council.
Business action
It is clear that a significant proportion of the evolving policy framework focuses on regulation of the business sector. The market has put no financial value on the capacity of the earth to absorb the GHGs poured into it as a consequence of more than a century of fossil fuel-driven economic development – the same pollutants which are now causing global warming. Regulatory carbon pricing seeks to address this, but should the world’s corporations be going further and taking independent action to tackle a problem that they have played a part in creating?
In addressing this, it is interesting to ask whether there are reasons why industry and business should act to reduce their carbon footprints, regardless of whether or not it is, in moral terms, the right thing for them to do. Fortunately, there are plenty – ranging from minimising reputation and regulatory risk to building real advantages in bottom-line performance through energy efficiency. There are also opportunities to grow the top-line through brand differentiation and product innovation.
Risks and opportunities
In terms of risk management, the developments outlined demonstrate that regulation is becoming much further reaching. It stands to reason that those companies that limit their footprints sooner rather than later will be better positioned over the long-term. A recent report by Goldman Sachs shows that among the six sectors covered – energy, mining, steel, food, beverages and media – companies that are considered leaders in implementing environmental, social and governance policies to create sustained competitive advantage have outperformed the general stock market by 25% since August 2005.
The flip side of risk is opportunity, and this is proving to be an equally significant driver as new markets open up. Even at a basic level, reducing emissions, particularly through energy efficiency, can result in significant cost savings. ‘Carbon Down Profits Up’, a report by The Climate Group, shows that in 2006 at least 27 UK companies (including BP, British Telecom and HBOS) reported direct cost savings as a result of actions taken to reduce emissions. On average, these companies have cut their greenhouse gas emissions by 18%, with energy efficiency one of the most beneficial investments they have made. And although return on investment for energy efficiency decreases as ‘low hanging fruit’ is picked, if the current trends in energy price rises continue, then margins will shift in favour of continued efficiency improvements.
For those companies placed to play an active role in developing the products and services that will form the building blocks of the low-carbon economy the opportunities are potentially even greater. For example, the market capitalisation of the 85 largest renewable energy companies reached US $50bn in 2005, double that of 2004. In 2006, investments in renewable power reached US$71bn, almost 50% up on the previous year.With the worldwide market for wind, solar, geothermal and fuel cell energy estimated at US$200bn in 2020, it is no surprise that dynamic companies are looking to establish themselves in this field. Global investment in clean energy reached $70.9bn in 2006,which is a 30% growth in just one year.
The economics supporting investment in low-carbon solutions certainly stack up. The 2006 Stern Review, the most extensive analysis carried out to date on the economics of climate change, showed that the costs of inaction amount to 5–20% of global GDP by 2050, versus a cost of 1% of global GDP for stabilising emissions at safe levels. Furthermore, a recent paper from management consultants McKinsey shows that 25% of the actions required, including fuel efficiency and building insulation, actually carry no net cost – in effect they come free of charge. With many of the remaining technologies, such as renewable power, there is a strong ‘learning effect’, meaning that costs decrease with use.
Empowering individuals
Another key consideration, for consumer facing companies, is rising public awareness around climate change, which itself creates a significant opportunity. Research carried out in 2006 found that 28% of individuals in the UK and 19% in the US are ‘strongly concerned’ about climate change, supporting a potentially much larger market than for organics or Fairtrade when those markets first took off.
Furthermore, this group showed a latent demand for products, services and brands that would allow them to reflect their climate-change concerns in their spending.
The signs that customers are willing to exert their power through what they choose to consume are encouraging, but the research shows that there are still major barriers that prevent individuals doing more. These range from lack of awareness about the problem, to a feeling of powerlessness and, in particular, concerns about convenience and fairness – people want to be met halfway by government and businesses, and they want low-carbon choices to be easy and affordable. Against this backdrop, in April The Climate Group launched ‘We’re in this Together’, a partnership of companies committed to offering simple, inexpensive low-carbon solutions to consumers. The aim is to help UK households to reduce their emissions by one tonne, a total of around 24m tonnes over the next three years, which is more than the combined household emissions of Scotland and Wales.
A range of companies including B&Q, Marks & Spencer, 02 and Tesco are taking part and are providing effective ways for people to take action. For example, Tesco is committed to selling 10m energy efficient light bulbs this year (a five-fold increase on last year) and is offering them in-store and online at half price.
Local authorities are also gearing up to tackle climate change within their community strategies. While the primary focus is on mitigation or reducing greenhouse gas emissions, they are also mindful of adaptation and ensuring local infrastructure and services are resilient to climate change. Local strategic partnerships, police, health trusts and LEAs, will increasingly be expected to play their part.
Local solutions include leading public awareness, introducing sustainable policies and practice, increasing energy efficiencies, and encouraging business opportunities.
The Audit Commission’s plans for the Comprehensive Area Assessment (CAA), which comes into force in 2009, aim to increase local authorities’ and their partners' focus on their environmental footprint, efficiency and innovation. Councils' success in tackling climate change will be assessed as part of the performance assessment framework from 2009. Steps should be taken now to ensure they can meet future challenges.
When assessing who should take the lead on tackling climate change, it is important to make a differentiation between the moral and practical elements of the debate. Clearly there are moral arguments why government, business and individuals should all take responsibility for climate change and, depending on your perspective, you might think that some sectors should take a greater share of that responsibility than others.
But looking beyond this, there is one very good reason for all these sectors to take action – ultimately it is in their own interests to do so. Instead of trying to argue that one sector is more important than another in tackling climate change, we need to understand the links between government, business and individual action on this issue, to avoid a situation where each sector passes the buck to another. We need to work together to develop solutions that deliver win-win outcomes for society. Prosperity, growth and political longevity can all go hand in hand with a proactive stance on climate change. And that’s why we can be optimistic about the future.
STEVE HOWARD is chief executive and SOPHY BRISTOW is a project manager at The Climate Group, which works as a catalyst for leadership among governments and companies to address the challenge of climate change. Visit: www.theclimategroup.org
