Following on from an earlier post , I thought I might elaborate on the five key questions that all industries need to answer in the face of emissions trading and why they are more helpful than any economic modelling to determine the strategy and risks a company may be prepared to take in the climate change debate.
 
1. Is it cheaper to buy carbon or reduce it?
 
The emissions trading scheme as proposed by the Australian Government covers the majority of the economy (the only major industry not included is agriculture) and does not include ‘off-sets’. This means that all companies have to deal directly with their carbon emissions by either buying permits or reducing the quantity of emissions.
 
While it may seem obvious to some, and despite the call for all companies to reduce carbon, realistically this is not the case. In fact, based on the 60% reduction target, 40% might not have to do anything.
 
Instead each company needs to plot its emissions (current and projected) against the cost to reduce this v the cost to just buy credits (factoring in that the price will probably rise). If the cost to buy credits is less than the cost to reduce, then all a company needs to worry about it ensuring it always has the money to pay for its carbon. (Also, it might be worthwhile investing in a good PR company or employee: in the religious fever that is climate change, taking this pragmatic approach might not be viewed particularly well!)
 
2. Will this always be the case?
 
It is important to remember that despite the current state of global financial affairs and climate change policies, these things are always changing. In particular, by the time an emissions trading scheme starts (1 July 2010), it is quite possible that recession fears have passed and production is going ahead at full steam. As such it is important that emissions and climate strategies are flexible.
 
Three things to be aware about that are likely to have an impact on the future price of carbon are:
 

• Learning more about climate change (because realistically it is an evolving science) and seeing evidence of things that either increase or decrease our concern about its impacts. For example, Arctic ice cover. Globally this is monitored daily because scientists believe it is our canary in the global climate coal mine.
• It takes time to actually reduce carbon from our business and industrial processes and although it will probably be cheaper to buy carbon to begin with, this is unlikely to be the case in the long run.
• The emergence of a new skill shortage. As the carbon price goes up, so will the price of actually changing processes. This will create a reinforcing feedback loop that keeps pushing the price higher. As such, the specialised ‘carbon fighting’ skills will be in high demand, technology won’t cheap, and ultimately, everyone will be trying to respond as fast as possible creating a demand v supply problem (that will further drive the reinforcing feedback loop).

 
3. What is the value of Australian-made?
 
While climate change is a global problem, consumers are still local, and although price is always a strong determining factor, climate may become the differentiating issue. Already today – and there is still a lot of scepticism around climate – most companies are touting their environmental credentials.
 
In five years, when emissions trading is the norm and even the big emitters of China and the United States have started to take stronger action, it is inevitable that the environment and climate will feature on all products as a selling point. At this in time, when the baseline has moved higher, new points of differentiation will be sought. When this does happen, it is very possible that companies that stayed in Australia, paid their carbon price and continued employing locals will use Australian Made with renewed vigour as a marketing tool. (And let’s not even think about what the Green lobby might do!)
 
4. Will emissions trading become a global standard?
 
Given current differences internationally and global history attempting to develop international standards, this is a difficult question to answer. Despite this, I think it is the most important question which business owners and executives need to answer. It will guide how much they invest in climate related issues and might be a defining factor in business success over the next 10-15 year period. Those businesses that hedge correctly – either way – will find themselves having spent significantly less to make the necessary changes to their business.
 
Despite the current variation in global climate policies, I think this will be the issue where we see major international converge over the next 5-10 years. As this happens, in the same vein of tariff liberalisation during the 1980s, Australia needs to recognise it is starting from a long way behind. This is predominately because we benefit from cheap coal and have very few other sources of energy.
 
Ultimately cheap coal may become our biggest hurdle: thanks to Al Gore and “An Inconvenient Truth”, there is international recognition that we delayed signing the Kyoto Protocol. Furthermore it is no secret our economy depends on black and brown coal, some of the biggest sources of carbon emissions.
 
So in developing strategies for managing carbon we need to be cognisant of international convergence and a growing stigma around coal and carbon that would seriously hurt our export markets. Already the United Kingdom has introduced a tax on people travelling from the UK to Australia because of the environmental impact of long-haul travel.
 
5. If so, does that change what you do in the short- to medium-term?
 
This is where the rubber hits the road in the winners and losers of climate change. Conducting the research, answering these (and other) questions, and deciding upon company-specific short, medium and long term strategies depends on the level of risk each company thinks exists. If after doing the research you don’t think there will be global convergence on the issue or that long-term dramatic changes are necessary, then all your company needs to do pay for its carbon emissions until the winds change.
 
Of course, if global convergence does occur and major changes are necessary, then this will ultimately be a really expensive exercise.
 
But, then again, if your company picks right and weathers the current climate change storm by paying only the minimum, then arguably it will be the winner.
 
And that’s what risk is about. What degree of risk are you willing to take on the climate change race? The long or the short odds? Ultimately, it’s your decision.