Carbon management in a climate of uncertainty

May 24, 2016,

For many Australian businesses, climate policy and corresponding reporting requirements have been surrounded by much uncertainty, with the major political parties having different ideas about climate policy.

Consequently, in recent times we have seen the proposal for the Carbon Pollution Reduction Scheme being rejected twice by Senate, the introduction and repeal of the carbon price mechanism and the scaling back of the Renewable Energy Target from 41,000 to 33,000 GWh by 2020. In September this year, the government introduced its Safeguard Mechanism Rules, which is the compliance instrument to the Emissions Reduction Fund (ERF).

The ERF itself is a voluntary scheme that aims to provide incentives for businesses and individuals to reduce their greenhouse gas (GHG) emissions. Setting aside a discussion around the effectiveness of Direct Action, the ERF, its Safeguard Mechanism and the adequacy of Australia’s announced emission target for 2030, it becomes clear that it can be a trying task keeping up to date with policy, reporting requirements and managing one’s own carbon strategy. To complicate matters more, potential liabilities from climate-related exposure arise from rising energy costs, fluctuating input resource costs, environmental regulations, changing consumer preferences and scrutiny from investors and shareholders, as well as reputational risks from other stakeholders such as clients and NGOs.

Under these circumstances, it can be difficult for business to determine the amount of change possible at the lowest cost possible. It is understandable that there is a robust debate on who should do what or who will bear the economic burden. After all, for business it is critical to understand how climate policy will affect both their companies and the business environment in which they operate. But business has also acknowledged that climate change is a central issue for domestic economic and environmental policy. Despite all the uncertainty, proactive firms leave potentially lagging policy behind, incorporate carbon management into their business decisions, create financial value and differentiate their business.

The incentive for doing so is often financially driven, for example in form of a possible (re)introduction of a price on carbon, be it a carbon tax or emissions trading. And in the case of larger organisations, many are already captured under the National Greenhouse and Energy Reporting scheme (NGERs) or report under the Carbon Disclosure Project, which require businesses (in the case of NGERs that trigger the liability threshold) to report on their GHG emissions and energy consumption.

But more frequently, we also see emission reduction targets by firms of all sizes and branding benefits from being transparent about business operations and/or the carbon footprint of a product or service. And while NGERs focuses on reporting requirements, rather than provide a clear policy for achieving emission reduction goals, businesses can take advantage of the opportunities inherent in assessing the energy and emission intensity of their products and services.

What’s your carbon footprint?

Starting with a verifiable inventory of sources and types of GHG emissions (more commonly known as a carbon footprint) is an essential and effective first step in identifying the overall carbon intensity of business operations, products or services. A carbon footprint does not only improve a business’s understanding of the key drivers affecting emissions through assessing the relationship between emissions, energy consumption and relevant business metrics. It also allows them to assess their exposure to climate change and climate policy-related risks, in particular those from policy measures aimed at reducing emissions and energy consumption by putting a price on them. A carbon footprint provides the means to identify emission-intensive processes and products, as well as identify improvement opportunities through an assessment of abatement options and costs. Based on this assessment, businesses may then re-evaluate, for example, operating procedures, procurement policies, service delivery or manufacturing processes.

Identifying the sources and types of emissions, setting calculation approaches, collecting data and choosing the appropriate emission factors, applying the relevant calculation tools and methods and rolling the data up to the corporate level is inherently a technical undertaking.

To make the most of a carbon footprint and to gain a comprehensive picture of the emissions intensity of one’s operations, extend the carbon footprint to include scope 3 emissions (eg, supplier emissions, employee commuting, business travel and investments) in addition to the reporting of consumed fuels and electricity under scope 1 and 2. For example, a price on carbon may increase the cost of goods or inputs purchased by a business, make business travel more expensive or change the viability of planned investments. By addressing the entire value chain, business can then assess and communicate the actions planned or taken to address risks or exploit opportunities and set more meaningful targets.

Despite the current situation around climate policy in Australia, businesses should not dismiss the necessity to monitor policy developments. The prospect of future changes should remain on the radar to avoid ‘surprises’. Through a sophisticated approach to energy and emissions reporting and management, businesses may be able to reduce their liability in a low(er)-carbon economy and respond to changes early and effectively.

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