Whether they want it or not, businesses around the world will have to learn how to adapt to carbon-constrained world – and Deloitte chair Nick Main has been plucked from New Zealand to help them make that transition.
He’s leaving for London to take up new role heading the firm’s global climate change and sustainability services. This at time when the whole issue is getting some serious traction.
“Globally this is an issue that’s really gaining momentum – with the US changing their views, COP 15 [UN Climate Change conference in Copenhagen] coming up and growing indications of Chinese concern – you can see there is mood for change,” says Main.
New legislation such as the Waxman-Markey bill (American Clean Energy and Security Act) recently passed by the US House of Representatives (though not yet the Senate) means companies are having to face new reporting requirements. Some are ill-prepared.
“Right now we’re seeing quite lot of demand from clients along the lines of ‘help me understand what this means to me as business’. Some of that relates to the energy-intensive businesses, but not all. The US is good example because it’s one of those markets that might be slow to move but when they do, they really do move.
“Some energy-intensive industries are now facing federal reporting on carbon emissions on quarterly basis and need systems to track this down. They know the strategic imperative – but not the operational side. At the other end of the spectrum, smaller players also caught in that bill don’t even understand the issues.”
With more products coming through, it is matter of helping people understand the problem, how they can play their part and how to survive the transition. Typically what Deloitte can offer is measurement-management strategy, says Main.
“Helping them shift in line with the new legislative environment would probably be one to three-year transition. Then there is managing business within different cost structure environment with the increasing cost of carbon and that’s 10 to 20 year project.”
Worldwide the carbon market has already been growing faster than anticipated both in terms of value and volume. During 2008 some 4.9 billion tonnes changed hands, 83 percent up on 2007 and with the introduction of cap-and-trade scheme in the US, it’s estimated that global carbon markets could be worth massive US$3 trillion.
“At that level it becomes bigger than all the other capital markets – I think what that says to me and to other business leaders is that this game is afoot now,” says Main. “With Copenhagen coming, there’ll be more stories about shrinking icecaps or the firestorms going on in the South of France. Australia is already forecasting worse fires this year, the opening of the North-West passage is now estimated to be just 12 years out, not 112. These things are not going to go away and people are going to be increasingly concerned about it.”
Although emission trading schemes have run into business resistance both in New Zealand and Australia, Main believes they’re much more efficient than imposing taxes or regulation.
“I think people overstate the complexity of this. It doesn’t matter what you do, if you are going to manage and mitigate then you’ve got to measure. Once you measure, there are two ways of putting price on – through tax or using cap and trade. The latter is in some ways more problematic for business because tax seems to initially offer more certainty.
“But cap and trade leads to an outcome in terms of reduction – the cap. The cap is allocated to you, the reductions in emissions tend to go to the person who has the lowest cost. So in terms of market efficiency it’s huge improvement over tax. But the key thing is to make sure people understand there is price on carbon and sinking lid on the ability to emit it.”
As to where New Zealand sits, Main reckons that it’s best to “be inside the tent” in terms of emissions trading – particularly given that our emissions profile is an unusual one.
“We are probably the only developed country that really cares about forestry and agriculture…”
That is both an opportunity – in terms of influencing how those issues are handled, and risk – if we turn out to be the only people playing that game. But with such big part of our emissions profile relating to agriculture, we have to be involved. So there is “something about being within the tent and having realistic target”, says Main.
He is little sceptical about some of the various forecasting models used to determine the financial imposts of an Emissions Trading Scheme (ETS).
“They are so dependent on inputs – you have to know the constraints of the model. I think one put $200 price on carbon but didn’t take into account any technical improvements – so no innovation. I don’t think that is the real world.”
The whole process of setting targets or allocating credits across industries and across countries is inevitably complex. “So none of this is going to be easy or simple, but you need some fundamental instruments in your own territory so you are turning off the tap and getting people to change their behaviour.”
Pricing carbon alone won’t be enough so there will be need for complementary measures and there is lot of thinking to be done around how you incentivise the right behaviours.
“But in some ways if you had message for New Zealand it would be that the rest of the world is moving very quickly down this path – it hasn’t been put off by economic crisis. In fact people are saying that if you are going to re-invest in the economy let’s not re-invest in the old one.”
He is concerned that New Zealand will tarnish its “pure” green brand by not showing leadership in the climate change space and believes there are competitive advantages in it that we could more usefully leverage.
In terms of his new global role, part of it will be around helping clients, but also about influencing policy – providing some thought leadership. Officials, he suggests, can sometimes get stuck in trap where they’re working with very theoretical answers.
“That’s place where we can add some value to say that real world answers would look bit more like this.”
Being plucked from New Zealand for this role perhaps says something about how even small countries get noticed and can make difference. And this country has reputation for negotiating above its strength because it is seen as open, honest – clean pair of hands.
Personally, Main describes himself as an optimist. “I do think this is problem we can solve. But, if you ask me about the bigger sustainability questions? We have an earth with six billion people – 6.5 in minute – probably one billion of whom are first world and another billion getting close. That leaves four billion aspiring and another three billion or so waiting to be born… I’m not sure how that is going to work.”
But there’s now more compelling sense of urgency about tackling the issues.
“There is sense of urgency from business perspective. There is also sense of urgency that the momentum now building has to be kept going. We are late to this – Margaret Thatcher was talking about the issue of greenhouse gas emissions in her term of office – the first cabinet minute on it in this country was back in 1993. Here we are 16 years later …”
US proposals
The Waxman-Markey bill requires that emissions from large sector of the US economy including power plants, factories and car exhausts must reduce to 17 percent below their 2005 levels by 2020 and 83 percent below those levels by 2050.
It sets up cap and trade system similar to the European Emissions Trading Scheme – 85 percent of permits will be given away.
It requires power producers to get at least 15 percent of their energy from renewable sources by 2020 with as much as five percent more energy saved from new efficiency measures.
It establishes new Clean Energy Deployment Administration funded with US$7.5 billion in “green bonds” available for private companies
