LEAD STORY : Emissions Trading – So far it’s all hot air – A carbon talkfest

When it comes to our proposed Emissions Trading Scheme, the funny thing is we’re only talking about 200 or so “points of obligation”. That’s wonderful phrase for activities that will trigger obligations which will fall on affected companies. These companies will have to go out and buy emission units to cover their carbon.
The small numbers prompt Deloitte chairman Nick Main to wryly suggest you’d think we’d be able to fit everyone into one room and have chat about it.
Instead, our proposed ETS has become political football. Earlier this year the Finance and Expenditure Committee read 259 submissions and listened to 160 oral submissions in 58 hours of hearings. The Bill was reported back to Parliament and since then it’s gone pretty quiet. The National party has recently withdrawn its support for the legislation, meaning the debate is likely to ramp up again.
We’d like to be able to tell you exactly what it will mean for your company but, truth is, at this stage nobody knows. Not the fine print, anyway. What everyone does know, of course, is that responses to climate change are likely to change the face of business as we know it today.
If and when an ETS becomes law, it looks set to have significant impact on the New Zealand economy. Bryan Gundersen – Wellington-based partner at Kensington Swan, and leader of the firm’s energy workgroup – says many industry groups such as the New Zealand Business Roundtable and the Greenhouse Policy Coalition believe the ETS will be as significant to our economy as the economic liberalisation reforms of the 1980s.
On top of that, major companies such as Rio Tinto Alcan, owners of Southland’s Tiwai Point aluminium smelter near Bluff, have threatened possible closure with hundreds of job losses if the Government presses ahead with the ETS in its current form. More recently, online news source Carbon News reported international paper giant Norske Skog might quit New Zealand if it is confronted by what it regards as hostile emissions regime.
As Nick Main points out, the difficulty is you don’t know how much of the debate is rent-seeking and how much is real problem. “Having said that, I don’t think it’s an intractable problem,” he adds. “I’m not sure we’ve got the right solution-making process. Shouting from the sidelines is probably not the right approach.”
As anyone who has spent any time discussing climate change will know, debate becomes binary very quickly. “We want to do everything or we want to do nothing,” says New Zealand Institute CEO David Skilling. Often the climate change debate in New Zealand collapses into talk around the ETS, which, in turn, gets tangled up with heap of other related, but separate, issues. As one person said: “If petrol weren’t $2 litre and this weren’t election year, this thing would be law by now.”
Skilling argues that we need to be thoughtful. New Zealand is the second most emissions-intensive economy in the OECD. We need to move quickly. “We can’t end up just debating and talking and not doing,” he says. “This has really been the story for the past seven or eight years while our emissions keep on going up.”
It doesn’t help matters that awareness and understanding of the ETS in business circles is patchy. That’s according to Julia Hoare, who is partner and leader of the climate change services team at Price­waterhouseCoopers.
Adding to the confusion, TZ1 CEO Mark Franklin says many people overseas think New Zealand already has an ETS. Franklin’s own eureka moment came good six months into his term as head of New Zealand’s carbon trading platform TZ1. As former CEO of Vector, and with wealth of experience in the energy and technology sectors across New Zealand, Australia and Asia, Franklin is no stranger to times of transition.
“I’ve been working around ambiguity my whole life,” he says, “but I have never seen subject like this that has so polarised people.”
Why this particular topic? Well, for starters, there’s the ripple effect. Companies hit by higher costs will look to share them out with others lower down the food chain. Plus, it’s incredibly complex. When Nigel Brunel, carbon trader from OMFinancial, first started to wrap his mind around ETS thinking he sparked learning curve like never before. “I’d never seen so many acronyms in my life,” he says.
Nowadays, Brunel can foot it with the best of them. He got there by going right back to the basics and trawling through United Nations document – “Negotiating the transfer and acquisition of project-based carbon credits under the Kyoto Protocol” – which explained the A-Z of Kyoto and worked his way up from there. He likens the experience to learning how to read music.
“There’s no easy way to learn all this. I found this document particularly helpful but it took me about two weeks of reading and going back to the glossary. It covers everything: why Kyoto was put in place, what it means, what developing countries are doing, what developed countries have to do, why carbon credits were created, and how they can be sold on the secondary market. You have to learn all that, but most people don’t have the time.”
Certainly, question time at recent New Zealand Business Council for Sustainable Development breakfast at one point lapsed into complex tangle of PFSIs, VCS and REDDs. (That’s Permanent Forest Sink Initiatives, Voluntary Carbon Standards, and Reducing Emissions from Deforestation and Forest Degradation in Developing Countries.)
That complexity comes layered with what Franklin describes as whole lot of “not listening” going on.
“There are lot of so-called experts,” he says. “I’ve spent six months in-depth and it’s taken me that long to really come up to speed with the nuances about how it works and what the issues really are globally.”
So if it takes someone like Franklin full six months to get his mind wrapped round the drivers, trigger points and subtleties of an ETS, what chance do already over-stretched New Zealand business leaders in general have of getting to grips with it?
“That’s the problem,” says Franklin. “I spend 40 percent of my time right now with small groups, boards and executive teams because I don’t think you can do anything with the ETS until people come up to speed with it. People don’t know what they don’t know about it.”
Franklin’s big ah-ha moment came when he realised we are mixing up two issues here. Firstly, there is the implementation of an ETS from compliance side. That’s Main’s 200 or so key players in room idea. And secondly – and this is the one that is really not well understood because it’s complex – there is the voluntary side of the market. This is growing globally.
“If the answer is to reduce emissions, how is that going to occur?” says Franklin. “The answer is it’s going to occur by people taking voluntary action: not just the country committing to Kyoto and putting cap on itself. These are two completely separate issues and that’s the big nuance that is very difficult to get.”
On the compliance side, odds are that those standing in the direct firing line for an ETS know who they are by now. Transport, forestry and agricultural sector players, and energy-intensive businesses in the cement, steel, aluminium, pulp and paper sectors, are homing in on what cost of carbon will do to their bottom line.
So given that most people believe we’ll have an ETS of some sort at some time in the near future, the writing is clearly on the wall for the major emitters. That means it boils down to managing in time of uncertainty. To Skilling’s mind, that makes it no different to stack of other business dilemmas. And it’s one that we share with the rest of the planet.
As Skilling say: “It’s not just an uncertainty around what happens in Wellington, it’s around what happens in New York and London and Shanghai.”
However, knowing you’re up for big change and doing something about it are very different things.
Realistically, such businesses would be hedging their potential commitments al