COP15 leaders prepare for climate change

16 December 2009 – The 192 parties to the UN Framework Convention on Climate Change are meeting in Copenhagen, Denmark, from 7- 18 December 2009. The intent of this 15th Conference of the Parties is to agree on a replacement to the Kyoto Protocol, due to expire in 2012. Given current uncertainty surrounding Australia’s domestic policy response to climate change, the signals and outcomes that emerge from this meeting assume even greater significance for business.

In our view the key impacts for business are:

The need to reduce emissions below an emissions trading cap

Regardless of Australia’s domestic policy outcomes, our current government is a signatory to Kyoto Protocol and committed to negotiations for a subsequent agreement. One of the trading mechanisms under the protocol is international emissions trading. Developed nations with binding emission reduction targets under the protocol may, if they satisfy certain conditions, trade in Assigned Amount Units [carbon] with other developed nations to assist in meeting their targets. (Source: Decision 13, CMP.1, ‘Modalities for the accounting of assigned amounts under Article 7, paragraph 4, of the Kyoto Protocol’ FCCC/KP/CMP/2005/8/Add.2). Because of this, businesses in Australia are in effect now operating in a market that is, and will most likely continue to be, constrained by an emissions reduction target or cap. As this target tightens over time, so too will the demands for business to reduce its emissions.

Development of emission reduction projects and trade in Kyoto units

With the establishment of the Australian National Registry of Emissions Units and the Australian National Authority for the Clean Development Mechanism and Joint Implementation business is now able to acquire and trade in Kyoto units and develop CDM and JI projects.(Source: Department of Climate Change) Under current Carbon Pollution Reduction Schemes rules and the National Carbon Offset Standard, eligible Kyoto Units may be traded to meet both compliance and voluntary targets.

Given the time and effort involved in the accreditation process for CDM and JI projects, there is little incentive for the development of new projects prior to 2012. Clarity is sought from Copenhagen as to the continuation, and the nature of any reforms of the CDM and JI mechanism, post-2012. Until that clarity is achieved, the credibility of the schemes post-2012 is undermined. As a consequence, the incentive for Australian businesses to trade in or develop such projects, given a lack of experience in the area, is low.

Climate change impacts and increasing energy costs

Even without solid agreements in Copenhagen, increasing scarcity of resources arising from climate change, in particular energy and water, will mean that preparation for a low resource constrained future should be increasingly factored into business decision making processes.

The energy costs of production even without CPRS are likely to increase. This is due to factors such as the Renewable Energy Target, escalating natural gas prices on the east coast of Australia, infrastructure upgrades in gas and electricity networks and peak oil. These factors strengthen the need for business to both reduce the energy intensity of its production process and its exposure to up and downstream energy price shock risks.

Climate change strategy

Given the likelihood of increasingly stringent targets and Intergovernmental Panel on Climate Change estimates of emission reductions required to maintain atmospheric warming below 2°C, compliance with existing or voluntary targets is unlikely to be adequate. Business strategies that result in the implementation of accelerated emission reduction programs are essential to mitigate exposure to risk.

Disclosure of risks and climate change impacts

Already organisations such as the Carbon Disclosure Project and the Investor Network on Climate Risk are placing increasing pressure on business to disclose risks and impacts associated with climate change, ands the strategies implemented to manage these. It is likely that these disclosure requirements will increase, with some speculating that these may even become regulated over time. Businesses seeking investor confidence should be in a position to properly document, review and adjust to these

Tanya Fiedler is senior consultant, Energetics Pty Ltd