Corporate Responses to Climate Change

Achieving Emissions Reductions through Regulation, Self-regulation and Economic Incentives

Rory Sullivan

• Publisher: Routledge
• Year: 2017
• Print ISBN: 9781906093082
• eBook ISBN: 9781351279987
• Topic: Business
• Subtopic: Business General
• Index: Business

Given the scale of the greenhouse gas emissions reductions that are seen as necessary to avert the worst effects of climate change, policy action is likely to result in a complete reshaping of the world economy. The consequences are not confined to 'obvious' sectors such as power generation, transport and heavy industry; virtually every company's activities, business models and strategies will need to be completely rethought. In addition, beyond their core business activities, companies have the potential to make important contributions to reducing greenhouse gas emissions through the allocation of capital, through innovation and the development of new technologies, and through their influence on the actions taken by governments on climate change.

Corporate Responses to Climate Change has been written at a crucial point in the climate change debate, with the issue now central to economic and energy policy in many countries. The book analyses current business practice and performance on climate change, in the light of the dramatic changes in the regulatory and policy environment over the last five years. More specifically, it examines how climate change-related policy development and implementation have influenced corporate performance, with the objective of using this information to consider how the next stage of climate change policy – regulation, incentives, voluntary initiatives – may be designed and implemented in a manner that delivers the real and substantial reductions in greenhouse gas emissions that will be required in a timely manner, while also addressing the inevitable dilemmas at the heart of climate change policy (e.g. how are concerns such as energy security to be squared with the need for drastic reductions in greenhouse gas emissions? Can economic growth be reconciled with greenhouse gas emissions? Can emissions reductions be delivered in an economically efficient manner?).

The book focuses primarily on two areas. First, how have companies actually responded to the emerging regulatory framework and the growing political and broader public interest in climate change? Have companies reduced their greenhouse gas emissions and by how much? Have companies already started to position themselves for the transition to a low-carbon economy? Does corporate self-regulation – unilateral commitments and collective voluntary approaches – represent an appropriate response to the threat presented by climate change? What are the barriers to further action? Second, the book examines what the key drivers for corporate action on climate change have been: regulation, stakeholder pressure, investor pressure. Which policy instruments have been effective, which have not, and why? How have company actions influenced the strength of these pressures?

Corporate Responses to Climate Change is a state-of-the-art analysis of corporate action on climate change and will be essential reading for businesses, policy-makers, academics, NGOs, investors and all those interested in how the business sector is and should be dealing with the most serious environmental threat faced by our planet.

Part I
Introduction

1
Introduction

Rory Sullivan
Insight Investment, UK

Setting the scene

Climate change is the most serious environmental threat faced by our planet. The scientific consensus is that the increasing concentrations of greenhouse gases in the atmosphere – primarily due to the burning of fossil fuels and land-use change – are raising average global temperatures and changing the Earth's climate and prevailing weather patterns. The consequences (some of which are already starting to be observed) are expected to include rising sea levels, the melting of glaciers and the thawing of permafrost, changes in patterns of precipitation with increased risks of flooding and drought, and changes in the frequency and intensity of extreme weather events (e.g. heatwaves are becoming more common, storm intensities are likely to increase).¹

It is widely agreed that dramatic reductions – probably 80% or more by 2050, against a 1990 baseline – will be required if we are to avert the worst consequences of climate change. It is also recognised that the process of reducing greenhouse gas (GHG) emissions cannot wait; significant emission reductions will be required over the next ten or 15 years. An example of what this might look like in practice has been provided by the European Union which, after its 2007 Spring Council, stated that EU-level reductions of greenhouse gas emissions would be at least 20% lower by 2020, against a 1990 baseline, and that it would increase this reduction target to 30% if other countries followed suit.

There are strong economic arguments in support of prompt action, specifically the need to avoid or reduce the consequences of the physical impacts of climate change² and the wider benefits (in terms of reduced energy demand growth and improved energy security) that may accrue through using and producing energy more efficiently (see, for example, IEA 2006).

The implications for companies

From a business perspective, companies will be exposed to weather-related impacts such as droughts, floods, storms and rising sea levels. These impacts will particularly affect companies in sectors such as agriculture, forestry, fisheries, healthcare, insurance, tourism, water and property. However, the reality is that all sectors of the economy will be affected in some way.

Companies will also be affected by policy measures directed at limiting greenhouse gas emissions. Given the scale of the emissions reductions seen as necessary to avert the worst effects of climate change, policy action directed at reducing greenhouse gas emissions is likely to result in a complete reshaping of the world economy. Economic development over the past two hundred years has been predicated on access to relatively cheap and widely available sources of energy (in particular fossil fuels). Efforts to reduce greenhouse gas emissions therefore go to the heart of the modern industrial economy. The consequences are not confined to 'obvious' sectors such as power generation, transport and heavy industry; virtually every company's activities, business models and strategies will need to be completely rethought. There is another dimension to this, which is that companies have the potential to make important contributions to reducing greenhouse gas emissions through:

• The allocation of capital (e.g. in clean energy sources)
• Innovation and the development of new technologies
• Their influence on the actions taken by governments on climate change

This book has been complied at an important point (October 2007 to April 2008) in the climate change debate. The last five years in particular have seen a dramatic shift in public and policy attitudes to climate change, with the issue moving from something of a niche environmental concern to a central question for economic and energy policy. The reasons are various.

From the perspective of the public discourse around climate change, long-running climate change campaigns by non-governmental organisations (NGOs) such as Greenpeace and WWF, the personal leadership shown by A1 Gore (in particular, through his film An Inconvenient Truth), the linking of extreme weather events such as the 2003 summer heatwave in Europe to the effects of climate change, the Stern Review on the Economics of Climate Change (Stern 2006) and the 2007 reports from the Intergovernmental Panel on Climate Change (IPCC 2007a, 2007b, 2007c) have all helped elevate climate change from the environmental pages to the front pages.

From the business perspective, the single most important event has been the leadership shown by the European Union and its Member States in introducing the EU Emission Trading Scheme (EU ETS), which came into force on 1 January 2005. The EU ETS sets limits on emissions of carbon dioxide (CO₂) – the most important of the greenhouse gases – from more than 12,000 installations, representing approximately half of the EU's total greenhouse gas emissions. While, perhaps inevitably, the operation of the EU ETS has been criticised (in particular the over-allocation of permits for the first phase, 2005-2007), the effect of the EU ETS must not be underestimated. Not only were emissions of carbon dioxide given a real (market) price, but the EU ETS signalled that governments were serious about responding to climate change and that they were willing to countenance public policy measures that imposed costs on companies as a necessary part of delivering on this objective. This message has been reinforced by the impressive rate of climate change-related policy development and implementation in Organisation for Economic Cooperation and Development (OECD) countries in particular, with many governments increasing their support for renewable energy, adopting new product standards, and providing incentives and other support for energy-saving measures.

Despite this progress, it is by no means a 'done deal' that climate change will remain high on the political agenda. There are many uncertainties in future climate change policy such as:

• The specific targets that will be adopted at the international and national levels
• The specific policy instruments that will be used and how these will vary between countries
• The future price of carbon dioxide and other GHG emissions
• The sectors that will be affected
• The emissions reductions that different sectors will need to achieve
• The relationship between climate change policy goals and other policy goals such as competitiveness and energy security

To illustrate, in April 2008 (the time at which this chapter was written), companies trying to set a longer-term climate change strategy for their business were faced with trying to assess the implications of (among many other policy variables):

• The UK Climate Change Bill which was making its way through Parliament
• The implications of the US presidential elections – and the proposals from the then President, George W. Bush, that the USA would start reducing its emissions in 2025
• The national plans that are to be prepared by EU Member States detailing how they will meet the EU's target of a 20% reduction in greenhouse gas emissions by 2020
• The outcomes of international negotiations to develop a successor to the Kyoto Protocol
• The EU's proposals to include aviation in the EU ETS and to impose specific emission reduction targets on the automobile industry
• The (probably inevitable) stirrings of a business backlash against the EU's proposals, with Acelor Mittal bringing a case against the EU challenging its decision to exclude the aluminium and chemical sectors from the EU ETS, and Shell warning that refineries in the EU may need to shut if they are not granted sufficient emission permits under future phases of the EU ETS

Notwithstanding these uncertainties, climate change-related regulation and policy are increasingly recognised as proper matters for management attention and, at least in some sectors, as key drivers for future business growth. Furthermore, the strengthening scientific evidence around the urgency of climate change suggests that – if governments respond in a manner that is consistent with this evidence – the rate of policy development and implementation will accelerate.

In anticipation, companies have taken a variety of actions:

• Establishing corporate management systems
• Making public commitments to emissions reductions or carbon neutrality
• Participating in voluntary initiatives such as product labelling
• Seeking to influence their supply chains and their customers to reduce their emissions

While progress to date has been impressive, a fundamental question remains: will these regulatory and self-regulatory initiatives actually deliver the very significant reductions in greenhouse gas emissions necessary to avert the most serious consequences of climate change?

About this book

The overall aim of this book is to reflect on current business practice and performance on climate change in the light of the dramatic changes in the regulatory and policy environment over the last five years. More specifically, it examines how climate change-related policy development and implementation have influenced corporate performance, with the objective of using this information to consider how the next stage of climate change policy (regulation, incentives, voluntary initiatives) may be designed and implemented in a manner that is effective (i.e. delivers the real and substantial reductions in greenhouse gas emissions that will be required in a timely manner) while also addressing the inevitable dilemmas at the heart of climate change policy (e.g. How are concerns such as energy security to be squared with the need for drastic reductions in greenhouse gas emissions? Can economic growth be reconciled with greenhouse gas emissions? Can emissions reductions be delivered in an economically efficient manner?) The book focuses on two areas:

• Company responses. How have companies actually responded to the emerging regulatory framework and the growing political and broader public interest in climate change? Have companies reduced their greenhouse gas emissions and by how much? Have companies already started to position themselves for the transition to a low-carbon economy? Does corporate self-regulation – unilateral commitments and collective voluntary approaches – represent an appropriate response to the threat presented by climate change? What are the barriers to further action?
• Drivers for action. What have been the key drivers – regulation, stakeholder pressure, investor pressure — for corporate action on climate change? Which policy instruments have been effective, which have not, and why? How have company actions influenced the strength of these pressures?

Structure

The book is divided into five sections. First, Rory Sullivan, Rachel Crossley and Jennifer Kozak present the results of a major assessment of how 125 large UK and continental European companies are managing their greenhouse gas emissions, focusing on both the governance systems they have in place and the manner in which these are incorporated into strategy and performance management. Their analysis suggests that, while a majority of companies (though by no means all) have established emissions management systems and processes and most companies expect their emissions intensity (i.e. greenhouse gas emissions or energy consumption per unit of production or turnover) to reduce, most also expect their absolute (or total) level of greenhouse gas emissions to increase. Their research also highlights that most companies are focusing on direct emissions, emissions from electricity consumption (indirect emissions) and, to a lesser extent, business travel. It appears that companies have yet to fully engage with issues such as the embedded energy in their raw materials, the emissions associated with the use of their products or services or – notwithstanding the increasing number of companies that have made public statements on climate change – their wider role in the climate change policy debate.

The second section of the book (Chapters 3-9) examines the influence of economic instruments and government-sponsored voluntary programmes. The aim of these chapters is twofold: to examine the outcomes that have been achieved (i.e. to assess the effectiveness of these interventions) and to draw lessons/conclusions about the design and implementation of such policy instruments. The first two chapters (by William Blyth and Rory Sullivan, and by Ans Kolk and Jonatan Pinkse, respectively) focus specifically on how companies have responded to the EU ETS, examining questions such as how public policy uncertainty influences investment decision-making, how companies' responses vary depending on the specific regulatory constraints to which they are subject, and whether economic instruments function in the manner in which theory predicts. The following chapter (by Taka Miyaguchi and Rajib Shaw) considers the different motivations for private sector companies to participate in Clean Development Mechanism (CDM; one of the Kyoto Protocol flexibility mechanisms) projects in Indonesia; they then use this analysis to present recommendations on how the wider Indonesian policy framework may be strengthened to both increase private sector involvem...

Table of contents

• Cover
• Half Title
• Dedication
• Title
• Copyright
• Contents
• Part I: Introduction
• Part II: Public policy: regulation, economic incentives and voluntary programmes
• Part III: Non-state actors and their influence on corporate climate change performance
• Part IV: Corporate responses and case studies
• Part V: Closing sections
• Abbreviations and acronyms
• About the contributors
• Index