The CEO guide to carbon

(First of four parts)

The world is inevitably moving towards a low carbon economy. Most national governments have now accepted the need for action to reduce greenhouse gas emissions. The levels of reduction vary, but the trend remains clear.

The United Nations conference in Copenhagen in December 2009 included, for the first time, a global agreement by 132 countries to limit temperature rises to two degrees. A business-as-usual approach will not achieve these reductions and more government interventions are required to meet these commitments. This will involve a significant restructuring of the global economy.

Governments have a range of available policy measures to try and reduce emissions, including carbon reporting, energy efficiency initiatives, promotion of cleaner fuels, carbon pricing including emissions trading, taxes and trade barriers.

CEOs need to understand the likely direction of the policy in all the jurisdictions where they have operations, suppliers and customers. Ongoing monitoring is also important to understand the implications that further policy shifts may have upon cash flows, liabilities, operational controls and risk management.

Emissions and energy reporting

Mandatory reporting of emissions and/or energy is an essential platform to support other government climate policies. It also contributes to accurate reporting of national emissions and energy use. It is an essential prelude for governments to design an effective emissions trading scheme or a carbon tax. The appendix to this guide identifies the Asia Pacific markets where mandatory carbon reporting exists.

Energy efficiency measures

Saving energy is generally the cheapest way of reducing global emissions. However, there are barriers to the uptake of energy efficiency opportunities including lack of capital or knowledge. Many countries have committed to energy efficiency targets for business and promoted it as a “win-win” both for business and the wider economy. As energy prices rise, the business case for energy efficiency actions becomes more compelling. Governments will increasingly require business to account for this through reporting of energy use.

Cleaner fuels

Switching to cleaner fuels is part of the carbon reduction solution. Many governments are now requiring a proportion of electricity to come from renewable sources. This indirectly affects energy users as costs may increase with the switch away from cheaper fossil fuels.

Grants, compensation, and tax rebates and other incentives may also be available for the production and use of cleaner fuels.

Carbon emission pricing

A carbon emission price provides a way of making cleaner activities more competitive and viable compared to polluting activities. It is applied to an activity such as fossil fuel-generated electricity to increase the total cost of this and make a cleaner alternative such as natural gas more viable than coal.

Carbon emissions prices have been applied at many levels of government including, national, regional and local government. The two main ways of applying a carbon emission price are either with an emissions trading scheme (ETS) or a carbon tax.

Emissions trading scheme

Emissions trading schemes (ETS) most commonly take the form of a cap and trade scheme, creating an artificial market that attempts to reduce emissions by creating scarcity for a “permit to emit”.

Such a scheme requires companies to report their carbon emissions and then surrender permits that match these emissions annually. Permits (usually equivalent to 1 tonne of carbon emissions) can be purchased from the government or from a secondary market. A capped number of permits are created by government and these decline over time, creating an increasing price that encourages emissions reductions.

A cap and trade has been operating in 27 European Union countries since 2005. The New Zealand scheme commeces on 1 July 2010 and similar schemes are now proposed for Australia, Japan, South Korea and Taiwan.

Carbon tax

A carbon tax is a fixed price payment to government based on the carbon intensity of an activity (such as per tonne of carbon emissions). Emitters can reduce emissions rather than pay a tax. Carbon taxes have been proposed for coal use in India and in China.

Clean Development Mechanism

The Clean Development Mechanism (CDM) allows for revenue to be received from projects that reduce carbon emissions in developing countries. New investments in eligible countries should now always consider the opportunity for generating this additional revenue.

Trade barriers

In light of the Copenhagen conference of December 2009 it has became evident that striking a global agreement on climate change actions will be difficult. Indeed, a harmonised set of global emissions targets and carbon prices seems unlikely in the short term. Different countries will, and should, act at different rates. This presents an opportunity for countries to provide preferential trade agreements, or restrictions, based on the alignment of their carbon emission reduction actions.

This situation is likely to place more onus on corporate leaders to show they are engaged in this debate and driving the carbon agenda within their organisation. CEOs need to demonstrate their understanding of the issue publicly and also establish a way of keeping track on developments at the national and local level that may impact their business.

The absence of carbon emission reduction actions may lead to limits on access to a market where carbon pricing is occurring, particularly for carbon-intensive products. A provision now exists in draft US legislation to apply a “carbon border tariff adjustment” to imports from countries that do not have sufficient carbon emissions action. This could have significant ramifications for some Asia-based exporters. A global approach to carbon emission reductions is unlikely to be harmonised for some time, but there will be commercial value in responding to this issue particularly if your business, or your customer’s business is dependent on international trade in carbon-intensive products.

To be continued

(Jennifer Westacott is a Partner for Advisory Services of KPMG Australia. Jack Holden is a Senior Manager for Advisory Services of KPMG Australia.

This article is an excerpt from Advisory Services publication, “The CEO Guide to Carbon: Emissions reporting and management in Asia Pacific”.

The views and opinions expressed herein are those of the authors and do not necessarily represent the views and opinions of KPMG in the Philippines. For comments or inquiries, please email Henry D. Antonio at [email protected] or [email protected]. Henry D. Antonio is a Partner for Advisory Services of Manabat Sanagustin & Co., CPAs, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.)