Cleaning up australia’s readiness for a low carbon future 2012 progress report

Based on the overall findings from the Low-Carbon Readiness Barometer, Australian corporations today feel less ready for a low-carbon future than they did in January 2011, before the ca

Contents

2 © The Economist Intelligence Unit Limited 2012 © The Economist Intelligence Unit Limited 2012

Elizabeth Fry and Sudhir Vadaketh were the authors of the report and David Line was the editor Gaddi Tam was responsible for design and layout The cover image is by Ivan Loh

The quantitative findings presented in this report are based on two surveys of executives in Australia about low-carbon readiness at the firm, industry and country level The results of these surveys, conducted in January 2011 and repeated in May

2012, have been used to determine the Australian Low-Carbon Readiness Barometer, an ongoing

index of corporate sentiment about readiness for

a low-carbon future

We would like to thank the survey respondents and interviewees for their time and insights

June 2012

Australia will begin pricing carbon in July 2012

The government announced the scheme more

than a year ago, during which time corporations

have had the opportunity to prepare for it Do

Australian corporations feel they are ready for

a low-carbon economy? What actions have they

taken to prepare for it? What are the biggest

threats posed by Australia’s shift to a more

sustainable model? Do corporations believe the

current carbon pricing scheme is here to stay?

And, crucially, have Australian firms identified

opportunities for growth or alternative markets

that are emerging or may emerge from a

low-carbon economy? This report, based on a survey of

over 130 senior executives in Australia, attempts

to answer these questions

The key findings of the research are as follows:

l Australian firms feel less prepared now than

last year for a low-carbon future Based on the

overall findings from the Low-Carbon Readiness

Barometer, Australian corporations today feel

less ready for a low-carbon future than they

did in January 2011, before the carbon pricing

scheme was announced Australia’s overall

low-carbon readiness is 2.9 out of 5, down slightly

from 3.1 last year (on a scale of 1 to 5, with 5

denoting excellent readiness)

There are several reasons that may explain this

change in sentiment First, executives may have

been overconfident before the carbon pricing scheme was announced and explained in detail

This year they have a much better grasp of their individual firms’ level of preparedness, and their sentiment has been tempered somewhat

Second, corporate nervousness on the eve of the introduction of the carbon pricing scheme

is bound to be at its peak, as with any new piece

of legislation Third, with national business and consumer confidence down slightly this year, and given uncertain global and regional economic outlooks, corporations may be feeling more sceptical about any new costs—

real and perceived—that they have to face

l More Australian firms are taking action to prepare for carbon pricing, particularly those which will be directly affected by the carbon pricing scheme Almost a third of Australian

companies have modelled the impact of different carbon prices on their business operations, a three percentage point jump from last year (29%) Firms that will be directly affected by the carbon pricing scheme have made much more progress in improving their environmental performance, with two-thirds

of them already modelling carbon’s impact

Still, that leaves a third which have yet to do

so Moreover, only 9% of companies which will

be only indirectly affected by carbon pricing through higher costs have conducted such modelling

Executive summary

4 © The Economist Intelligence Unit Limited 2012 © The Economist Intelligence Unit Limited 2012

That said, more than two-thirds of firms surveyed have some sort of carbon-reduction strategy in place The primary driver for developing this strategy is the need to comply with laws and regulations Of the firms which will be directly affected by carbon pricing, some 85% have a carbon-reduction strategy

in place, with a further 6% in the midst of developing one More than half have developed broad strategies that encompass their external partners or supply chains, in addition to their own business

These findings indicate that Australia’s carbon pricing legislation has spurred firms to take action to reduce their carbon emissions This will ultimately reduce the country’s overall carbon footprint Policy clarity has given firms

a much better understanding of the expected impact to their businesses, and this has allowed them to make informed investment decisions

l Carbon pricing is here to stay, but perceived price uncertainty will be the biggest barrier

to further progress on carbon reduction

Close to three-quarters of survey respondents believe that carbon pricing is here to stay, but almost half of them think that a new, better pricing regime will eventually replace the current proposed scheme (of a fixed price followed by emissions trading from 2015)

This is partly due to disagreement about the optimal carbon price Close to two-thirds of respondents believe that the A$23 per tonne starting price is too high Still, there are a few others in favour of a higher price: almost 10% of survey respondents feel the A$23 per tonne starting price is too low And a plurality

of respondents (38%) considers uncertainty about the future price of carbon as the primary barrier to making further progress on carbon reduction in their companies

This uncertainty may not be resolved quickly

Even in the EU, which began trading carbon emissions in 2005, there is still debate about what the optimal price should be It is likely that Australia, which is just about to take its

first steps towards carbon pricing, will have

to go through several years of discussion and trading before reaching equilibrium More concrete action depends on greater certainty about the costs carbon pricing will impose

l The corporate carbon agenda has shifted towards cost reduction While respondents

last year sniffed opportunities in “Developing new products and services” (47%) and

“Improving relationships with customers”

(47%), this year “Cost reduction” has risen to the fore This perhaps reflects an increasing certainty about the added costs, particularly among companies directly affected by the scheme Any potential new opportunities, however, remain relatively unexplored

Unsurprisingly, firms that will be directly affected by the carbon pricing scheme have made more progress on this score In particular, more than half of this group has set up dedicated roles or teams to identify greater carbon or energy efficiency measures internally Around 30% of them have also recruited a government lobbyist, or hired

an external consultant to help identify opportunities This reflects these firms’

willingness to engage third-party help as part

of a broad stakeholder engagement strategy

Meanwhile, reflecting the current anxiety about carbon pricing, only a third of respondents believe that the opportunities created by imposing a carbon price will outweigh the risks

in the long term This is down from about half last year

one-About the survey:

The research involved surveying 136 based senior executives who are familiar with their companies’ sustainability strategy Many of the respondents are in senior management—40% are

Australia-in the C-suite or sit on the board In terms of size, 51% work at companies with a global headcount of over 1,000 people Some 46% of respondents work

at firms with global annual revenues in excess of US$1bn

The respondents work in a broad mix of

industries—24% work in the energy and natural

resources sector; 15% are in manufacturing;

12% work in construction and real estate; 12%

work in the retailing sector; 10% are in IT and

technology; and the remainder work in logistics and distribution; transportation, travel and tourism; agriculture and agribusiness; consumer goods; and telecoms

6 © The Economist Intelligence Unit Limited 2012 © The Economist Intelligence Unit Limited 2012

Introduction

desire to address climate change has waned

According to a recent poll by The Lowy Institute,

an Australian think-tank, 57% of Australians are in favour of scrapping carbon pricing altogether—when as recently as 2006, some 68%

wanted aggressive action taken to address climate change.1

Against this backdrop, the Economist Intelligence Unit (EIU) surveyed Australian corporations in May 2012, just weeks before the start of carbon pricing, to gauge their sentiment on the imminent scheme and determine what actions they had been taking to prepare for it Our survey base is comprised of companies directly and indirectly affected by carbon pricing (see Chart 1).2 This

is an update of a survey we first conducted

in January 2011, before the government had announced its carbon pricing plans

In this report we examine corporate Australia’s readiness both to face the risks and and seize the opportunities of a low-carbon future In particular, we look at whether corporate sentiment and action has shifted over the past year

1 “The Lowy Institute Poll”,

The Lowy Institute, 2006 and

2012

2 Survey respondents are

split in this way only for 2012

results

After years of debate about how to curb carbon emissions, Australia’s parliament passed legislation in 2011 that introduces a carbon pricing scheme from July 1st 2012 Under the scheme, heavy emitters will be required to purchase fixed-price permits at A$23 for each tonne of carbon they produce The permit price will be fixed for each year but will increase annually at a pre-set rate, ahead of a full emissions-trading scheme, with a A$16 price floor, in 2015

Despite the legislation, there is still a bit of uncertainty about Australia’s climate-change policies Julia Gillard, the prime minister, leads

a Labor Party government that depends on the support of independents and the Greens’

sole member of parliament for its slender parliamentary majority Tony Abbott, the opposition leader, has vowed to scrap the carbon pricing scheme if he wins power (the next election must be held by November 2013)

Meanwhile, as the global economic outlook gets gloomier, and corporations, governments and consumers focus on more basic concerns, the

Chart 1 Will your company be impacted under the carbon pricing legislation?

(% respondents)

Yes, we will be directly impacted

No, we won’t be directly impacted, but will feel the impact indirectly through higher costs

No, we won’t be directly impacted, and don’t expect to feel any indirect impact Don’t know

38

49 7

6

The Australian Low-Carbon Readiness Barometer:

Jan 2011-May 2012

1

Based on the survey conducted for this report,

we have updated the Australian Low-Carbon

Readiness Barometer, an ongoing index of

perceptions of “low-carbon readiness”

The barometer seeks to measure the degree to

which companies believe Australia is prepared

for the transition to a low-carbon economy, both

in terms of minimising carbon emissions and

seizing growth opportunities that this transition

may present in terms of new markets for cleaner

products and services

The overall score is the average of three

qualitative scores by senior executives on their

perceptions of “low-carbon readiness” of their

company, their industry, and Australia overall,

on a scale of 1 to 5, with 5 denoting excellent

readiness.3

In turn, perceptions of “low-carbon readiness”

at the company, industry and national level are

measured by averaging respondents’ scores for

two questions—“Please rate the overall readiness

of each of the following for minimising their carbon footprint” (see appendix: Chart 1); and

“Please rate the overall readiness of each of the following to capitalise on growth opportunities in

a low-carbon economy” (see appendix: Chart 2)

Using this methodology Australia’s overall carbon readiness is 2.9, a small drop from 3.1

low-in the basellow-ine report last year This low-indicates that, on average, Australian corporations today

feel slightly less ready for a low-carbon future

than they did in January 2011, before the carbon pricing scheme was announced

There are several reasons why this may be so

First, as we noted in last year’s report, executives may have been “overestimating their own firms’

readiness in relation to their competitors and the overall economy” Last year, before the carbon pricing scheme was announced, executives would have witnessed their own firms’ efforts at improving their environmental performance—

without firm national guidelines—and possibly been buoyed by what they saw This year, with details of the carbon pricing scheme well known, they have a much better grasp of their individual firms’ level of preparedness Hence, this year’s company score has been normalised somewhat, and brought more in line with Australia’s overall score

Country score—low-carbon readiness of

“the Australian economy” 2.6 2.6

3 For clarity, the scoring system in the barometer has been reversed from that used in the original survey questions (where 1=excellent) The original survey questions are reproduced in the appendix

8 © The Economist Intelligence Unit Limited 2012 © The Economist Intelligence Unit Limited 2012

Barometer by company size

Perceptions of low-carbon readiness also depend

on the size of the company Although all firms are feeling a little less positive, medium-sized firms are still the least upbeat But it is large firms that have seen the sharpest drop in perceptions of low-carbon readiness These firms typically have deep pockets and plenty of resources to commit to any carbon-reduction initiative, and hence would have been feeling extremely bullish in January

2011 However, many of them are also the heaviest emitters As carbon pricing draws near, they perhaps have a more realistic view of the scope of change needed

Second, corporate nervousness on the eve of the introduction of the carbon pricing scheme is bound to be at its peak, as with any new piece of legislation In January 2011, carbon pricing must have seemed a long way off Many firms might not have regarded it as an immediate, pressing business concern Today, as July 1st 2012 draws near, concerns about preparedness have risen

Carbon pricing is here, and Australian firms are still unsure about its budgetary and strategic implications for their businesses

Third, with national business and consumer confidence down slightly this year, and given the uncertain global and regional economic outlooks, corporations may feel more sceptical about any new costs they have to face Broader economic uncertainty may be affecting their confidence about low-carbon readiness

Barometer by industry

When asked for their perceptions of low-carbon readiness in their own industry, executives in the agriculture and natural resources and services sectors seem slightly more upbeat than those in the construction and manufacturing sectors

Agriculture and natural resources firms are feeling slightly more confident than last year, perhaps because they have been slowly readying themselves for carbon pricing Export-oriented manufacturing firms, by contrast, have been going through difficult times, given the uncertain global economic outlook and the strong

Australian dollar That, along with the imminent

imposition of carbon pricing, is forcing some of them to rethink their corporate strategies; some have opted to move capacity abroad Finally, services firms, many of which will not be directly affected by the carbon pricing scheme, may have been more relaxed about it last year, before the full details were released Now that they better understand the actual impact of the carbon pricing scheme to their businesses, they may be feeling a little less optimistic

2011 2012

Agriculture and natural resources 4 2.9 3.0 Construction and manufacturing 5 2.9 2.6 Services 6 3.1 2.9

2011 2012

Small (<101 employees) 3.7 3.4 Medium (101-10,000 employees) 3.3 3.0 Large (over 10,000 employees) 3.7 3.1

4 Includes agriculture and

agribusiness, energy, and

natural resources sectors

transportation, travel and

tourism; and consumer

goods sectors.

Corporate sentiment towards

a low-carbon future

2

Carbon pricing schemes

Last year, before Australia’s carbon pricing

scheme was announced, there was little consensus

amongst Australian executives about how to go

about cutting carbon emissions: some favoured

a cap-and-trade scheme, others a corporate

or consumer tax, while a minority believed

that carbon should not be priced at all This

year, climate change scepticism seems to have

intensified More than half of respondents believe

that the impact of carbon emissions on global

warming has not been sufficiently established to

warrant wholesale changes in corporate strategy

or behaviour, up from 40% last year

Nevertheless, though there is still some

uncertainty, a vast majority of survey respondents

believe that carbon pricing is here to stay (see

Chart 2) But almost half of them think that a new,

better pricing regime will eventually replace the

current proposed scheme

This is partly due to disagreement about the optimal carbon price Close to two-thirds of respondents believe that the A$23 per tonne starting price is too high This could be because the price of publicly traded EU carbon permits has fallen steeply to around Euro6.50 (A$8.20) per tonne, making Australia’s fixed price seem very high Looking further ahead to 2015 and the start

of emissions trading in Australia, some executives may also feel that Australia’s mooted A$16 floor price is too high

“My view has been that climate change is real and I believe it’s caused by man and probably caused by carbon dioxide,” says Mark Chellew, chief executive and managing director of Adelaide Brighton, a cement producer.7 “But Australia

is going out aggressively ahead of the world I think we’ve taken too big a first step A carbon tax of about $10 per tonne would have been a reasonable starting point.”

7 Adelaide Brighton is initially eligible for free permits in year one of the scheme for 94.5% of its output Its liability for the remaining 5.5% in year one is expected to be A$7m before tax and mitigation.

Chart 2

Which of the following best reflects your view of the likely state of the carbon pricing mechanism in five years’ time?

(% respondents)

A new, better, pricing regime will eventually replace the current scheme

The proposed scheme will persist in its current form: a fixed price on carbon from mid 2012, ahead of a full emissions-trading scheme in 2015

Carbon pricing will be scrapped altogether

Don’t know

49 23

23 5

10 © The Economist Intelligence Unit Limited 2012 © The Economist Intelligence Unit Limited 2012

Still, there are a few others in favour of a higher price Almost 10% of survey respondents feel the A$23 per tonne starting price is too low

David Hone, the London-based global climate change adviser at Shell, an oil and gas firm, thinks Europe’s current carbon price is undermining the region’s efforts to reduce corporate carbon footprints “There is a growing push from businesses there to recalibrate the system so that prices rise to the sorts of levels that are being introduced in Australia,” he says, indicating that Australia’s A$16 per tonne cap-and-trade floor

is suitable “A low price doesn’t drive change A more robust price will drive change in investment and opportunity by providing the right investment signals.”

Perhaps the salient point here is that even in the

EU, which began trading carbon emissions in

2005, there is still debate about what the optimal price should be It is likely that Australia, which

is just about to take its first steps towards carbon pricing, will have to go through several years

of discussion and trading before equilibrium

is reached That, in turn, should lead to more

concrete action: a plurality of respondents (38%) considers the uncertainty about the future price

of carbon as the primary barrier to making further progress on carbon reduction in their companies

Threat or opportunity?

Reflecting the current anxiety about carbon pricing, only a third of respondents believe that the opportunities created by imposing a carbon price will outweigh the risks in the long term This is down from about one-half last year

Meanwhile, while respondents last year sniffed opportunities in “Developing new products and services” (47%) and “Improving relationships with customers” (47%), this year “Cost reduction”

has risen to the fore (see Chart 3) As carbon pricing draws near, firms are more focussed on how they can reduce costs rather than grow new business opportunities This perhaps reflects the fact that there is increasing certainty about the added costs, particularly among companies directly affected by the scheme Any potential new opportunities, however, remain relatively unexplored

Chart 3 What do you think are the biggest opportunities to your business in taking steps to reduce its carbon footprint? Select up to three.

(% respondents)

Cost reduction Improving relationships with customers Developing new products and services Improved employee engagement/commitment Risk mitigation (eg, in supply chains) Access to new markets

Improving relationships with suppliers Other, please specify

We don’t see any opportunities in this Don’t know

35

24 22 20 18 7

2

24 4

33

Developing new products and services Improving relationships with customers Risk mitigation (eg, in supply chains) Improved employee engagement/commitment Access to new markets

Cost reduction Improving relationships with suppliers

47

34 26 25 22 9

47

Impact on business

A national carbon price will inevitably have

an impact on many aspects of business When

compared to last year, respondents are generally

more pessimistic about the carbon legislation’s

impact across all aspects of their business

Respondents generally believe that a price on

carbon will lead to higher operating costs, lower

profits, and weaker competitiveness (see Chart

4) However, respondents are still confident

that the carbon legislation will help improve

their firms’ brand value and reputation, and

increase innovation and investment into clean technology

Among the companies that are directly affected

by the carbon pricing scheme (38%), views tend

to be more polarised, with more believing that there will be a positive or negative impact on the different aspects of their businesses than those which expect no change This suggests that these firms are—as might be expected—further ahead

in their carbon reduction strategies, and hence may have a better understanding of how the carbon price will affect their firms

Improve Stay the same Deteriorate Don’t know/not applicable

One reason, perhaps, for the anxiety about

the imminent carbon price, is that few firms

believe that they will be able to pass on any

additional costs to their customers (see Chart 5)

Wesfarmers, owner of Coles, Australia’s largest

supermarket chain, has said it will challenge any proposed supplier price increases and strive to avoid passing on any carbon-related costs to its customers (see case study: Wesfarmers)

49 7

12 © The Economist Intelligence Unit Limited 2012 © The Economist Intelligence Unit Limited 2012

Wesfarmers, owner of Coles, Australia’s largest supermarket chain, as well as major coal and chemicals operations, will be among the companies most heavily affected by the new carbon price scheme

Aside from power stations, Wesfarmers is Australia’s sixth biggest carbon emitter, producing 2.7m tonnes of direct emissions The company says it will incur a A$100m net annual cost in the first year of the scheme as a result of the initial carbon price of A$23 per tonne (For comparison, its 2011 revenues were A$56bn)

Yet the conglomerate believes it can maintain its margins by taking steps to reduce carbon emissions and improve energy efficiency “We invested heavily in energy efficiency a few years back when it became clear that Australia would put a price on carbon,” says Cameron Schuster, the firm’s sustainability manager

For example, Coles is installing voltage optimisation technology that reduces overall store power consumption

Still, the carbon legislation provided some policy clarity “While our greenhouse gas accounting, monitoring and reporting systems were purpose-built for a carbon price four years

ago, the continuous flow of regulation and policy in the past six months has necessitated a review and some tweaking,” Mr Schuster says

Apart from the investment to improve energy efficiency, much of the group’s focus in the last year has been on intensive emissions reduction, particularly in the chemicals business It

is testing a new nitrous oxide reduction technology that could potentially cut emissions quite significantly Meanwhile, Wesfarmers’

coal business has worked with regulators to find

a way to improve the method of measuring seam methane emissions

coal-Wesfarmers has also spent time developing internal policies to guide employees as they prepare greenhouse and energy reports and deal with customers and suppliers on issues to

do with carbon pricing Among other things, these policies deal with report verification, record keeping, carbon accounting and pricing, and the transfer of carbon permits

Though the carbon cost is significant, Wesfarmers believes it can mitigate it to a large extent with top line growth and increased organisational efficiency

Case study: Wesfarmers

Corporate action for a low-carbon future

3

Modelling the impact of carbon prices

Though firms are feeling more anxious this year

about carbon pricing, they are nevertheless

taking action to prepare for it Almost a third of

companies have modeled the impact of different

carbon prices on their business operations, a

three percentage point jump from last year (29%)

In particular, firms which will be directly affected

by the carbon pricing scheme are much further

ahead (see Chart 6), with two-thirds of them

already modelling carbon’s impact on their

business operations Of the firms which are only

indirectly affected by carbon pricing, almost half

of them are still in the planning stages

For years, Shell has embedded a US$40 per

tonne shadow carbon price into all new

project evaluations (see case study: Shell)

“Institutionalising carbon pricing in projects can

be a challenge since it does have an impact on how

people design and implement their projects,” says

Mr Hone

He believes that a strategic vision must be clearly

communicated from senior levels in order to

embed carbon monitoring into an organisation’s

structure, and to ensure behavioral change

happens throughout the corporate culture Shell’s

main driver of strategic change is a high profile

CO2 team that sits at the top of the group and reports directly to the CEO “I think the strategic change is still in its infancy,” Mr Hone says

Chart 6

In your scenario planning, have you assessed or modeled the impact of different carbon prices

on your business operations?

8

6 6

39 5.8

5.8

Indirectly affected Directly affected

Reducing carbon footprints

Meanwhile, Australian corporations are at different stages of maturity in their efforts

to reduce their carbon footprints More than two-thirds of firms surveyed have some carbon-reduction strategy in place (see Chart 7)

Surprisingly, this represents a three percentage point drop from 70% last year This could be because some firms which will not be directly affected by the carbon pricing have had to scale back their overall carbon-reduction strategies in the face of other competitive pressures, including sluggish demand—and a strong Australian dollar for export-oriented firms