Cleaning up australias readiness for a low carbon future

The Australian Low-Carbon Readiness Barometer: Baseline expectations 10 Pricing carbon: How to reduce carbon emissions 13 Capitalising on opportunities in a low-carbon economy 25... This

Commissioned by

The Australian Low-Carbon Readiness Barometer: Baseline expectations 10

Pricing carbon: How to reduce carbon emissions 13

Capitalising on opportunities in a low-carbon economy 25

Cleaning up: Australia’s readiness for a low-carbon future is an Economist Intelligence Unit report,

commissioned by GE The Economist Intelligence Unit (EIU) conducted the survey and interviews

• Tim Nelson, head of economic policy and sustainability, AGL

• Peter Burn, policy director, Australian Industry Group

• Craig Roussac, general manager of sustainability, safety and environment, Investa

• James Kell, CEO, Kell & Rigby

• Peter Shields, economics and sustainability team, Macquarie Generation

• Robert Poole, general manager, industry and government affairs, Murray Goulburn

• Carl McCamish, executive general manager of policy and sustainability, Origin

• Rob Kella, formerly chief risk officer, Qantas

• David Plunkett, general counsel, Qenos

• Susie Smith, manager for climate change and sustainability, Santos

• Armineh Mardirossian, group manager, corporate responsibility, WoolworthsMay 2011

Preface

Executive summary

Although corporate and public opinion in Australia is, by and large, in favour of lowering carbon

emissions, there is much debate about how to do it Although it seems somewhat inevitable that

Australia will eventually transform into a low-carbon economy—thereby reducing its dependency on

carbon for economic growth—the roadmap for this transition is not yet clear The current government

has announced plans to implement a carbon-pricing scheme from July 2012, but politicians have yet to

achieve consensus on the finer details

In this uncertain environment, Australian businesses must design and implement corporate

strategy How prepared are Australian corporations for a low-carbon economy? What are the biggest

threats posed by Australia’s shift to a more sustainable model? What is industry’s preferred option for

pricing carbon, and why? 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 include:

•Corporate strategy on carbon reduction is being held back by a lack of policy clarity, and

companies are unsure when a clear policy will be implemented For the majority of firms, the current

uncertainty around Australia’s future environmental policies is hindering the development and

implementation of corporate carbon-reduction strategies Almost two-thirds of respondents to the

survey consider the unclear regulatory environment the primary barrier to making further progress on

reducing carbon emissions

Carbon reduction has moved up and down the corporate agenda over the past few years, partly in

tandem with the perceived political commitment towards combating climate change The years of

political paralysis have also led to some corporate scepticism—just 16% of respondents believe that

the Australian government has the political will to push through a carbon price.1

This uncertainty has already hampered corporate strategy and decision-making, particularly with

regards to potential new investments in Australia Some firms, for instance, believe they are making

poor investment decisions—investing in emissions-heavy capital equipment and infrastructure—

because they still do not have the certainty of a carbon price, which will make low-carbon technology

more attractive

1 The survey was conducted in January and February 2011, before the prime minister, Julia Gillard, announced plans for a carbon tax

This suggests that Australia must resolve the current impasse over carbon pricing in order for corporations to design more effective long-term strategies, ultimately improving the economy’s competitiveness.

•The majority of Australian firms are doing something to address carbon emissions, but only

a minority have detailed strategies for a low-carbon future Some 70% of firms say that they have

a strategy in place for reducing their carbon footprint More than two-thirds of firms have specific, measureable targets for reducing their overall energy usage However, some of these efforts may be quite basic Only 21% of respondents, for instance, say their companies have a clearly defined carbon reduction programme for their entire supply chain Less than one-third of firms have modelled the impact of different carbon prices on their business operations

Clearly, Australian firms are at many different stages of preparedness for a low-carbon future Some have developed thorough, holistic strategies; many have not done much at all, perhaps waiting for concrete legislative changes before acting

•Australian firms see opportunities in a low-carbon future, and some have already started capitalising on them More than one-half of respondents believe that the need to cut carbon emissions

is a driver of process innovation, and is an opportunity to gain a competitive advantage by creating new or more marketable products Meanwhile, more than one-half of the respondents believe that a corporate carbon tax will improve innovation and investment in clean technology More than one-half also say their companies are ready to capitalise on growth opportunities in a low-carbon economy More than one-third of respondent companies have created new dedicated roles or teams to identify green products or services

•The biggest perceived risk in a low-carbon future is increased costs When asked to identify the

biggest risks to their business posed by Australia’s shift to a more sustainable economy, almost quarters of respondents say a major risk is added costs arising from compliance with regulations

three-In addition, more than one-third of respondents believe that a carbon price will harm their international competitiveness unless their foreign counterparts are subject to the same requirements These worries may be partly driven by uncertainty around carbon pricing—companies are still unsure of the exact cost to their business

They also do not know what, if any, compensation they will be entitled to Ross Garnaut, the government’s chief climate-change advisor, believes that a carbon price will affect the international competitiveness of some companies, and recommends that trade-exposed industries receive compensation—varying depending on the industry—for three years from mid-2012

Still, the prevailing uncertainty suggests that the public and private sectors need to invest more in carbon research to deepen Australia’s collective understanding of the potential impact of a carbon price

•There is little corporate consensus about the impact of climate change Surprisingly, there are

many executives who still question the science of climate change—40% of respondents say that the impact of carbon emissions on global warming hasn’t been sufficiently established to warrant wholesale

changes in corporate strategy or behaviour This indicates that broader, deeper climate-change

education is necessary

Similarly, there is a broad variation in assessment of the business impact of Australia’s shift to a

low-carbon economy, with some respondents viewing it more as a threat to their business, and others

more as an opportunity They are similarly split on whether the opportunities created by introducing a

carbon price will outweigh the risks in the long run More than two-thirds of respondents do, however,

feel that cutting Australia’s carbon emissions is principally a matter of changing corporate behaviour

Put together, these findings portray the uncertainty, doubt and confusion in Australia’s private

sector towards climate change and carbon reduction This suggests that the national discussion and

debate about sustainability is still in its infancy

•The majority of respondents favour some sort of carbon-pricing scheme, but they disagree about

which one One-quarter favour a carbon cap-and-trade scheme, while 20% prefer a simple tax on the

carbon footprint of their operations A further 12% want a consumer tax on the carbon footprint of

goods and services consumed

Many of the companies interviewed for this report approve of the government’s idea of introducing

a carbon tax—which gives them price certainty—followed later by a market-based pricing mechanism

Nevertheless, they are doubtful about the perceived accelerated timeline They would also like more

detail on the impact on trade-exposed and emissions-intensive industries; the provision of incentives,

allowances and a transition period; the potential for unintended consequences; and a host of other

uncertainties surrounding any scheme

This suggests that the Australian government must carry out further research and analysis into

carbon pricing, as well as broad-based communication and dialogue, in order to secure buy-in from

Australian corporations and society By building a broader consensus behind its carbon-pricing

policies, the government will encourage more firms to make low-carbon investments in the country,

and spur clean-product innovation within local firms This should help to position Australian

companies for success in low-carbon economies around the world

•Large firms are more prepared for a low-carbon future The survey results suggest that bigger

companies have invested more into preparing themselves for a low-carbon future For instance, 41% of

About the survey

The research involved surveying 131 based senior executives who are familiar with their companies’ sustainability strategy Many of the respondents are in senior management—57% are in the C-suite or sit on the board In terms of size, 47%

Australia-work at companies whose global headcount exceeds

1000 people Some 45% of respondents work at firms whose global annual revenues exceed US$1bn

The respondents work in a broad mix of industries—23% work in the energy and natural resources sector; 18% work in construction and real estate; 11% are in the telecommunications industry; 11% work in transportation, travel and tourism; 10% are in the agriculture and agribusiness sector; and the remainder work in logistics and distribution;

IT and technology; manufacturing; consumer goods; retailing; healthcare, pharmaceuticals and biotechnology; professional services; and education

As the world’s hydrocarbon reserves continue to be depleted, all countries will have to reduce their

carbon intensity—the amount of carbon required per unit of GDP This shift is being accelerated

by concerns about climate change, which have led to global agreements, commitments and efforts

to reduce carbon emissions Some countries, including Denmark, India, and the Netherlands, have

already implemented a carbon tax, largely with the intention of reducing carbon emissions

This issue is particularly important for Australia, the world’s top coal exporter, which generates

more than 80% of its electricity from coal and has per-capita CO2 emissions that are the highest in the

developed world.2 Most other developed countries now have falling or steady emissions but, partly as a

result of its resources boom, Australia’s emissions continue to increase rapidly

Australia’s robust economic growth drove energy demand from 2007 to 2009 Yet emissions

grew only two-thirds as much as energy demand during that period, and four-fifths as much as GDP,

reflecting a drop in Australia’s carbon intensity Nevertheless, in the absence of further policy action,

Ross Garnaut, the government’s chief climate-change advisor, estimates that total emissions will

increase by 24% from 2000 levels by 2020.3 This represents an upward revision of four percentage

points from 2010 projections, largely owing to the emissions from opening new coal mines and

liquefying natural and coal seam gas for export These findings are fuelling a growing awareness in

Australia about the need to continue reducing its carbon intensity

Australians have also suffered from tragic weather-related disasters recently, from the suffocating

droughts in the decade up to 2009, to the devastating floods in Queensland in 2010-2011 These have

heightened criticism of carbon emissions and the role they play in climate change

According to the Commonwealth Scientific and Industrial Research Organisation (CSIRO),

Australia’s national science agency, there is a 90% chance that greenhouse gas emissions resulting

from human activities caused most of the global warming since the mid-20th century CSIRO believes

that future climate change in Australia will depend on the level of carbon emissions in the country If

emissions are low, CSIRO expects warming of 1-2.5 ºC by around 2070, with a best estimate of 1.8 ºC If

emissions are high, CSIRO expects warming of 2.2-5 ºC by around 2070, with a best estimate of 3.4 ºC.4

Although public opinion in Australia is, by and large, in favour of lowering carbon emissions, there

is much debate about how to go about it Australia’s politicians have been unable to achieve consensus

on the issue, largely because opinion is so divided

2 The Global Carbon Project, 2009

3 The Garnaut Climate Change Review Update 2011

4 “Climate change in Australia: technical report 2007”, Commonwealth Scientific and Industrial Research Organisation

In 2007, the Labor Party, led by Kevin Rudd, swept into power partly because of his commitment to reducing carbon emissions In 2008, Mr Rudd’s administration ratified the Kyoto protocol and outlined

a proposed Carbon Pollution Reduction Scheme (CPRS), a cap-and-trade scheme intended to cut Australia’s greenhouse-gas emissions by 5% over ten years However, the proposal was defeated three times in Australia’s Senate (the upper house of parliament) Each time, members of the Australian Greens party opposed it on the grounds that the scheme would be too ineffective in reducing carbon emissions, while the opposition Liberal-National coalition claimed that it would unfairly harm trade-exposed industries like the mining sector

The Copenhagen climate conference in 2009, meanwhile, indicated that international enthusiasm for combating climate change had waned, and that a binding global pact was less likely to be agreed

Mr Rudd hence delayed implementation of the CPRS until 2012 This policy retreat, amongst other things, lost him his party’s support, and hence his job as prime minister In June 2010 Julia Gillard, his Labor Party colleague, took over as prime minister, and soon after called an election, which resulted in

a hung parliament With the support of four MPs—one Green and three independents—Ms Gillard was able to form a minority-led government

Soon after Ms Gillard’s ascension, a renewed global commitment towards combating climate change emerged While the Copenhagen climate conference in 2009 had failed to deliver any international agreements, the subsequent Cancun conference in December 2010 produced some concrete policies (albeit with vague details) These included US$100bn a year for developing countries by 2020 as climate assistance; a climate fund, partly under the direction of the World Bank, through which much

of the money might flow; and a deal on the conditions under which countries may be paid to decrease the damage being done to their forests

In February 2011 (after the survey for this paper was conducted), Ms Gillard announced plans to introduce a fixed price on carbon from mid 2012, ahead of a full emissions-trading scheme in 2015 Under the new carbon-pricing scheme, Australia’s biggest polluters will be required to purchase fixed-price permits for each tonne of pollution they produce.5 The permit price will be fixed for each year but will increase annually at a pre-set rate In effect, the price of the permit will be the carbon price.Despite these plans, there is still uncertainty about Australia’s climate-change policies Ms Gillard, after all, does not have a widespread electoral mandate Building a consensus is difficult owing to the unstable nature of the ruling coalition Ms Gillard’s Labor Party and the opposition are committed to reducing Australia’s emissions by 2020 to at least 5% below 2000 levels The Greens, meanwhile, want cuts of 25-40% below 2000 levels They are also against generous compensation to the coal industry and the heaviest-polluting power generators As such, the federal government could fail to win support for its proposed carbon emissions tax

In addition, powerful stakeholders, including the mining industry, are lobbying for or against

a carbon price Export-dependent companies are worried about a loss of competitiveness internationally Operating costs will probably rise—RepuTex, a Hong Kong-based consultant specialising in carbon risk analysis, estimates that if the government sets the carbon tax at A$25 per tonne, although nearly one-half of the A$3.3bn cost would be passed on to consumers, the top

200 companies by market capitalisation would be left with a net liability of A$1.75bn.6 Amongst

5 Throughout the paper,

we will refer to the current

consumers, meanwhile, there is some opposition to the scheme as people are increasingly worried

about rising gas, electricity, water and food prices

All this suggests that the Australian government must carry out extensive further research and

analysis into carbon pricing, as well as broad-based communication and dialogue, in order to secure

buy-in from Australian corporations and society

Australian corporations ultimately need policy clarity They are concerned that the different

political parties will never be able to agree on emissions targets and carbon-reduction policies The

years of political inaction have also led to some corporate scepticism—just 16% of survey respondents

believe that the Australian government has the political will to push through a carbon price This

uncertainty around Australia’s future environmental policies is holding back corporate

carbon-reduction strategies

Policy clarity will also allow Australian firms to capitalise on any opportunities that might emerge in

a low-carbon economy Though carbon reduction is often framed as an effort to control climate change

and reduce fossil fuel dependency, from a corporate point of view, it is as much about developing

innovative products and exploiting new growth markets In this report we examine corporate

Australia’s readiness to face both the risks and opportunities of a low-carbon future

The Australian Low-Carbon Readiness Barometer: Baseline expectations

Based on the survey conducted for this report, we have devised the Australian Low-Carbon

Readiness Barometer, an ongoing index of perceptions of “low-carbon readiness” Importantly,

in future iterations the barometer will measure improvement or decline over current conditions rather than the absolute readiness This chapter summarises the findings of the initial survey, which forms the baseline index

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.6

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 Chart A); and “Please rate the overall readiness of each

of the following to capitalise on growth opportunities in a low-carbon economy” (see Chart B)

Using this methodology Australia’s overall low-carbon readiness is 3.1

The following scores will form the baseline for the ongoing index:

It is notable that executives view prospects for their own company—the business about which they are best informed—with the greatest degree of optimism That may be because they are privy to new carbon-reduction strategies or clean energy opportunities that reveal the potential for their own firm

to succeed in a low-carbon future Alternatively, they may be overestimating their own firm’s readiness

in relation to their competitors and the overall economy Whether executives are being too positive or too negative will become clear in due course

6 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.

Barometer by industry

When asked for their perceptions of low-carbon readiness in their own industry, executives in the

agriculture and natural resources, and construction and manufacturing sectors seem slightly less

upbeat than those in the services sector

This could be because companies in those industries typically emit more emissions than

quickly adjust to changes in market conditions

7 Includes agriculture and agribusiness; energy and natural resources sectors

8 Includes construction and real estate; manufacturing sectors

9 Includes healthcare, pharmaceuticals and biotechnology; IT and technology; logistics and distribution; professional services; retailing; telecommunications; transportation, travel and tourism; consumer goods; education sectors

It may well turn out that executives in this baseline report are too optimistic about their own

companies’ prospects, in relation to those around them With uncertainty still surrounding a

carbon-pricing scheme, many firms may actually be caught unawares when the final legislation is passed

With the overall barometer score at 3.1 out of 5, there remains plenty of room for movement in both

directions over the coming year To register your disposition—be it positive or negative—please join us

Carbon reduction has moved up and down the corporate agenda over the past few years, partly

in tandem with the perceived political commitment towards combating climate change If and when

Australia finally does decide to price carbon, more than one-half of Australian firms believe they are

Chart B Please rate the overall readiness of each of the following to capitalise on growth opportunities in a low-carbon economy

Rate on a scale of 1 to 5, where 5=Excellent, 3=Average and 1=Very poor.

(% respondents)

Your industry The Australian economy

31 34

where 5=Excellent, 3=Average and 1=Very poor.

(% respondents)

Your industry The Australian economy

34 35

low-Corporate sentiment towards a low-carbon

More than one-third of respondents, meanwhile, do not think that carbon should be priced,

believing instead that green technology or behaviours should be subsidised (see Chart 1) The

majority, however, favour some sort of carbon pricing One-quarter favour a carbon cap-and-trade

Carbon doesn’t need to be priced; green technology or behaviours should be subsidised instead

Carbon cap and trade scheme (eg, CPRS)

Corporate tax on carbon footprint of operations

36 25

This preference for a cap-and-trade scheme over a carbon tax probably reflects the perception

that the former will have a greater environmental impact “The most effective, low-cost and flexible

solution for a global problem is a globally traded carbon unit and a trading scheme that links countries

and industries,” says Carl McCamish, executive general manager of policy and sustainability at Origin,

an energy company “A price on carbon might affect behaviour but you don’t know by how much If you

put a cap on the total emissions that are ever going to be emitted, however, you have more certainty

with the environmental outcome.”

Several interviewees for this paper feel that the success of a trading scheme is dependent on it being internationalised Companies are searching for the cheapest source of abatement and that involves being able to trade permits internationally For some companies, however, a straight carbon tax provides much-needed certainty When business leaders know what it will cost them to emit a unit

of carbon, they can budget and plan accordingly With a carbon trading scheme, the price fluctuates, creating some uncertainty

Qantas, Australia’s largest airline, prefers the simplicity of the tax for now since it makes for easier administration and implementation Businesses can easily use the information they already provide

as part of the requirements of the National Greenhouse Energy Reporting Act (NGER) according to Rob Kella, until recently chief risk officer at Qantas Their carbon tax liability can be estimated from that.10Others believe that the current two-step proposal—a tax followed by a cap-and-trade scheme—is the most sensible approach Once Australia is used to the general idea of paying for carbon emissions,

it can then move to a more market-based system

Even Qantas would prefer a cap-and-trade scheme in the long run, but its appeal depends on how the rules are set “As a trade-exposed, emission-intensive business we didn’t feel the Rudd-designed CPRS reflected the inherent limitations of our business and what we were trying to do strategically to move things forward,” says Mr Kella

Murray Goulburn, a dairy co-operative and one of Australia’s largest exporters of processed foods, has come to the same conclusion As a moderately intensive emitter of greenhouse gases it was not eligible for free permits under the CPRS However, as a fully trade-exposed business it would have incurred high costs and would not have been able to recoup one cent of the tax It is hopeful that any future cap-and-trade scheme will address these concerns

Tim Nelson, head of economic policy and sustainability at AGL, an energy firm, also supports a fixed price for now, but likes the idea of eventually moving to a cap-and-trade scheme To him, a carbon price such as A$20-30 per tonne is manageable and would allow for a gradual transition to a low-carbon economy “We’re not talking about revolutionising the economy overnight, but a reform that will take three or four decades,” he says

Mr Nelson recommends transitional assistance for energy-intensive, trade-exposed industries

to mitigate the financial impact on those businesses until comparable carbon-pricing schemes are implemented in competitor countries He also suggests financial assistance for significantly affected industries like high-emitting coal-fired generators “It makes sense to promote investor confidence and ensure energy security as we move to cleaner technology and renewables,” he says

Threat or opportunity?

When asked if Australia’s shift to a more environmentally sustainable economy is a threat or an opportunity to their business, respondents are divided One-half believe that the opportunities created by imposing a carbon price will outweigh the risks in the long run The biggest opportunities, according to almost one-half of the survey respondents, will be in developing new products and services and in improving their relationships with their customers (see Chart 2)

10 For several years,

energy-intensive industries

have been forced to report

energy use under the Energy

Efficiency Opportunity

Assessment Act and the

National Greenhouse Energy

Reporting (NGER) Act About

one-third of Australia’s top

companies are assessed As

a guide, businesses emitting

more than 25,000 tonnes of

Companies such as AGL, Origin and Qantas—three of Australia’s largest emitters11—envision plenty

of opportunities to develop new products and services for a ”clean” economy In fact, they are already

investing heavily in clean energy Origin wants to justify building more gas plants that would cut

average emissions when generating electricity “We have just built Australia’s biggest base-load

gas-fired plant so we are very proactive in that space,” says Mr McCamish

11 Compared with others as

reported in Greenhouse and

Energy Information 2009-10,

National Greenhouse and Energy Reporting, Department of Climate Change and Energy Reporting

Opportunity awaits

Chart 2: What do you think are the biggest opportunities to your business in taking steps to reduce its carbon footprint?

Select up to three (% respondents)

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 47 34

26 25 22 9

Source: Economist Intelligence Unit

In response to demand from environmentally conscious consumers, Origin has moved to build a

Kella He sees many clean energy opportunities in the aviation and automobile sectors, particularly

with the use of alternative fuels, which would also allow countries to reduce their dependence on the

Middle East for crude oil

Reflecting a popular corporate view, James Kell, chief executive of Kell & Rigby, a construction firm,

believes that any and all sustainability efforts are good for the planet and should be encouraged

While still hesitant to spend money on measuring his firm’s carbon footprint or modeling risks and

opportunities, he feels any price on carbon will boost innovation and investment in clean technology

For instance, although solar PV and solar thermal technologies are not yet commercially ready,

and the grid in Australia is not “smart” enough to handle them well, they will one day be feasible

“Making buildings more sustainable and having a lighter footprint is the right thing to do, so I’m

heading in that direction whether the debate is purely about carbon or not,” says Mr Kell He sees

plenty of opportunities through new building practices such as new substations, renewable electricity

infrastructure and the like Much of this will be demand-driven, according to Mr Kell, as “green”

case study Qantas

seven years we were pursuing fuel-conservation strategies then and

looking at new equipment primarily because fuel was a high cost

Emissions became a bigger issue subsequently and in many respects

just complemented the work we had already started on,” he says

There have also been opportunities for Qantas to make

incremental improvements to its existing fleet For example it

switched to lighter catering carts in order to lower the total onboard

weight of the aircraft The major transformations will occur in a few

Aviation is one of the most energy-intensive sectors in the world Some 95% of airline emissions relate to the burning of aviation fuel Imposing a carbon price on Qantas creates a competitive distortion since the firm competes with airlines from Asia and the Middle East that have fewer emissions subject to tax or trading systems

Therefore Qantas is hoping that any new carbon-reduction regime builds in some transitional arrangements for the aviation industry and some incentives in recognition of initiatives already in place—especially given the work on cleaner aviation fuel

“Government is asking for a response on pricing principles but seems to be putting the cart before the horse,” says Mr Kella “It is creating opportunities for industry to participate but seems to have taken a view of how to proceed before the consultative period has begun People are worried about the time they have to prepare.”

Innovation opportunity Chart 3: Please indicate your level of agreement with the following statements Rate on a scale of 1 to 5, where 1=Strongly agree and 5=Strongly disagree.

Source: Economist Intelligence Unit

buildings, which require different methods of construction, are more easily designed and constructed

if they are requested by clients

These anecdotes resonate with the survey results, where more than one-half of respondents believe that cutting carbon emissions is a driver of process innovation, and is an opportunity to gain a competitive advantage by creating new, or more marketable products (see Chart 3)

Firms are a bit more phlegmatic, however, about whether cutting carbon emissions can help them

find new clients On balance, they are also somewhat sceptical that cutting carbon emissions will give

them a competitive advantage in terms of cost reduction

Risks from going clean

Almost three-quarters of respondents say compliance costs arising from new environmental legislation

is the biggest risk posed to their business by Australia’s shift to a low-carbon economy (see Chart 4)

This finding underlines the fear of a spike in operating costs due to higher energy prices and taxes on

carbon emissions It also underscores the importance of policy clarity and regulatory transparency so

companies can start managing and mitigating these risks At the moment, policy uncertainty appears

to be causing concern and hindering corporate strategy Almost one-half of the respondents perceive

loss of competitiveness as a big risk

Peter Burn, policy head at the Australian Industry Group, a non-profit cross-industry association,

does not believe that the additional ongoing compliance costs will be great He points out that

one-third of Australia’s biggest emitters already measure and report carbon emissions under NGER

Although firms incur significant costs to comply with the NGER, he believes that a carbon price that

feeds off that reporting regime should not be expensive to implement

There will be additional compliance costs, says Mr Burn, if businesses participate in the Emission

Intensive Trade Exposed (EITE) scheme or other programmes aimed at offsetting any loss of

competitiveness Both small and large companies may be involved The EITE system has high upfront

costs but much lower ongoing costs

In terms of implementation, a cap-and-trade scheme would be costlier because instead of paying a

tax, companies will have to acquire permits, expertise and any other know-how related to the permit

platform Additional compliance costs would also be involved if the company were to buy carbon

offsets, such as forestry investments

All things considered, however, Mr Burn believes that loss of competitiveness could potentially have

a much bigger impact on businesses than ongoing compliance costs

Risky business?

Chart 4: What do you think are the biggest risks to your business posed by Australia’s shift to a more sustainable economy?

Select up to three (% respondents)

Imposition of large costs through compliance with regulations

Loss of competitiveness

Creation of an uncertain investment environment

Risk of brand/reputational damage through non-compliance

Loss of strategic focus on enhancing corporate value

Enhanced supply-chain risk

73 49

42 27

16 15 Source: Economist Intelligence Unit

it The end result, suggests Robert Poole, general manager, industry and government affairs at Murray Goulburn, is that more manufacturing will be shifted abroad, as global corporations practice environmental regulatory arbitrage The net effect on carbon emissions worldwide will remain unchanged In fact, global emissions could even increase, if the company moves to a country that uses

a more emissions-intensive production process, risking so-called carbon leakage “Fears about carbon leakage are overblown but remain a powerful obstacle to the introduction of effective mitigation policies the world over,” says Professor Garnaut

Mr Poole believes that an international solution is critical since at present trade is highly distorted

by the fact that some countries price-in pollution and some do not “If emissions reduction is the appropriate response to address man-made climate change, then by definition if we don’t get the major economies involved, we are not going to achieve the outcome we are seeking,” he says

As with many companies, the dairy co-operative operates in a highly global competitive market where it already faces restricted trade access and export subsidies “We don’t want to see another distortion in the already tough global dairy sector,” Mr Poole says

The Australian government, led by Ms Gillard, says it is engaged in genuine consultation with exposed, emissions-intensive industries Nevertheless, the government has been forced to publicly defend the consultation process, amid industry worries that the carbon price and compensation package have already been decided Similarly, the interviews conducted for this paper suggest that many executives feel their voices are not being heard “More work needs to be done on securing investment certainty during the transition from a fixed carbon price to a cap-and-trade scheme,” says one executive

trade-Impact on operating costs and profit

A national carbon price will inevitably have an impact on many aspects of business Respondents generally believe that a price on carbon will lead to higher operating costs, lower profits, and weaker international competitiveness (see Chart 5) This reflects the fact that a tax is immediate and unavoidable, whereas any future fillips to profitability or competitiveness are merely potential Peter Shields, who works in the economics and sustainability team at Macquarie Generation, a state-owned power generator, believes that the firm will lose hundreds of millions of dollars with the introduction

of a carbon tax It can pass on a fair portion of the costs but the tax could potentially wipe out all its profits

emissions intensive, as our operations require very high temperatures and large volumes of steam,”

says David Plunkett, general counsel at Qenos “We have already taken steps to improve our energy

efficiency and therefore reduce our carbon emissions Nevertheless, if a carbon price is introduced, and

we don’t get appropriate transitional assistance, our long-term viability will be threatened.”

Furthermore, a carbon price will dramatically change the dynamics in the energy sector and has led

to fears that electricity security will be compromised As evidence, the opposition Liberal-National

coalition points to Professor Garnaut’s report, which it believes shows that the government’s carbon

policy would lead to brownouts and insufficient electricity production

Balancing these detrimental effects, however, respondents to the EIU survey do believe that a

carbon price will benefit their business in some ways More than one-half believe that it will boost

innovation and investment into clean technology, while 43% say that their company’s brand value and

reputation will be enhanced

Several interviewees are concerned that proceeds from any carbon pricing scheme will not be used

to develop clean technology The government has recently said that one-half of the revenues from its

proposed carbon-pricing scheme will be transferred to low-income households—probably through

credits and tax cuts—to compensate for higher electricity bills This has fanned fears that there will be

insufficient funds to compensate polluters and for clean technology investments

“While you don’t want to disadvantage Australian households, the government must make sure that

any additional revenue is invested in the most effective carbon-reduction measures,” says Mr Kella of

Qantas

Ups and downs

Chart 5: How do you think the introduction of a national corporate carbon tax will affect your company in the following areas?

Pick the most likely impact for each of the following variables.

56

Risk management

Transparency

5 12 58

Corporate preparedness for a low-carbon future

Modelling the impact of carbon prices

About one-third of Australia’s top companies are already assessed under NGER, helping explain

the survey finding that around the same proportion of respondents have modeled the impact

of different carbon prices on their business operations (see Chart 6) In essence, NGER provides the framework for how a carbon tax or an emissions scheme would work Once companies know what their emissions are, they can assess liabilities and look for cost-effective carbon-reduction strategies

Assessing the future Chart 6: In your scenario planning, have you assessed or modelled the impact of different carbon prices on your business operations?

(% respondents)

Yes

No, but we are planning to do so

No, no plans to do so Don’t know

29

33 31 8

Source: Economist Intelligence UnitFor many interviewees, the cost of carbon is incorporated into all planning and all investment decisions However, one-third of respondents say they have no plans to model the impact

According to AGL’s Mr Nelson, one-third of Australia’s companies measure energy efficiency rather than carbon emissions per se, since energy consumption is the critical issue for them The sophistication of the modelling is really in proportion to how much energy they use Smaller users should focus on how efficiently they use electricity and gas, he says Bigger users are probably already efficient but they should explore abatement opportunities outside their sector, such as sourcing inputs with lower energy intensity and hence lower costs in an emissions-trading environment

Like many heavy emitters, AGL models the impact of different carbon prices on operating costs, profitability and net present value over the next ten years and discloses it to shareholders The company decided several years ago to start investing in clean assets in order to become more competitive in an environment where carbon costs are factored into fossil-fuel power generation