Without a global climate deal, can the private sector carry the weight?

The momentum from the Cancun climate change talks late last year may not last, as parties head to Durban for the 17th Conference of the Parties to the UNFCCC this winter knowing the world’s largest carbon emitters—the US and China—are far from reaching agreement.  The Kyoto Protocol will likely expire in 2012 without a legally binding replacement being agreed to.  Norway and Australia submitted a proposal to the UNFCCC ahead of talks in Panama next week, mapping out a timetable of what needs to be agreed to between Durban and 2015, in order to enable a legal agreement with binding mitigation commitments by both developed and developing countries.

In the meantime, the private sector is actively pursuing voluntary climate commitments, and doing so has its rewards.  Ecosystem Marketplace reports that in 2010, the volume of the voluntary carbon offset market was the largest ever (131 MtCO2e).  Voluntary buyers of carbon offsets invested about $424 million in 2010, and 29% of those transacted carbon credits were for REDD+ projects.

However, the voluntary market alone will never deliver the US$17-40 billion per year required to halve emissions from the forest sector by 2030.  A UNEP Finance Initiative report, released this week, stresses the importance of a global climate change agreement, in order to motivate and leverage private investment in REDD+ at the scale needed.  The report is backed by the Bank of America Merrill Lynch, Barclays and Deutsche Bank, and offers policy scenarios that are most likely to rapidly mobilize capital from the private sector at the required scale while actively addressing the concerns and risks of private sector participation.  The preferred policy option is a nested approach with strong reference and accounting systems at the national level, in order to create a price signal for private actors that makes the protection of forests financially competitive with conventional land-use options that lead to deforestation and forest degradation.

Companies reducing their carbon footprints see gains in their bottom line

Companies taking steps to reduce their carbon footprint delivered double the average investment returns over the past six years than those that did not, according to a Carbon Disclosure Project report prepared by PwC.  The Carbon Disclosure Project surveys Global 500 companies—the largest companies by market capitalization in the FTSE Global Equity Index Series—on behalf of 551 investors with US$71 trillion of assets, asking them to measure and report what climate change means for their business.  The findings suggest a strong correlation between higher financial performance and good climate change disclosure and performance:

  • 74% of Global 500 respondents disclose absolute or intensity emission reduction targets, an increase from 65% in 2010.
  • 65% of respondents provide monetary incentives to staff for managing climate change issues, versus 49% in 2010.
  • 59% of emissions reduction activities reported by Global 500 respondents have a payback period of three years or less.

Strong private sector performance linked to national climate commitments

The Carbon Disclosure Project Global500 2011 report also illustrates that companies in Australia, Germany, Italy, Switzerland and the UK demonstrate the strongest performance leadership, while Canada, Japan and the USA lag behind.  That is not surprising, given the strong greenhouse gas reduction commitments within the EU and Australia.  Australia and China should have domestic emissions trading programmes in place by 2015.  China recently announced plans to invest 2 trillion yuan (US$313 billion) in creating a green, low-carbon economy.

While California’s carbon market is destined to be the world’s second largest, behind the EU ETS, by 2016, California carbon allowances underperformed during September.  PointCarbon attributed the overall sluggishness of trading among the four types of offsets that will be eligible for compliance under California’s cap-and-trade system to a lack of compliance buyers in the market.  That will change once California’s carbon market gets underway in 2013.

National climate commitments need to send the right signal to the private sector.  The UK Coalition Government’s changes to the Carbon Reduction Commitment (CRC) efficiency scheme has curtailed businesses’ energy efficiency plans, according to npower’s Business Energy Index.  The CRC scheme, which requires large energy users to monitor and report their carbon emissions, initially sought to reward those making the greatest strides in energy efficiency at the price of those taking no action. Energy users would purchase carbon credits, but those at the top of the energy efficiency ranking would receive bonus payments while those at the bottom would have been penalized.  However, the Coalition announced the removal of the recycled payments aspect of the scheme, in last-year’s budget, and turned the payments for carbon credits into a simple revenue-generator for the Treasury.  This lack of financial incentives frustrated businesses, especially progressive ones.  Meanwhile, the Guardian reports this week that a delay in the UK Renewables Obligation Certificate (ROC) reforms promised this year puts renewable energy investment in doubt.  Investors are hesitant to make long-term business plans in new technologies without knowing how much support via subsidies can be relied upon in the future.

While the private sector is capable of solutions to decouple economic growth from carbon emissions, it needs public sector commitment and a global climate agreement to frame the pathway forward.


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