Taking steps to curb the fossil fuel habit

Europe’s largest companies are coming under increasing political pressure to cut their carbon footprint ahead of crunch climate talks next year, but carbon trading is now just one of many tools being deployed to curb the use of fossil fuels, reports John McGarrity

When world leaders and environment ministers from around 190 countries gather in on the outskirts of Paris to hammer out a potential successor to the Kyoto Protocol at the end of next year, the world’s largest companies will be asked to back tough carbon reduction targets and help prevent runaway – and economically-ruinous – climate change.

Such a deal, should it be signed, is likely to look very different from the 1997 Kyoto Protocol, which placed the burden of emissions cuts on the resources sector - mainly in rich countries – prompting the EU to launch an emissions trading scheme for big producers and users of energy that had only a very limited success in reducing reliance on fossil fuels.

While improved carbon trading schemes – backed by tighter caps on CO2 - is still likely to play a major role in countries’ efforts to cut emissions in future decades, other pressures could deliver big cuts in carbon at company level compared to a scenario where boardrooms do nothing.

Environmental taxes, government efforts to control airborne pollution from fossil fuels, global divestment campaigns involving some of the world’s biggest institutional investors, and direct action on multinationals by pressure groups, are all prompting tougher action by boardrooms across almost all industry sectors.

Global IT and social media companies such as Google and Facebook are increasingly investing in renewable energy or are building low-carbon data centres to deal with the increasing demand for information and streamed content, responding to intense pressure from green groups and motivated by potential long-term profits in switching away from fossil fuels.

Producers of consumer goods and the food and beverage sector - most notably Unilever - are changing their supply chains to cut transport-related emissions and source commodities more carefully - particularly palm oil blamed for destruction of rainforests.

‘Divestment’ campaigns
Meanwhile the finance sector – including banks such as HSBC and Deutsche Bank – are limiting their exposure to coal and other fossil fuels as a global ‘divestment’ campaign gathers increasing momentum.

And increasingly, national and state governments are stepping in to compel companies to do more to measure their carbon emissions and take action to reduce their impact on climate change.

For almost a year, companies listed in the UK have been required to measure their carbon footprint and declare them in corporate accounts, while privately-owned enterprises are being encouraged to calculate emissions on a voluntary basis as the country tries to navigate a path to ambitious medium and long-term carbon cuts.

And in the US, where most states are not yet covered by carbon trading, over 40% of Fortune 500 companies have either set targets for greenhouse reductions, energy efficiency, or renewable energy, according to a report in June from Ceres, a US-based environmental reporting network.

And it is in the US, where use of wind and solar and energy efficiency at manufacturing plants and headquarters is leading to the most noticeable emissions cuts, says the CDP, which measures corporate efforts to rein in fossil fuel use.

The CDP reckons that the 53 Fortune 100 index of the US’ largest companies cut their annual emissions by 58 million tonnes of CO2 equivalent, saving them $1.1 billion annually and comparable to retiring 15 coal plants.

But while many high profile companies in Europe and the US are taking strong measures to cut emissions through greater use of renewable and energy saving targets, the majority are not, meaning that corporate efforts as a whole remain insufficient.

Without carbon trading, the corporate sector is unlikely to cut carbon in line with what will be needed under national targets, notes Dirk Forrister, head of the International Emissions Trading Scheme and a former adviser to President Clinton.

“Carbon trading is still the best way of delivering emissions cuts at least cost, and policymakers are learning from the mistakes that will make schemes more effective. Carbon trading in the EU, China and the US will be hugely relevant for companies in future decades,” says Forrister.

At present, prices for carbon allowances in the EU emissions trading scheme languish around 5 euros, around a sixth of their high water mark seen in 2008.

This has deprived the world’s largest carbon market of a strong price signal to switch to cleaner energy and seen an increase the burning of coal compared to more expensive gas.

For companies not covered by the ETS, the switch from gas to coal - and weak carbon prices - has kept down energy prices, but threatens longer term EU carbon reduction targets – 40% by 2030 and 80% by 2050.

In response, the EU has agreed measures to reduce the amount of CO2 power plants and heavy industry can emit after 2020, meaning that companies are taking measures to cushion themselves against higher energy and carbon costs by investing more in renewable energy.

Last month, a partnership of pharmaceutical companies including GlaxoSmithKline and Novartis completed a wind energy project to power their Irish manufacturing operations in Cork, motivated mainly by the need to reduce carbon-related energy costs.
The architects of the EU’s carbon trading scheme and energy efficiency policy intend that non-ETS sectors – such as transport, buildings and agriculture - do more to make cuts in emissions cuts that will be required through a future global climate agreement.
But it is not only on home ground that carbon trading will remain highly relevant for European companies, as major export markets in the Americas and Asia increasingly embrace the idea of putting a price on emissions.

Under proposals announced by the US Environmental Protection Agency last month, individual states can use a range of measures, including carbon trading, cut emissions from coal-fired power plants.

This could expand carbon trading beyond north-eastern states, California and some Canadian provinces, the early movers in North America’s cap-and-trade efforts, although some resource-dependent states such as Texas are likely to eschew markets in favour of regulation if the Obama plan is implemented.

Meanwhile, in China, the world’s largest emitter, pilot carbon trading in megacities such as Beijing, Chongqing, Shanghai and Shenzhen is likely to expanded on a nationwide basis.

Developing markets
Meanwhile, other developing countries, including India and Vietnam, may have carbon trading schemes in place within the next decade, meaning that European and North American companies will find it increasingly difficult to avoid paying for the costs of their carbon footprint if they relocate operations abroad.

“Effective carbon trading schemes around the world could have a huge impact on companies’ supply chains, particularly if power prices increase through a shift to gas or renewable energy,” notes IETA’s Forrister.

Without robust carbon prices in both developed and developing countries, a major shift away from relatively cheap coal is unlikely, as the thousands of new coal-fired plants built in China and India in the past decade will be both an economic and political necessity for future economic growth, says the International Energy Agency.

Despite the increasing efforts of the UN to persuade the world’s largest companies to do their bit in slashing carbon emissions, narrow, sectional interests are likely to predominate at next year’s Paris meeting. There, it will be up to individual countries to decide which industries must make the biggest sacrifices to meet future targets.