The heat is on

Global climate change is high on the political agenda and is likely to take centre stage at the G8 summit in July. But with 80% of the FTSE Global 500 now explicitly acknowledging the importance of climate change as a business risk, according to CSR consulting firm Business for Social Responsibility, the impact on accounting could be as seismic as the effect on the environment.

Climate change is moving up the business agenda, as plans to limit emissions of green-house gases take effect. Company directors are being forced to prepare for the effects of a raft of stringent regulation – not least the EU’s new carbon dioxide emissions trading scheme. The financial, environmental and social impact of climate change is not just an issue for energy-intensive industries, such as the food sector, manufacturing and industrial plants. Half of the UK’s carbon emissions come from the business sector, according to the Carbon Trust, yet little has been done directly by businesses to address this. Such widespread indifference towards climate change from the business community has forced the government to introduce legislation to tackle the problem. The Kyoto Treaty, created in 1997, legally obliges each signed-up nation to reduce emissions of greenhouse gases by an average of 5.2% below their 1990 levels over the next 10 years. But the reductions dictated by the treaty do not go nearly far enough: gases remain in the atmosphere for over a hundred years; in reality emissions need to cut by 60% to make a difference. At the same time, countries are allocated ‘carbon credits’ based on economic and environmental factors, which can be exchanged with other countries. This means some countries could end up increasing their overall emissions, leaving the system open to abuse. The climate-change levy was introduced by the government in April 2001 as a means to assist the UK in reaching its C02 reduction targets as set by the Kyoto Agreement. The UK agreed to a 20% reduction against 1990 levels by 2010. The ‘incentive’ for business and commerce to make this happen was an additional tax on fossil fuels, effectively adding 0.43p per kilowatt hour of electricity and 0.15p per kilowatt hour of natural gas. Faced with this extra tax, energy-intensive industries lobbied the government to make concessions. These took the form of climate-change agreements, whereby qualifying companies could claim partial rebates on CCL charges, depending on the nature of the activities being carried out and subject to a commitment to reduce energy consumption. While most businesses are aware that they are eligible for discounts, most will need specialist advice, since the legwork involved in achieving the rebate is a task in itself. The first phase of the European Union Emissions Trading Scheme (EU ETS) came into effect in January 2005 and saw only large energy consumers allocated their allowance. This will give way to a second phase in 2008 affecting those in the commercial sector who are lower-level consumers. The overall allocation of allowances for the first phase has been set at a level that will ensure the UK will exceed its Kyoto targets, and is also on track to meet its domestic goal of moving towards a 20% reduction in C02 emissions by 2010. The EU ETS will effectively establish the world’s largest ever market in emissions. It creates a new revenue stream for companies that emit less carbon than permitted. Up to 2,000 UK installations that collectively emit about half of the economy’s C02 emissions, are set to participate in this market. Those companies that exceed their target have an excess of C02 allowances to trade. Those who fail to meet their targets will need to purchase C02 allowances. One of the main questions being asked in boardrooms across Europe is how this new legislation will affect them financially. Financial directors need to consider the costs of emissions trading against the long-term savings that can be achieved. One major threat is additional energy costs. To protect their bottom line, FDs must have a carbon-management strategy in place to deal with the long-term effects of forthcoming emissions legislation. But staying on the right side of the law is not the only incentive, as businesses find themselves under increasing pressure from consumers to be more eco-friendly, as more and more select ‘green’ suppliers. Effective management of climate change requires companies to consider consumption and reduction of emissions, as well as investigating ‘greener’ suppliers.

As well as the financial impact of climate change, there is a huge ethical dilemma for today’s business leaders – if they don’t act as individuals, they play their own role in the problem. Climate change is set to worsen, and consumers will move towards ‘greener’ companies as the issue impacts on their homes, towns, holiday destinations and relatives.

Long-term rising energy costs will soon make energy saving a competitive necessity. It is also possible for businesses to profitably achieve real, long-term solutions to reduce energy usage and costs by looking at the way their sites or premises are operated.

Even a small office can emit three-to-five tonnes of carbon dioxide a year, through lighting, heating and office equipment. Implementing no/low-cost measures could result in a 20% reduction in energy use.

Business leaders must act now to understand, quantify and manage the impact of climate change, not just on their business, but on the future of the planet. Current and planned legislation changes will increase the costs faced by businesses, but what price the real ‘costs’ of not addressing the issues? Climate change is, after all, universal and affects everyone, not just those in business.

Simon Northrop is managing director of energy consultancy McKinnon & Clarke

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