The Road from Bali: Business Opportunities and Obstacles Surrounding Climate Change
Building Relationships | Pioneer Thinking
Introduction
A large international climate change conference attended by representatives from 190 countries took place in Bali in December 2007. The goal of this meeting was to accelerate the international response to climate change started by the Kyoto Protocol in 1997. The Bali talks mark the formal launch of a two-year process to create a broader, more ambitious climate agreement to succeed the Kyoto Protocol by the end 2009; to find agreement on the main agenda items—reduction of greenhouse gases, adaptation, technology and finance; and set a timeline to finish these negotiations. Its urgency has been underscored by the recent release of U.N. climate reports that have warned of worsening climate impacts from greenhouse gas emissions than initially expected, including more heat waves, droughts, storm damage and rising seas. Climate change is now here, according to the reports. The question now is how to adapt to the changing climatic conditions and keep global temperature rise to under 2 degrees C by 2050 to avoid the worst effects. The stakes are global in scale.
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The IPCC and the Kyoto Protocol—What Are They? Since 1988, the Intergovernmental Panel on Climate Change, or IPCC, has assembled reports summarizing the scientific, technical and socioeconomic aspects of climate change. The IPCC strives to present the scientific case for human-induced climate change, its potential impacts and options for adaptation and mitigation. IPCC reports are an indispensable part of almost any climate change debate. In 2007 and despite the lack of Hollywood razzamatazz, the Intergovernmental Panel on Climate Change won the Nobel Peace Price. This recognition coincided with the release of the IPCC Fourth Assessment Report which proves beyond doubt that climate change is happening and accelerating. These reports
The Kyoto Protocol
continue to drive policies and news coverage.
now covers more than
The IPCC reports also serve as the underpinning for the Kyoto Protocol, which is
170 countries globally
an international agreement to reduce emissions of greenhouse gases, or engage
and more than 60% of countries in terms
in emissions trading if they maintain or increase emissions of these gases. The Kyoto Protocol now covers more than 170 countries globally and more than 60% of countries in terms of global greenhouse gas emissions. As of December
of global greenhouse
2007, the US, and Kazakhstan are the only nations that have not ratified Kyoto.
gas emissions.
This treaty expires in 2012, and international talks began in May 2007 on a future treaty to succeed the current one. Bali was an important milestone in this quest for new agreement. Under Kyoto, governments fall into two categories: developed nations, referred to as Annex I countries (which agree to limit greenhouse emissions and submit an annual greenhouse gas inventory); and developing nations, referred to as Non-Annex I countries. They have no greenhouse gas emission reduction obligations but may participate in the Clean Development Mechanism. By 2008-2012, Annex I countries must reduce their greenhouse gas emissions by a collective average of 5% below their 1990 levels, according to Kyoto standards. Recent IPCC reports suggest that the actual cuts need to stabilize the climate are significantly higher. Kyoto includes “flexible mechanisms”—which allow Annex I economies to meet their greenhouse gas emission limitation by purchasing GHG emission reductions from elsewhere—this is also known as carbon trading.
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Every business emits greenhouse gases—because every enterprise uses energy, vehicles or infrastructure. Businesses are going to have to pay more for emitting greenhouse gases, but can potentially reap greater benefits for their efforts to cut emissions. Thus every business is a stakeholder in Bali and subsequent similar events. Business will also have to communicate effectively about these issues, and do so with a wide range of stakeholders: governments, regulators, NGOs, the media, employees and the general public.
How do you communicate CBRE’s stance on climate change and why?
CB Richard Ellis has long been recognized for success and leadership in the commercial real estate industry. In 2007, our company took a strong position in support of environmental sustainability. Studies have shown that buildings account for as much as 40 percent of the earth’s greenhouse gas emissions. As the world’s largest real estate services firm, we directly manage more than 1.7 billion square feet of property and corporate facilities, and we advise the owners and occupiers of billions more square feet. By aggregating and sharing our expertise in “green” building policies, processes and procedures we can make a tangible impact on improving energy efficiency, reducing greenhouse gas emissions and slowing climate change. In addition, as a global company of more than 24,000 employees and hundreds of offices worldwide, we have made a commitment to operate our day-to-day business in ways that are environmentally sustainable and will help us achieve a goal of becoming carbon-neutral by 2010. Our Environmental Stewardship program has attracted the interest of many including stakeholders, clients, competitors, media, NGO’s and employees. Clear, consistent and effective communication is critical to the success of our efforts. As a leader, we embrace our responsibility to actively contribute to the betterment of society. Being a good corporate citizen is good business especially in the area of environmental sustainability. Sally Wilson Global Director of Environmental Strategy, CB Richard Ellis
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Key Players at Bali In 2007 climate change
The G-8 leader—the United States—is the major
moved up to the
holdout to ratifying the 1997 Kyoto Protocol. This non-
very top of the world
participation has created uncertainty about the rules for
political agenda. This
U.S. businesses and all businesses that operate in U.S.
started with the EU
markets as well as creating uncertainty outside the
adopting a 20% or
U.S., such as with business operating within European
30% reduction target
carbon markets. This uncertainty has led a number of
for 2020 (depending
state governments, such as California, to band together
on the involvement
to discuss regional climate regulations to fill the perceived
of others). China
gap on the part of the federal government. Thus, busi-
announced its first
nesses are faced with very wide-ranging rules in multiple
national climate change strategy and all major summits adopted policy positions on climate change, starting with the G8 and including Asia Pacific Economic Cooperation (APEC), Association of South East Asian Nations (ASEAN) and the Commonwealth.
jurisdictions, which add to cost and complexity. Other G-8 governments have and will continue to tighten the rules about greenhouse gases and the methods to lower them. The E.U. has already committed Europe to reducing its continent-wide greenhouse gas
The G-8 countries comprise about 65% of the world’s
emissions by 20% below 1990 by 2020, and is willing
economy, and have been the biggest emitters historically
to commit to 30% below this figure if the U.S. comes
and arguable responsible for the situation today. Their
on board for talks.
wealth makes them the best situated economically to respond to climate change.
How will business need to craft its position on climate change?
In 2008, the current green debate is likely to evolve into a more sophisticated dialogue, one that is sharply focused on climate change issues. The stakes are high in the U.S. because NGOs, policymakers, and competitors are all making decisions today that will shape tomorrow’s market place and policy environment. It is imperative that U.S. businesses are at the table for this debate, but claiming a place will involve a different kind of effort than in the past. Expect a shake-up in green issues. ‘Action before words’ will be the mantra for 2008. Proof points and work completed will become a minimum threshold for media coverage. To the chagrin of some businesses, merely stating aspirations and goals will no longer be newsworthy. The positive side is that businesses that have taken credible steps of almost any variety can leverage this entrée in the green media space. Mark Grundy, Edelman Corporate Social Responsibility & Sustainability Former Communications Officer at the European Commission’s Environment Agency
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Among the tools used to reduce greenhouse gas emissions is emissions trading—already underway in Europe in the form of the European Emissions Trading Scheme and regionally planned for the U.S. The wealthy G-8 members also want developing countries, as well, to cut their emissions. Firms in G-8 countries must be prepared to state their climate change business agenda persuasively with various governments, regulatory bodies, and appropriate general publics. Governments of developing countries, which will experience the most rigorous impacts from climate change. Some of these countries (such as China and India) are also very large emitters of greenhouse gases. They want
The art of communicating about climate issues with devel-
the latest technologies from the developed countries
oping countries can demand a lot from businesses. Many
as an incentive to tackling climate change in their own
key influencers in these countries regard the developed
backyard, yet their hunger for building coal plants remains
world’s emphasis on cutting emissions as overblown when
far from satisfied. They note that the G-8 countries have
it applies to developing world emissions. They object to
enjoyed decades of economic growth from their carbon
tariffs on biofuels from developing countries, for example,
intensive energy usage, and that it’s unjust to demand cuts
and often have counter-tariffs on environmental goods and
from countries that are in the early phases of prosperity.
services. These market obstacles can often play a major
In the communications war during the Bali meeting,
role in the public discussion in developing countries.
China won praise for its recent shift to a much greener
Non-governmental organizations address various
stance, for working hard to cut emissions on a number of
climate change issues, from biodiversity and conservation
fronts. Corporations with China-based operations need
to energy usage and carbon sinks. Imaginative and persis-
to learn know how to work with these new stance and its
tent businesses have enjoyed some notable successes at
implications in a sensitive way.
cultivating valuable relationships among their former critics.
What impact will increased climate change regulation have on U.S. policy?
The Supreme Court’s 2007 ruling that CO is a pollutant under the Clean Air Act has increased the chances that mandatory greenhouse regulation will become law under the next President. But the main legislative vehicles are extremely complex, and the political and economic implications are immense. Huge policy fights are inevitable, and passage of a sweeping program, while perhaps likely, is not at all certain. Paul Bledsoe, Edelman Senior Counselor Former White House Climate Change staff member
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What is the changing role of NGOs in the climate change debate?
Historically, businesses have been the unwilling target of government regulation, but times are changing. Today, forward-looking businesses – often with NGO partners – are keeping the heat on governments to devise the best regulatory framework. Smart businesses and NGOs know that this framework needs to be sustainable in the broadest sense – comprehensive, transparent, and effective, but one that harnesses the market to find low-cost and longlasting solutions. Peter Goldmark Director of Climate & Air Program, Environmental Defense
For example, GE and Occidental Petroleum have worked
sense from a business point of view.” He added: “But first
closely with some of their leading NGO critics to refine their
we need political agreement on the launch of negotiations
own sustainability and environmental programs. In doing
on such a new climate deal. And that has to happen this
so, they gain allegiance and goodwill from former critics.
week here in Bali.”
As they continue to develop and grow in this shifting,
The message from UNFCCC to the global business
fluid environment, multinationals of all sizes must be
community was:
alert to their own climate vulnerabilities, as well as the opportunities they present.
• $20 trillion of investment will be needed between 2005-2030 to meet the 50% increase in global energy
Business: Much of the work of Bali happens in the
hunger; 50% of this investment will be needed in
blocks of the agenda labeled “informal groups,” and it
developing countries; and 86% of these investments
is here that business has made its presence felt. There
will have to come from the private sector
were also business side events, most notably, the first ever Global Bali Business Day hosted December 10 by the World Business Council on Sustainable Development (WBCSD) and the International Chamber of Commerce. The Bali Global Business Day (10 December 2007) brought together some 350 decision makers from companies, governments, inter-governmental and nongovernmental organizations. United Nations Framework Convention on Climate Change (UNFCCC) Executive Secretary Yvo de Boer, during his opening remarks at the Bali Global Business Day, declared: “The engagement of the business sector in fighting climate change is crucial... An international climate change deal for the post 2012 period should therefore be designed in a way that makes
The Road from Bali: Business Opportunities and Obstacles Surrounding Climate Change
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• Bold action is needed in the North to fuel clean growth
• Adaptation to climate change is now a reality for all
in the South. Without cooperation, technology and
countries: a comprehensive framework that allows
incentives, developing countries will have no choice but
all countries to adapt is called for. Levies on carbon
to take the fossil-fuel heavy route to industrializing: a
market mechanisms, like CDM, should be used to help
new climate change deal has to build in the right incen-
finance adaptation measures in developing countries
tives for the developing world. This will represent huge investment opportunities for low carbon technologies, products and services. • Fossil-fuel is here to stay, so new fossil-fuel technologies should be explored to reduce its impact
• Carbon markets alone will not work: a favorable investment climate needs to be created through government policies to drive new low carbon and adaptation technologies into the market, using soft loans, venture capital and tax incentives.
What is the new role of business in shaping climate change regulation?
The issue of climate change is at a turning point – and it will soon change the business world as we know it. Massive amounts of money are to be made and lost by not effectively addressing or taking advantage of the commercial opportunities that climate change regulation presents. New businesses will be created and others will disappear. As the first of the UN climate change meetings to include an official Business Day, the Bali conference underscored the expectation that business must be part of the solution. Jonathan Wootliff, Edelman Senior Counselor Former Greenpeace International Communications Director
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The Bali Agenda Key Actions Coming Out of Bali
the Clean Development Mechanism (CDM) or other
Key actions coming out of Bali dealt with four areas:
signatory countries under the Joint Implementation (JI).
• Carbon trading
• Technology transfer
• Deforestation
• Adaptation fund
If they emit less than their quota they can make money by selling their own surplus credits. America balks at paying billions of dollars a year to
Carbon Trading
developing nations just to buy enough carbon credits
Carbon trading is one of the main methods Kyoto
to keep the US economy running. Under Kyoto, Russia
uses to reduce greenhouse gas emissions. Countries
has billions of dollars worth of surplus carbon quota.
are given quotas for carbon emissions. If they emit
European policymakers refuse to buy credits without
too much and cannot reach their national targets
actual projects for the obvious ethical reasons associated
from national measures alone, they are obliged to
with selling ‘hot air’: US policymakers refuse to support
buy other countries’ surplus credits under the Kyoto
a system that could generate billions of dollars of income
Mechanism—either in the developing world through
for Russia and so help accelerate its growing power.
What the European Carbon Market looks like Under the European Emissions Trading Scheme, emitters can buy the right to emit additional levels of carbon above the ceiling at which their firm was capped, and the monies paid go to other firms who didn’t use their full quota of credits. In theory, the price of emitting carbon should keep rising, which would then give businesses within the system an incentive to reduce their CO2 levels. The EU maintains that carbon trading could allow Europe to cut its own emissions by up to 30% and this newly-created market-based system is preferred to a flat carbon tax.
When carbon has a cost, carbon emissions will become a cost on the balance sheet. But businesses can also make money by cutting emissions.
1
3 Carbon Trader Financial Institution Buy/sell
Credit
2
Financial institutions and other intermediaries will make markets in these emissions reductions, buying them from green companies and projects, and…
Emission
Carbon “Governing Bank” The market has to be regulated and unified, so that prices are transparent and that “system gaming” is kept to a minimum
A “green” company creates emissions reductions, which it can then sell.
6
Green Friendly
… then sell the reductions to companies that need to “offset” their emissions.
fine
it cred
Company B
4
$
The carbon markets needs a regulatory framework to certify that the emissions reductions are genuine, and that the market is functioning smoothly fairly. In the EU, the European Emissions Trading Scheme oversees the carbon market.
Company A Industrial
Carbon Reduction Redesign or Reinvest to save
Company X Green Friendly
The Road from Bali: Business Opportunities and Obstacles Surrounding Climate Change
Company Y Green Friendly
Company Z Green Friendly
5
Because of the cost of carbon emissions, Company A now has a stronger incentive to make reductions to its own carbon footprint.
9
Multi-nationals may already be complying with EU regula-
Technology Transfer
tions. In the US, such firms can elaborate publicly on their
The theory behind technology transfers is simple. Rather
carbon experience, where appropriate.
than emerging economies relying on coal, they receive the latest energy technology at a much-lowered price,
Deforestation
bypassing the older, carbon-based energy sources.
Deforestation contributes about 20% to total greenhouse gas emissions today. Protecting forests was not part of the Kyoto Protocol, which has proved a major gap in mitigation efforts. The Bali meeting attempted to address this gap.
The Clean Development Mechanism (CDM) allows industrialized countries to invest in projects that reduce emissions in developing countries as an alternative to more expensive emission reductions in their own countries.
REDD is an acronym for Reducing Emissions from Defor-
Private sector investment in CDM projects are the main
estation and forest Degradation. In practice, REDD would
drivers behind technology transfer.
mean payments from G-8 countries to heavily forested countries like Indonesia and Brazil for every hectare of forest that they save from cutting.
CDM projects have been booming in China, India and Brazil, but much less CDM financing has reached Africa— which is a key topic at Bali. Less developed countries and
Companies should review their activities for implications
small island states are being marginalised from the CDM,
in this area. For instance, cosmetics and food companies
as they are unable to compete with the returns on invest-
are large users of palm oil, which comes from large
ment offered by the industrial scale CDM projects in the
plantations often built on deforested land—an issue for
emerging economies.
such names as P&G, Nestle, Kraft, and Burger King.
Do you have a stake in the energy or other technologies
Improved monitoring of forests from space and
that are candidates for transfer to developing countries?
anti-corruption measures are a part of this initiative.
How can multinationals prepare to seize public relations
Multinational companies need to understand their own
advantages from these transfers, and at the same time
stake in these issues.
take steps to protect their intellectual property.
How do you fold emissions trading into the agenda of companies looking to manage their carbon footprint?
I think this depends on the footprint and reduction strategy of each company. If a company has a large footprint and determines that offsets are an important tool for them, they might set up a hedging program, examples of which abound, ranging from airlines to power plants. Other companies may have smaller footprints and be able to implement projects that neutralize their footprint, and even perhaps create offsets themselves. In both cases, trading may or may not be a core activity of the company. However, a robust emissions trading market will benefit them by making the price more transparent and lowering transaction costs when they do need to enter the market to buy or sell. Gia Schneider Vice President, Energy-Trader and Environment Markets, Credit Suisse Energy
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What are the implications of the Bali Conference for U.S. business?
Until 2009, the U.S. administration is likely to ‘continue-as-is’, refusing to put targets on mandatory cuts. President Bush has announced a climate-change meeting in Hawaii in 2008 for 17 of the world’s major greenhouse-gas emitters to talk about setting ‘new’ goals for curbing emissions. Critics have dismissed the Bush meeting as an attempt to dilute the Bali agenda. Jonathan Adashek, Edelman Corporate Social Responsibility & Sustainability Member of the US delegation to the third Conference of the Parties to the UNFCCC in Kyoto, Japan
Adaptation Fund
rise to $1-$5 billion yearly by 2030 if investment in green
Another significant part of the struggle to stabilize the
technology in developing nations surges, according to the
climate is adaptation—improving the world’s resilience
highest U.N. projections at the meeting.
in the face of impacts from climate change such as sealevel rise, worsened storms, heat waves, and increasing levels of infectious disease. Developing countries demanded more money put into the Adaptation Fund, which is designed to help the poorest countries respond to the built-in impacts of climate change, such as flooding, drought, sea-level rise, increased infectious disease. At Bali, the Adaptation Fund comprises only about $36 million, but the total could
There are business implications of adaptation measures because risk issues—at the heart of adaptation—are often a public relations challenge. For example, multinationals must often publicly stress their preparedness and resiliency for governments, shareholders and insurers, announcing their business continuity management plans and creating plausible messages about their readiness for business interruptions.
How can multinationals prepare to seize public relations advantages from these transfers, and at the same time take steps to protect their intellectual property?
The Asia Pacific region is likely to be hard hit by the impacts of climate change, particularly because of rising sea levels and the increased incidence of severe tropical storms. Yet much of this region has made very little contribution to the build up of greenhouse gases. Business needs to recognize that it has a role in mitigating the worst effects of climate change and work with others to ensure that further economic growth is consistent with a need to reduce carbon footprints. Businesses can also be part of the much-needed technology transfer into the region. Importantly, there is a need for new partnerships with government and civil society organizations to ensure that dangerous climate instability is avoided. Richard Welford, Edelman Senior Counselor Director, CSR Asia
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Carbon Sequestration One hope for slowing the build up of CO2 in the atmosphere is carbon sequestration—finding some reliable way for storing carbon underground, or in the oceans. Possible methods are still very much in the drawing board phase. These include:
From a business
• Sequestering carbon in underground geologic repositories.
standpoint, 2008 will
• Enhancing the ability of the earth’s biosphere to remove CO2 from the
be the year of carbon sequestration.
atmosphere by vegetation and storage in biomass and soils. • Enhancing the oceans’ uptake of CO2 from the atmosphere by fertilization of phytoplankton with nutrients, and injecting CO2 into the deepest parts of the ocean. • Sequencing the genomes of microbes that could “eat” the carbon and produce fuels such as methane and hydrogen as a byproduct. There are enormous technical obstacles to each of these projects. In the shortterm, sequestration may not help us much, and there are daunting environmental issues to consider—even a small leak of carbon could create a major climate catastrophe. But the promise of sequestration is considerable. Most advanced scientific nations are conducting active research in this area. From a business standpoint, 2008 will be the year of carbon sequestration. The UNFCCC is expected to recognize it within its CDM markets for the first time and, in Europe, the EU will announce the acknowledgement of carbon sequestration and the awarding carbon credits for projects within the Emissions Trading Scheme.
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What Happens Post-Bali At Bali, the U.S. refused to accept language calling for 40% cuts in emissions by 2020—the number that seemed to come up most often, based on IPCC projections. Despite this lack of consensus at Bali, the UNFCCC process will press on in an effort to find a post-Kyoto settlement. For the UNFCCC and EU the starting bell rings on January 1, 2008 and the race will run until the end of 2009. However, if anything has been learnt from Kyoto the first time around, it’s that getting over 150 countries to come to an agree-
global carbon market will continue to grow but in a slow, regionalized disjointed way as it does today
ment is an extremely cumbersome and painful process.
Until 2009, the U.S. administration is likely to ‘continue-
For this reason, the G8 route could be the way forward.
as-is’, refusing to put targets on mandatory cuts. Presi-
The first real opportunity for a finalized climate agreement with mandatory implications that has U.S. and China as well as India sitting around the table with the Europeans will probably wait until the G8 meeting in Italy, 2009. Even then, it will take something out of the ordinary to wager a deal. Behind closed doors on both sides of the Atlantic, there is already talk of an ‘independent, private/public
dent Bush has announced a climate-change meeting in Hawaii in 2008 for 17 of the world’s major greenhousegas emitters to talk about setting ‘new’ goals for curbing emissions. The meeting is a follow-up to a summit that Bush convened in late September. Critics have dismissed the Bush meeting as an attempt to dilute the Bali agenda. There is no telling what might emerge from this meeting.
technology share package’ being put together as an
For business, above all this means continued uncertainty.
incentive for China and India to bring in their own emis-
Corporations in Europe will participate in the European
sions targets. To what extent this materializes is unknown,
Trading Scheme, and the regional US carbon markets
but it is certain is that it would offer the most pioneering,
will grow. Yet clear political direction and resolve will
global businesses the opportunity to take a seat at the
probably be lacking. The understandable preference that
table. If no binding reduction agreement is found, the
businesses have for regulatory consistency and clarity will
global business of climate change and the evolution of a
be frustrated for some time to come.
How is the climate communications landscape changing?
The next two years of post-Kyoto negotiations will constitute a period of uncertainty for European business on climate change. The potential growth and destiny of Europe’s fledgling carbon market, which is currently hanging in the balance, will be determined by either UNFCCC or bi-lateral settlements. Buy-in from the U.S and China could potentially lead to the world’s first global carbon market and bring about massive new investment possibilities: No buy-in would mean continuing marginalized, regional carbon markets – leading to an inherent weakness in the carbon price – and ultimately undermining EU and UNFCCC efforts to champion market-based instruments, such as the European Emissions Trading Scheme. Xavier Delacroix Managing Director, First&42nd Paris
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CSR.Sustainability@edelman.com | www.edelman.com