Friday, July 10, 2015

No more Business as Usual!

This is Anthony Day, speaker, writer, conference chair and author of this, the Sustainable Futures Show.  If you like the show please tell your friends. If you don't like it please tell me at Oh, and you can tell me if you do like it too.

This week, two reports. One from the Royal Institute for International Affairs, one from the Carbon Trust. Also, the latest update of Jeremy Leggett's The Winning of the Carbon War is out. You can download that free of charge from his website which is You really ought to read it. I did offer to record it as a podcast for him but he says it's in hand and he's talking to some people at the BBC. So, er, watch this space. That solar-powered plane, Solar Impulse 2, has landed safely in Hawaii after the longest solo flight ever. The next stages cross the United States and the Atlantic Ocean, and then back to the start point in Abu Dhabi.

Making the headlines this week has been the Greek economic situation. We won't say anything at all about that. And the UK chancellor’s budget. There's a few things there we’ll comment on - so let's start with that.

The Chancellor has maintained his freeze on fuel duty. Some would say this is a missed opportunity, because while oil prices are relatively low he could surely have slipped in an odd penny or two. The main difference for motorists is the change to vehicle excise duty, or car tax as some call it. These changes are for new cars registered from 1st April 2017 and the assumption is that cars registered before that date will be taxed at their current rate for the rest of their lives. Under the new rules only zero-emissions cars will avoid tax. All others will pay an amount on first registration depending on emissions levels and then pay a standard rate of £140 per year. This means that there’s now no real incentive to buy a low emissions car, as after the first year the annual tax is the same. There is a surcharge if the car costs over £40,000, bringing it up to £450 a year, but that’s less than the current top rate band of £505! Not very green!

The government will remove the Climate Change Levy exemption for renewably sourced electricity from 1 August 2015. Another short-notice policy change affecting the renewables industry. The purpose of the Climate Change Levy is to make it more expensive to generate electricity from unsustainable and polluting fuels. It is logical that renewable energy which avoids such fuels should not bear the levy. The Chancellor doesn’t think so. The change will have significant implications for the renewables industry but a negligible effect on tax revenues. But then, the Chancellor favours fracking above all else. He reiterated that he would establish a sovereign wealth fund from the proceeds of fracking. I remain convinced that you’ll find it next to the crock of gold at the end of the rainbow.

And so to these reports I mentioned.

“Titans or Titanics? Understanding the business response to climate change and resource scarcity.” That’s the title of a recent report from the Carbon Trust.

The report seeks to understand and explain how large businesses are responding to climate change and resource scarcity and makes a number of key findings. The most concerning is that the action of businesses on environmental sustainability today is significantly short of what is required to address the serious challenges of climate change and resource scarcity. The Trust goes on to say that there is common consensus around what will be required by businesses to address climate change and resource scarcity. They report that 70% of global business leaders surveyed are confident that action taken by consumers, governments, and investors will force the change to an environmentally sustainable future. (This sounds a bit like complacency to me - “We’re just waiting for the market to send us a signal. In the meantime, business as usual!”)  According to the report businesses recognise that climate change and resource scarcity will require them to make changes. Most executives see risks, even more see opportunities. Half of them expect to make fundamental changes and most of those are confident that they will be able to make the changes when the time comes. 99% believe they are at least average on environmental sustainability and half of them see themselves as leaders. 

The report warns that despite this, businesses are living in two realities: although they recognise and accept there will be risks and opportunities that will impact company value, they continue to focus on the short term. Despite a recognition of the likely need to change, businesses lack a clear vision of how this transition will be achieved beyond the business planning horizon.
They also say that there is a failure of governance from corporate boards, who need to better address uncertainty around the future risks and opportunities from environmental sustainability. There is also a lack of available frameworks or tools to help boards and senior executives to effectively assess and quantify value at stake. The report includes a useful checklist. We’ll look at that in more detail in a future episode.

Within the report they go on to talk about how adaptation - dealing with the consequences of climate change - will be so much more expensive than mitigation: taking action to prevent climate change getting worse. By 2050 business as usual and adaptation could cost from 5 - 20% of global GDP per annum, whereas mitigation could cost as little as 1%. Reminds me of Lord Stern’s 2006 report where he said much the same, except that the longer we delayed mitigation the more costly it would become. The report quotes Lord Stern and many other experts. It talks about the growth in population and about the pressures not from the absolute growth but from the growth in the middle classes. It talks about a shortage of fresh water and about resource scarcity. These are not new insights, but it’s depressing that the report paints a picture of a business community that is unprepared, if not unconcerned. Who are these businesses, when almost every major corporate from Unilever and Marks & Spencer to IKEA and HBOS is bragging about its green credentials? Are they islands in a sea of indifference? I asked the Carbon Trust about their research. They said: “Insights are based on six months of in-depth interviews with a range of experts from business, finance, government, academia, and civil society. The Carbon Trust also commissioned independent market research interviews with 229 board-level executive decision-makers across five regions: the UK, South Africa, Southeast Asia, Latin America, and the USA.” Looks like a pretty impressive sample. Looks like we still have a lot to do to get the message out!

This week the Royal Institute of International Affairs published Oil and Gas Mismatches: Finance, Investment and Climate Policy. The emphasis is on investment prospects for oil and gas. That might not sound very interesting to climate change watchers, but the odds are that some of your pension is invested in oil and gas, so listen up!

According to the report, oil and gas investment is affected by price volatility, the changing financial environment and climate change policy. The outlook for the oil price is uncertain and has been since Saudi Arabia abandoned the role of price stabiliser last year and the price collapsed. It remains around $65/barrel, just over half of where it was this time last year. Best estimates are that it will be much the same in 12 months, but the underlying feeling seems to be that it’s anybody’s guess. There is therefore a mismatch between the oil companies’ development plans and viability, as they were mostly drawn up on the assumption of the higher oil price. This has implications not only for oil companies like BP and their shareholders who rely on dividends, but also for the national oil companies who rely on earnings to balance their national budgets.

In a time of quantitative easing yields are low, but as this ends yields will rise and the yields expected from oil companies will also rise, putting them further under pressure.

The report looks in detail at Climate Change policies, which it sees more or less as a wild card. The issue will be the outcome of COP 21, the international climate change conference in Paris in December. Will the 195 countries decide to take strong action or weak? If the decision is weak, to do not very much or at least to delay taking any serious decisions for the time being, then oil production and demand can remain much as business as usual. (With all the consequences highlighted by the Carbon Trust). If the decision is strong, then there are all sorts of implications. First, it is likely that governments will take action by taxing the use of fossil fuels one way or another. This will drive a wedge between the price paid by the consumer and the price obtained by the producer. Where regulation is strong, investment that could have been made in an environment with weak regulation will not be viable. Indeed, strong regulation implies stranded assets, oil and gas reserves which cannot be used and therefore have no value, as regulation cuts demand. In the interim, until the outcome of COP 21 is known, significant oil and gas reserves remain in limbo. Their value is uncertain and investing in them would be highly risky. If the outcome turns out to be high regulation there will be consequences for other industries as well: power stations, manufacturers of gas-guzzling vehicles and buildings that do not effectively conserve energy, for example. 

Undoubtedly there are interest groups, albeit with a short term view, that will be lobbying hard for business as usual. We have to hope that the legislators who meet in December will be fully informed.

The report closes with the warning that the age of cheap oil production may not yet be over, but the age of cheap oil use almost certainly is.

I always like to end on a cheerful note. I’ll try and think of one for next time. This is Anthony Day, the Sustainability Coach, and that was the latest episode of the Sustainable Futures Show. Now I’m sure it’s in your diary, but don’t forget that the Sustainable Best Practice Exchange takes place in Harrogate on 5th November. We’re inviting a minister to brave the journey from London and join us in the Northern Powerhouse. I hope you can come too. Details soon!

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