Brian Fallow: NZ slow to grasp risks and rewards of climate change

Big corporates in this part of the world are only slowly getting to grips with the risks climate change poses to their businesses - and the opportunities it presents - if a recent survey on behalf of institutional investors is anything to go by.

Which is odd, because research by economists at the Treasury and Victoria University has found climatic events like drought have a bigger effect on New Zealand's economic cycle than almost anything. Only export prices have been a more powerful driver, and climate has been a more important source of economic headwinds and tailwinds than domestic monetary or fiscal policy, for example.

And at the very least, to the extent they are consumers of energy, corporates stand to be hit by measures to combat global warming.

This year, the 50 largest companies listed on the New Zealand stock exchange and the 100 largest in Australia were included in an international survey by the Carbon Disclosure Project, which represents 225 institutional investors entrusted with a cool US$31 trillion ($47 trillion) of people's savings.

Their local partners, the Investor Group on Climate Change Australia/New Zealand, comprises 16 investors with just under A$200 billion ($230 billion) in funds under management.

The question they put to corporates is also a warning: Climate change, and the policy response to it, represents a risk to your business and our money. What are you doing about it?

Not all that much, it seems.

While 94 per cent of respondent Australasian firms recognised the potential for climate-change-related issues to impact their future earnings, liabilities or general risk profile, only 31 per cent had clear management accountabilities within their organisations for both the strategic and operational management of those issues.

While most respondents could quantify their emissions to some extent, only 9 per cent offered full disclosure supported by third party verification.

"From an investor perspective the availability of reliable, complete, greenhouse-gas-emission-profile data is important," the report said. "It enables the consideration of a company's emission-related risk exposure, for example potential costs and liabilities under a national emissions trading scheme, and provides a good indicator of a company's responsiveness to climate-change-related issues."

Only 9 per cent of the companies had formal emission-reduction targets and timelines.

And only 9 per cent provided quantified total energy costs and could show a clear understanding of the potential impact on their profits of changes in energy pricing. Indeed, 42 per cent could not provide any information on their energy consumption.

Such figures are disturbing since we are talking about large companies here, which can more readily than their smaller counterparts afford to devote time and attention to climate change given the risks it presents.

The risks are physical, regulatory and reputational.

And competitive. The issue is not going to go away so, in the medium to long term, companies which fail to take steps to mitigate climate-change-related risk may lose a competitive advantage.

Then there are the business opportunities in coming up with climate-friendly alternatives to incumbent technologies.

When half of the country's greenhouse gas emissions arise from agriculture, it is clearly sensible for PGG Wrightson to be breeding grass plants with a high carbon-to-nitrogen ratio in the hope of reducing the amount of methane ruminants belch.

The company is also looking to biotechnology to create new species of clover that will be productive in warmer or drier climates.

Such far-sightedness seems to be the exception and not the rule, however.

If anything, the report's dispiriting findings probably flatter corporate New Zealand's preparedness for a carbon-constrained future, in that only 40 per cent of the NZ50 firms responded to the survey.

But national emissions trading is coming. Both major parties back it.

Dr William Pizer, an economist with a particular interest in climate change at the Washington think-tank Resources for the Future, was in New Zealand recently for a meeting of the what-to-do-about-it working group of the United Nations Intergovernmental Panel on Climate Change.

"Domestic emissions trading is probably the best way on the one hand to put out there an incentive to reduce emissions; and on the other to send a message which the Government really needs to send, that this is a serious enough problem that businesses need to think about it," he told the Business Herald.

"As important as the level of the target or the price of allowances or whether to tax or have market-based policies - is simply the signal that the way the future is going to look, and business can't ignore this."

Pizer doubts a market-based approach alone is capable of achieving a dramatic reduction in energy related emissions.

"Because you need a pretty high price to get carbon emission out of energy use, whether it is electricity or transport, and I am just not confident governments have the capacity, the political will, to follow through with the really long-term pricing that would be required."

But a "modest" price-based approach, supplemented by policies to encourage the development and deployment of low-emissions technology - such as performance standards for cars, buildings and power plants - would be a better way to go, he suggests.

"In the US we talk about a target price of US$7 to US$10 ($10.60 to $15.15) over the next few years. In 15 years you have raised the price to the point where you can encourage technologies with the price, and in the meantime you have encouraged the technologies to be ready.

"Using both [markets and technology support] and not relying entirely on one is probably the way to go."

The sort of carbon price that would be needed to make it worthwhile for US power companies to invest in coal gasification and geological sequestration of CO2 is probably around US$30 ($45) a tonne, Pizer says.

In the United States, with emissions of more than six billion tonnes a year, that would imply a carbon market of more than US$200 billion ($303 billion) - as much as all other environmental expenditure. Yet only a fraction of that would actually get spent on mitigating greenhouse gas emissions.

Clearly, that level of environmental spending has not brought the US economy to its knees.

True, said Pizer. "But for every other environmental regulation we had some vision of how to address it - scrubbers or replacement chemicals or whatever - and we had some of what the price would be on that. With CO2 we are talking about stuff we haven't done yet - like storing CO2 on a large scale in saline aquifers. That's what is scary, not the money by itself."