Corporate Low-Carbon Management under Uncertain Negotiations over International Frameworks
March 24 (Tuesday) 2009
Takafumi Ikuta
Research Fellow
Summary
- The first commitment period for the Kyoto Protocol (2008-2012) began this year. However, preliminary figures for 2007 domestic greenhouse gas emission announced in November 2008 show an increase of 8.7% from the base year (1990). Emission reduction remains an elusive goal. Even when counting reductions from the Kyoto mechanism such as forest sink measures and emission trading, achieving protocol targets would require emission reduction of 9.3% from the base year (117 million t-CO2). The recent economic downturn can potentially contribute to emission reduction. Still, achieving the protocol targets will be extremely difficult, and a scenario of having to purchase additional carbon credits from overseas is becoming more realistic.
Uncertain Discussion towards a Post-Kyoto Protocol
Meanwhile, international discussion is shifting to the construction of a “post-Kyoto Protocol” framework for 2013 and beyond. Agreement on a new protocol is expected at The 15th Conference of Parties to the United Nations Framework Convention on Climate Change (COP15). Discussion on climate change measures and Japanese leadership were expected at the Lake Toya G8 Summit in July 2008, but adequate results were not seen on either account. The G8 agreement on long-term targets by 2050 (50% global reduction of total greenhouse gas emissions) should not be mistaken for substantial progress, and in the end mid-term numerical targets for around 2020 were not set. Japan was unable to present its own mid-term targets or exercise leadership.
It became clear at the Lake Toya Summit that a new international framework cannot be formed under the G8. The Major Economies Meeting on Energy Security and Climate Change (MEM), comprised of 16 countries including eight emerging countries such as China and India that together produce 80% of global greenhouse gas emissions, is gaining credibility as a framework for the future. That said, there were conflicts of interest concerning division of roles at the MEM, held alongside the Lake Toya summit, and the countries were unable to agree on long-term numeral targets.
To construct an effective international framework, there must be consensus-building regarding issues such as participation of all major emitting countries, technology transfer to developing countries, and the development and spread of innovative technology. Conclusions reached at COP14 held in Poland in December 2008 show no significant progress. And negotiation toward COP15 concerning consensus on new reduction targets and the division of roles among developed and developing countries is expected to intensify under a globally tense economic climate.
Growing Demands for Low-Carbon Management
While the fate of negotiations for an international framework is unclear, a look at the current management conditions of companies leaves little doubt that demands for low carbon management are growing. Domestically, the cabinet approved an Action Plan for building a low-carbon society in July 2008 and established long-term targets of 60-80% reduction by 2050: this confirms that global warming countermeasures will be more than fleeting. Concrete numerical targets were set regarding technology development and diffusion measures such as expansion of solar energy generation (tenfold by 2020 and fortyfold by 2030); introduction of next generation cars (50% of new sales by 2020); and a change to incandescent energy-saving lamps (by 2012). Trial runs for a domestic emission trading scheme – one framework to facilitate the transition to a low-carbon nation – will also be conducted. Trading of emission quotas and credits that certify reductions among businesses is expected to begin in summer 2009. Participation is voluntary, there are no penalties and the format for participation is expected to be varied: challenges remain in becoming a framework that can verify adequate results. Yet, it can be said that the first step has been taken towards constructing a domestic market.
International carbon markets are advancing. The aggregate size of global carbon markets in 2007 was US$64 billion, a year-on-year increase of 105%. Following Europe’s development of a market based on mandatory reductions in 2005, Australia, Canada and New Zealand are expected to introduce their own emission trading schemes and the change of US administrations also should accelerate the establishment of a trading market. While recent carbon market prices have been weak, the market size is in a basic trend of growth.
Calls for management of supply chain CO2 are also increasing. The Carbon Disclosure Project, an international NPO that has conducted survey reports on carbon emission of companies since 2003, began a pilot project to examine climate change measures implemented through the supply chain in 2007. Though without Japanese participation, major US and European corporations have joined to make the project a potential procurement standard for the future. Movements to show the carbon footprint along the entire value chain for products are also becoming prominent. One company in the UK displays CO2 emissions on its potato chip bags; retail grocery giant Tesco has declared that it will do the same on all of its brand products. Trial runs for showing carbon footprints are also planned primarily in the Japanese food and retail industries. The day when CO2 information is listed on products alongside raw materials and ingredients is not far off.
Low carbon management: risks and opportunities
As policy and market trends concerning climate change issues rapidly change, companies must accurately grasp their own risks and opportunities and have sound decision-making for low carbon management.
Overseas financial institutions have introduced risk management that compares business data – asset value, sales and profits and so on – and CO2 emission of companies. Companies with heavy CO2 emission are rated as high-risk for future measures. In terms of risk management, it is necessary to minimize CO2 emission in products and the company itself, and management of the entire value chain is also important.
On the other hand, a clear CO2 unit price would also lead to more business opportunities. Despite a lull in soaring energy prices, the need for energy-saving and the cost cutting that it brings is still high. Competition in low-carbon products and business development such as CO2 emission management and reduction support services for companies and products will become fierce. Innovative approaches for providing solutions based on low-carbon trends and customer needs are needed to strengthen long-term competitiveness.