Companies must ask themselves how they can adapt their entire business to succeed in a world in which carbon has become a scarce commodity.
As regulation tightens and stakeholders demand companies do more to mitigate their environmental impact, business leaders must ask themselves challenging questions about their operations, strategy and reporting mechanisms.
Policy efforts to tackle climate change are an important driver of change. In December 2011, the international community agreed in Durban to establish a new climate change treaty that should, for the first time, involve all countries and see all major economies take on legally binding commitments. The new protocol is to be signed by 2015 and enacted by 2020. At the same time the Kyoto Protocol will continue beyond 2012, albeit without the US, Canada, Russia and Japan.
The two main carbon policy instrument options used by governments to transition to a low-carbon economy are:
- Carbon taxes
- Emissions trading (or cap-and-trade) schemes
A carbon tax is a fixed price levy on the carbon content of the use of fossil fuels, with the level determined by the authorities. An increasing number of countries, developed and developing alike, have implemented or plan to implement carbon taxes, sometimes alongside or as a transition to a cap-and-trade system.
By contrast, emissions trading schemes set a limit on the amount of carbon or GHG emissions installations can emit, allowing participants to trade allowances to cover their needs, with prices set by market dynamics. Cap-and-trade systems are becoming increasingly popular around the globe.
The carbon policies that have been implemented by governments over the past decade have given carbon a value. Market-based regulation has made carbon a limited resource and, as such, carbon has a price.
So how does carbon affect investment decisions and company balance sheets? Are carbon-constrained companies less competitive in the globalized economy?
We look at the impacts of a carbon-constrained world on the decision-making process and bottom line of companies, whether they operate in the US, Europe or developing countries: