Wednesday, 7 January 2009

Corporate Responses- Interview with Dr Rory Sullivan

In November 2008, Greenleaf released a new book, Corporate Responses to Climate Change: Achieving Emissions Reductions Through Regulation, Self-Regulation and Economic Incentives, which P.E.D reviewed here. The book was edited by Dr Rory Sullivan, the Head of Responsible investment at Insight Investment. Recognised as one of the leading global experts on investment and climate change, Dr Sullivan has led Insight’s climate change-related research and engagement work over the past six years and has published a series of major reports on the subject. His academic research has focused on the role of self-regulation in public environmental policy, with a particular focus on voluntary approaches in climate change policy.

1. Where did the idea for the book come from?

The starting point was actually frustration with the nature of the public policy debate around business and climate change. In recent years, much of the discussion around business and climate change has been couched in very simplistic and quite antagonistic terms: companies bad/policy makers good (or vice-versa!), voluntarism bad/regulation good (or vice-versa again!). At the same time – and almost in a parallel universe – we have seen the first serious attempts by policy makers (most significantly through the EU Emissions Trading Scheme) to take meaningful and substantive action on greenhouse gas emissions. Companies have responded with a range of commitments and actions to reduce their greenhouse gas emissions. Yet, for all the rhetoric and action, global and corporate greenhouse gas emissions have continued to rise inexorably.

It is this context that the book is located. The objective is not to make a case for business or government action on climate change (a case that has been made many times before) but to carefully and systematically analyse current business practice and performance on climate change, in the light of the dramatic changes in the regulatory and policy environment over the last five years, and to use this analysis to provide concrete proposals on how the next generation of climate change policy instruments may be designed and implemented in a manner that delivers the real and substantial reductions in greenhouse gas emissions that will be required in coming years.

2. You set out with the aim

"to reflect on current business practice and performance on climate change in the light of the dramatic changes in the regulatory and policy environment over the last five years. More specifically, it examines how climate change-related policy development and implementation have influenced corporate performance, with the objective of using this information to consider how the next stage of climate change policy may be designed and implemented in a manner that is effective while also addressing the inevitable dilemmas at the heart of climate change policy”.

How far do you think you succeeded? Given the chance, what would you add to the book?

I think the book has delivered on its central objective of cutting through the lazy rhetoric that clouds the business and climate change debate and presenting a clear – albeit stark – assessment of the current state of play as well as providing credible, evidence-based proposals for public policy on climate change. The book covers the major topics that you would expect in a book on greenhouse gas emissions mitigation: corporate motivations, the role of leadership within the organisation, the manner in which external influences (policy, stakeholder pressure, etc) interact to influence behaviour, the strengths and weaknesses of different policy instruments (command and control, incentives, market based instruments, self-regulation), the key climate change policy instruments that have been adopted.

So, in response to your question, I wouldn’t change anything in the book. Indeed, the relative lack of progress at Poznan and the recent discussions around the European Union's climate change programmes confirm some of the central concerns raised in the book: that lack of progress on developing and implementing policy in this area is the key challenge, that governments have yet to explicitly answer the question of how they deal with potentially competing goals such as energy security, and that, ultimately, clear, robust, long-term public policy – i.e. ‘Long, Loud & Legal’ - is key if we are to see a significant change in corporate performance.

There is however one major topic that the book – by design – didn’t cover, namely adaptation.

Clearly, a discussion on corporate greenhouse gas emissions – the focus of the book – is only half the picture. The other is how companies are developing their business strategies to take account of the physical impacts of climate change and also the opportunities presented by a changing climate. While acknowledging the causal links between greenhouse gas emissions and the global climate, adaptation is still treated very much as a distinct issue by companies and by policy makers. Furthermore, with the obvious exception of sectors such as insurance, the thinking on how adaptation policy needs to be designed and implemented to incentivise appropriate corporate responses is still very much in its infancy and so a book on this subject is probably somewhat premature.

3. On page 35 of the book you write "Overall, there needs to be a scarcity of allowances in order to create a market price for carbon and thereby induce reductions in greenhouse gas emissions." Anyone reading the Financial Times recently could be forgiven for thinking that German industry- carmakers, steel etc- have just gutted the European Climate Programme, especially on the question of the auctioning of carbon credits for the emissions trading scheme. Is that a fair representation? If so, what signal does that send to energy-generators?

I’m not sure that the wording of the question presents a completely fair representation of the recent debate. There are actually two distinct issues at play. The first is whether the European Climate Programme will deliver the significant, substantial reductions in greenhouse gas emissions that are required. From the evidence to date, the EU does seem likely to deliver on its targets of reducing the EU’s greenhouse gas emissions by 20% by 2020. As an intermediate goals towards the longer-term goal of reducing greenhouse gas emissions by 80% by 2050, as suggested by the IPCC, this is an important and substantive contribution and the EU should be applauded for providing real leadership on this.

The second is the distributional effects of the EU’s policy actions. The EU is faced with significant challenges of keeping its Member States on board with its overall climate change goals; inevitably, this requires paying attention to issues such as protecting European companies from unfair competition from companies outside the EU who do not face the same carbon constraints, and avoiding EU businesses relocate to outside the EU with the loss of jobs that would entail but at no net benefit to the world’s greenhouse gas emissions. One of the consequences has been that some of the major beneficiaries have been the energy companies and large industrials. Clearly, this raises the ethical (or distributional justice) questions of whether companies should be rewarded for having historically high emissions. But, this outcome, uncomfortable though it may be, may be a necessary price to pay in order to deliver on the EU’s overall climate change goals.

4. Elsewhere in the book, an author points out that the EU negotiating position of "20% cut by 2020, or 30% if comparable economies come aboard" actually creates policy uncertainty for companies, which they generally don't like. Given the uncertainty over whether there will even be a deal at Copenhagen (there seems to be some back-pedalling and downward massaging of expectations), what would you like to see the EU doing? What are your hopes/expectations of Copenhagen.

Obviously, the ideal outcome from Copenhagen would be a binding agreement that sets clear targets for the world’s greenhouse gas emissions and puts us clearly on the pathway to a low carbon economy. However, we need to recognise that there are many obstacles in the way of such an agreement, and it may be 2010 or 2011 before we see any form of agreement emerge.

There are some positive signs at the national and regional level. For example, China has set a nationally binding goal to reduce energy consumption per unit of economic output by 20 % in 2010 from 2005, South Africa has said that its emissions will peak by 2025, with cuts starting a decade later and Mexico has said that it intends to halve its emissions by 2050 against a 2002 baseline.

I think we are, now more than ever, looking to the developed countries – the EU, the US and Australia seem the most likely - to provide leadership by example. If there is a single conclusion to be drawn from the EU’s experience over the past few years it is that meaningful policy action on climate change does not necessarily entail significant adverse economic effects and, indeed, any short-term costs should be outweighed by longer-term benefits such as improved energy security and more efficient use of energy. Furthermore, the EU Emissions Trading Scheme (EU ETS) has played a catalytic role in putting climate change on the corporate agenda, not only demonstrating that governments could act but that they were prepared to act and to take decisions that were not necessarily in the best short-term interests of all companies.

5. The UK Government has created the Department of Energy and Climate Change. What key decisions do you think it should make on nuclear and new coal-fired power stations? Does the lack of CCS mean there should be, as James Hansen proposes, a moratorium on coal-fired stations? Would the gap be filled by renewables, or something worse?

There is a lot of rhetoric around the government’s commitment to action on climate change, yet at the same time many of the individual projects being proposed/discussed – the third runway at Heathrow, the Kingsnorth power station – seem likely to significantly increase the UK’s greenhouse gas emissions.

New coal fired power stations represent the key litmus test of the government’s commitment to action on climate change. Allowing coal-fired power stations to proceed without carbon capture and storage would clearly demonstrate the lack of government appetite for substantive action on this issue.

A balanced approach to climate change policy does not mean that greenhouse gas emissions cannot or should not increase from specific activities but the government should explain how, if it does intend to allow such projects to proceed, it intends to reduce emissions elsewhere in the economy to compensate for increases that result from other of its decisions.

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