The impact of climate change on SMEs
The responsibility of climate change control doesn't just rest on governments and multinationals. SMEs can also play a key role and benefit from such schemes
Licardo Prince, Business Times 18 Nov 08;
THE year 2009 will be an important one for the world's response to reducing greenhouse gas emissions. US president-elect Barrack Obama has an ambitious plan to reduce America's emissions. And the objective of governments in general is to reach a binding global agreement on climate change post-2012 at the Copenhagen meeting of the United Nations Climate Change Conference in December 2009.
But business does not need to wait to see what will come out of Copenhagen. It is clear that the central response to climate change of most OECD member countries is to use 'cap-and-trade' schemes. The end-result of such schemes is to put a price on emissions, which will be an additional cost for business. Putting a price on emissions will drive a structural shift in such countries - from an economy that creates emission-intensive goods, technologies and processes towards one that creates low-emission goods, technologies and processes. This is a result of consumers and business changing the goods and services they demand in response to the price signal.
Cap-and-trade schemes already operate in the 27 member nations of the European Union. In addition, 30 states and provinces of the US and Canada are in the process of introducing an emissions trading scheme. Mr Obama has made a commitment to introduce a cap-and- trade scheme in the US. Japan is trialling emissions trading and intends to introduce a scheme in 2010 or 2011. Australia intends to introduce a scheme in 2010 and New Zealand is introducing a scheme this year.
What does this mean for SMEs in Singapore? First, cap-and-trade schemes are designed to place direct obligations only on the largest emitters, so it is unlikely that an SME here will have a direct obligation. However, this should not mean SMEs should be indifferent. With all the fundamental changes, cap-and- trade schemes and other policy responses to climate change present challenges and opportunities to businesses of all sizes in all locations.
What are the challenges?
For SMEs that have suppliers in countries where cap-and-trade schemes exists, or have a presence in such countries, costs will increase. Your ability to pass on such costs will depend on whether your competitors are also incurring them.
For SMEs that do not have such additional costs imposed on them, their products will become more competitive against those that do. However, competitors in countries with a cap-and-trade scheme in place will seek to improve their processes to become less emission-intensive, which by itself can be a competitive advantage. With consumer sentiment in many developed countries now moving towards considering the emissions produced from the goods and services they consider purchasing, businesses that respond quickly to this trend will have a competitive advantage. And with costs increasing in countries with schemes, the likelihood of businesses in such countries moving quicker is higher.
It should also be noted that if you have competitors in countries with cap-and-trade schemes, they are likely to receive some form of assistance from their governments so they don't lose competiveness against your business. These businesses will, therefore, have longer to reduce their emission intensity, so the cost impact on them of introducing such a scheme will be reduced, thus reducing the price advantage that may otherwise emerge.
Another important challenge is that if you supply large businesses in countries with a scheme, it is increasingly likely that these businesses will seek from you information on the emissions you generate to produce whatever they buy from you. While such information is not related directly to the requirements of cap-and-trade schemes, it does reflect the concern of such businesses over changing consumer sentiment on emission intensity. Therefore, not only will you need to put in place methods to measure your emissions to keep such customers, but your big-business customers may also insist that you reduce your own emissions, which will mean you will have to invest in improving or replacing current plant and equipment and or improving processes.
What are the opportunities?
The policy responses of the major developed economies on climate change present a number of opportunities for SMEs. The obvious opportunity is for businesses operating in countries that do not impose the additional cost on business that a cap-and-trade scheme will impose on competitors. Such businesses will find that on price they may be more competitive than competitors based in countries with a cap-and-trade system. Such businesses can take advantage of this price distinction to grow their business in existing markets and compete in new markets.
Another opportunity arising from the introduction of cap-and-trade systems in other countries is that businesses from these countries may be seeking suppliers from outside such countries or even to move production to non cap-and- trade countries to take advantage of the price advantage. If you are seeking new clients for your products or investment, this is an additional competitive advantage you may find useful in winning business and/or investment.
Businesses that produce their products with less emissions than their competitors will find that they have a competitive advantage as consumers and business will be looking for such products. This not only applies to low-emission products but also producing high-emission goods with less emissions than competitors. While it is predicted that growth for low-emission products over the next 40 years will outpace growth in demand for high-emission products, there will still be growth opportunities in high-emission products for those that can produce such goods with lower emission than others.
The major opportunity will be for SMEs that can research, develop and commercialise new low-emission technology or processes. The introduction of cap-and-trade schemes will encourage businesses and governments to invest heavily in new technologies. For SMEs that can develop and commercialise such technologies, the opportunities globally are significant. In fact, the whole purpose behind a cap-and-trade scheme is to ultimately reduce emissions, and the only way the proposed significant cuts in emissions can be achieved is significant investment in new low-emission/low-energy intensive technologies.
What are the mechanics of a cap-and-trade scheme?
# A government will set a cap on the total amount of carbon pollution allowed in an economy by sectors covered by the scheme.
# The government will issue permits up to the annual cap each year.
# Only entities that generate more than a certain quantity of carbon pollution each year - liable entities - will need to acquire a permit for every tonne of greenhouse gas they emit.
# The quantity of carbon pollution produced by each liable entity will be monitored and verified.
# At the end of each year, each liable entity will need to surrender a permit for every tonne of carbon pollution the entity produced in that year.
# Liable entities compete in the market to buy the number of permits that they require. Liable entities that value the permits most highly will be prepared to pay the most for them, either at auction or in a secondary trading market. For some liable entities, it will be cheaper to reduce emissions than to buy permits.
# As a transitional assistance measure, certain categories of entities may receive some permits free or cash compensation. Liable entities could use these permits or sell them.
The price of permits is not set by the government. Rather, it emerges from the market. If an entity can reduce carbon pollution more cheaply than the prevailing market price of permits, it will chose to reduce pollution rather than buy permits. Therefore, the scheme can provide a strong incentive for liable entities to reduce carbon pollution if the price for permit prices is high. At the same time, the price on emissions provides a financial incentive for firms to develop and/or adopt technologies to reduce emissions.
Conclusion
For SMEs in Singapore, there will be issues to consider, even though they may not be directly liable under a cap-and-trade scheme. The importance of these issues depends on how exposed your business is to international competition and markets - particularly countries with cap-and-trade schemes - and how emission-intensive your inputs or processes are.
All businesses can also use the shifting demand that the price signals from a cap-and-trade scheme will create, as an opportunity to consider developing and commercialising new technologies that reduce emissions.
Licardo Prince is communications adviser, external affairs at CPA Australia.
