It seems unlikely that the Copenhagen summit will result in any legally binding obligations for reduction in greenhouse gas (GHG) emissions. However, given the intensity of public emotion on the subject, unlike in the case of the World Trade Organization earlier this decade, an agreement will be reached in the near future.
Hence the flurry of announcements a few weeks before the Copenhagen meet. The US, which had refused to ratify the Kyoto Protocol earlier this decade, has now announced a target reduction of 17% by 2020. Even China has unilaterally committed to reduction by 40-45% in the intensity of carbon emissions by 2020. Brazil, too, has made a commitment to a reduction of 36.1-38.9% in its GHG emissions by 2020.
Photograph: Jason Lee / Reuters
From the time the Intergovernmental Panel on Climate Change (IPCC) released its fourth assessment report in 2007, the writing has been on the wall—creeping legislation and growing consumer sentiment will force companies to become greener.
Japan introduced laws from April 2006 regarding the rationalization of energy use and promotion of measures to cope with global warming, including mandating energy audits for industry and obliging manufacturers of motor vehicles and appliances to increase energy efficiency to the level of the most efficient products in the market. The Climate Change Act, 2008, in the UK requires legally binding reduction of CO2 emissions of at least 34% of the 1990 level by 2020, and of at least 80% of the same level before 2050.
Pressure from consumers and the search for competitive leadership has already led companies to initiate action for greener products. Toyota developed a hybrid car, selling its millionth in 2007. By 2020, almost all Toyotas will be hybrids. In the US, General Electric (GE) developed its “Ecomagination” strategy a few years ago to meet consumer demand for more energy-efficient and less-emissive products, “and to drive growth for GE— growth that will reward investors”.
In addition to voluntary action and creeping legislation, there is also pressure from investors. The UK-based Carbon Disclosure Project is now backed by at least 475 institutions with at least $57 trillion under management; institutions are embarrassed to be left out. Long-term lenders want clients to future-proof their business with green strategies. By 2020, the global carbon market will likely swell to $565 billion from $29 billion in 2006—investors are demanding a proactive response from managements to such opportunities and threats.
In contrast, the Indian government is locked politically into a stand of “no unilateral action without compensation”. Compelled by the stand of other countries, the government has only recently announced voluntary emission cuts. But given local resistance to this announcement, it’s still to be seen what will become of it.
The climate Bill passed in June by the US House of Representatives has a provision for taxing imports from countries with laxer rules on emissions. A World Bank study in November finds that a US import tax (of $60/tonne of carbon dioxide) would cause India’s exports to decline by 16%. France has now asked the European Union, which absorbs 20% of India’s exports, to impose a carbon tax on imports from countries deemed to have low environmental standards, such as India.
While India’s intensity of carbon emissions, at 1.6-1.8 tonnes per $1,000 of gross domestic product, is lower than that of China (which is 2.85 tonnes), Indian companies will be naive to rely on the government for protection. Coercive action by developed countries and pressure from domestic consumers will find them unprepared.
India’s industries must gear up to manage the challenges of consumer trends, public opinion and creeping legislation on climate change with the objectives of:
• protecting business and facilitating growth in the face of tightening legislation;
• maintaining competitive position through greener products and processes addressing customer demand;
• enhancing reputation among constituents—clients, suppliers, employees, communities, regulators and investors;
• seeking leadership with new green products and services.
An approach that the government and chambers of commerce can encourage is to ask firms to adopt a voluntary code of affirmative action for a sustainable eco-footprint.
This eco-code would include:
• reliable and credible measurement of their eco-footprint;
• goals (starting 1 April) for progressive reduction in energy usage intensity, emissions intensity and consumption of finite natural resources, and perhaps for achieving net carbon neutrality and reporting to its stakeholders on achievements versus goals;
• sensitizing the organization on reducing the eco-footprint of its activities;
• board-level responsibility for tracking performance as well as threats and opportunities from climate change.
A voluntary code will help the government politically in manoeuvring to change its stand to something globally acceptable while competitive, and investor pressure will move companies along towards a commercially sounder stand.
Pradip Shah is the founder of Crisil. The article is based on a talk given by the author at the Indian Institute of Management, Ahmedabad, on 28 November. Comments are welcome at email@example.com