Colluding With Environment Makes Good Business Sense

Updated: Oct 28 2002, 05:30am hrs
In what could be termed a far cry from the opposing, and often combative, stances adopted by business and environment till the 1990s, the ongoing eighth Conference of Parties (COP-8) in New Delhi has seen a respectable gathering of global business representatives participating in the deliberations. In fact, many of the discussions were spearheaded by representatives of companies, including energy majors, under the aegis of the International Chambers of Commerce (ICC).

This change in attitude began in the mid-1990s and has accelerated over the last five years, much of it prompted by the fact that once the 1997 Kyoto Protocol comes into force, acceding nations will impose limitations on greenhouse gas (GHG) emissions, which in turn may see governments adopting policies designed to lessen GHG emissions, such as levying of carbon taxes, and the imposition of stringent legislation to punish polluting units. In the services and financial sectors, asset managers may see the value of companies using carbon-intensive technologies (such as cement, aluminium, coal and oil-based power companies) decline as investors become more aware of liabilities linked with such industries.

Ironically, it was the UN Framework Convention on Climate Change (UNFCCC) and the Kyoto Protocol which provided the means for industry to collaborate with governments and environmentalists to participate in climate change mitigation ventures. While the UNFCCC allows industrialised countries to meet their emissions reduction commitments jointly with other parties through a form of project-based emissions trading, Articles 6 and 12 of the Kyoto Protocol authorises Parties to adopt Joint Implementation (JI) and Clean Development Mechanisms (CDM).

Today, though some companies continue to be opposed to action on environmental issues, many more see it as an opportunity rather than something thay must fight. Part of this attitudinal change is driven by the need for companies to position themselves for a future when government policy will be increasingly driven by climate change issues. Also as a recent report released in early October by the United Nations Environment Programme Financial Initiatives (UNEPFI) a unique partnership between the United Nations Environment Programme (UNEP) and a conglomeration of some 295 banks, insurance and ivestment companies warned, global warming, if not dealt with in time, has the potential to wreak havoc across the worlds stock markets and financial centres.

That rapid, unplanned industrialisation and urbanisation is being increasingly seen as a major contributor to global warming and climate change, was evident from the scientific report released by the Inter-governmental Panel on Climate Change (IPCC) in Shanghai in January 2001. According to the report, increasing emissions of GHGs are preventing energy mitigation into space and therefore contributing to rises in global temperatures of between 0.3-0.6 degrees Celsius since the end of the 19th Century. If no action is taken to slow down global warming, it may result in potential consequences such as changing ocean currents, leading to more frequent storms and hurricanes, melting glaciers, and disruption in agriculture and commerce.

It should come as no surprise that the industry that has been in the forefront of climate change mitigation is insurance. According to the US Deparment of Energy, global economic losses from natural disasters have increased 15-fold since the 1960s, with combined insurance losses jumping from $7 billion to more than $90 billion currently, causing profits to drop and sending the $2 trillion industry into shock. Large resinsurance companies like Munich Re are employing climate scientists to enable the company to predict the future and allow them to prevent losses. Along with the banking and financial sectors, the insurance sector is a major component of UNEPFI.

Today, GHG emissions trading has emerged as the policy of choice for many companies to address environmental concerns. However, though a significant GHG market has evolved over the last five years, it is at best an ad hoc and fragmented one, voluntary in nature and evolved from a variety of project-based emissions trading programmes, including the Activities Implemented Jointly (AIJ), Canadas Pilot Emissions Reduction Trading Program (PERT), etc. Also, few GHG emissions trades have involved an exchange of emission permits such as credits, since these refer to government-issued commodities that only exist within the context of formal trading systems, and hence have no guarantee that governments will allow them to be applied agaist future emisions reduction requirements. Currently, only a few governments, like the UK and Denmark, have moved forward in designing domestic trading systems. But unless a common international trading system is developed, differences in individual systems could lead to market distortions, and prevent increased cross-border emissions trade. It is therefore essential that the Kyoto Protocol comes into force and guidelines formalised to deal with global warming.

For Indian business in particular, the time is opportune to take advantage of the challenge and opportunities emerging from the debate on global environment, such as using the benefits accruing from CDMs in order to bring new technology and investment and creating more jobs, while simultaneously reducing pollution levels. More and more companies are investigating how they could benefit from participating in the CDMs. Organisations like CII and Ficci are conducting environment-related conferences and summits and addressing problems associated with reform in varied sectors of industry, including energy.

That it makes immense sense for Indian business to play a proactive role in environmental issues is clear. As an IPCC report pointed out, climatic change will have a serious impact on the countrys agriculture, economy and human health as an increase in global temperatures can result in a fall in food production and decline in its GDP by a significant 4.9 per cent in this century. According to some climate change experts, high temperatures combine with low rainfall in many countries to create drought conditions. As farmers pump more and more water to meet the growing world demand for food.

As a result, water tables are dropping at an alarming rate in key farming areas of China, India and the US. Unless industry cooperates with governments in evolving effective solutions to deal with what could become a catastrophic situation, it will find itself scrambling to cope with an increasingly difficult situation.