ESG Focus: Emission Schemes, All Hot Air?

ESG Focus | Oct 15 2021

A new Carbon Pricing Index is drawing attention to the huge emissions control gap between Australia and climate change leading nations.

-Carbon pricing is too low to encourage industry to meaningfully reduce emissions levels
-Australia is far behind global climate leaders, with no emissions scheme in place
-Corporate Australia lists emissions as its top ESG priority, but emissions controls continue to miss the mark

By Danielle Austin

Although corporate Australia continues to identify environmental, social and governance (ESG) measures as top company priorities, the nation continues to fall short of a global benchmark on emissions controls.

Carbon pricing is widely considered a key measure in the transition to a global cleaner energy future and to achieving emission reductions targets, and the recently announced Real Carbon Pricing Index is bringing transparency to the widely varied approaches to carbon pricing around the world.

The Index has provided additional transparency to global carbon pricing and decarbonisation efforts by comparing the measures implemented by different nations, with a hope of setting a benchmark for global carbon prices. The different emissions trading schemes, or lack thereof, have created a chasm between nations like Sweden and Switzerland, which currently charge US$136.34 and US$104.67 per tonne of carbon, and nations, including Australia, who are yet to implement any carbon emissions trading scheme.

While the global average price for carbon emissions is US$4.42 per tonne, around 75% of carbon emitters aren’t paying anything. While Sweden and Switzerland set a benchmark as climate change leaders, the European Union, Finland, Norway and the United Kingdom, where carbon pricing sits at around US$70 per tonne, have all implemented carbon emission pricing schemes that meet or exceed the targets laid out in the Paris Agreement for 2030.  

The role of the private sector in a net zero emissions economy

Results of the Index have demonstrated that current erratic global carbon pricing is largely too low to make a meaningful reduction in emission levels, with current pricing doing little to incentivise heavy emitting sectors to change their practises. The High Level Commission on Carbon Pricing has suggested an increase in pricing to US$50-100 per tonne could still allow Paris Agreement 2030 targets to be met.

While carbon pricing policy is implemented at a government level, the discussion of carbon pricing brings to light how industry in Australia is contributing to emissions reductions targets without government interference. A lack of clearly defined roles relating to the responsibility of reaching emissions targets has created huge variance in commitments to reaching targets from government and industry globally.

Increasingly, expectations are being placed on businesses sectors around the world to play a role in reaching emissions reductions targets where governments are falling short. And while two-thirds of companies listed on the S&P500 have reported emissions targets, according to Morgan Stanley only a subset of these are proven to align with Paris Agreement targets. The broker noted that a lack of standarisation of emission targets leaves much at the discretion of the business, leading to differences in emissions reporting and data collection, targets that will not achieve decarbonisation as quickly as necessary, and a lack of clear roadmaps to achieving targets.

Keeping up with the Jones’

The Business Council of Australia is of the view that decarbonisation is imminent, meaning that corporate Australia has the choice of embracing change and attempting to forge a competitive advantage in the space, or risk falling behind the pack on a global scale. According to the Business Council, creating a net zero emissions economy will require collaboration between federal, state, territory and local government, regulators, and industry, sharing existing policies and technology to encourage private sector investment.

In a report released in early October the Business Council outlined what it described as “the most efficient and least costly pathway” to a zero emissions economy. In a two-pronged approach, the plan focuses on targeting low hanging fruit, stepping up action in easier-to-abate sectors including electricity, while additionally increasing investment in low carbon technology and green industries to prepare for the transition in harder-to-abate sectors. Additionally, the plan encouraged an acceleration of emissions reductions targets to establish Australia as a global competitor and encourage investment in new technology and innovation.

It was also noted a formal commitment to a net zero future aligned with Paris Agreement targets is necessary to guarantee further industry investment commitments. Not only is a collaborative effort required to reach these targets, but data shows a strong transition to net zero emissions by 2050 will be economically accretive to Australian to the tune of around $890bn.

Time for corporate Australia to step up?

While Australia currently accounts for around 1% of global gas emissions, the absense of an emissions trading scheme demonstrates the lack of importance being placed on greenhouse gas effects.

According to research from the 2021 Perennial Better Future Survey, greenhouse gas emissions continue to be the top ESG priority for Australian corporates for the second year in a row, followed by diversity, modern slavery, and cyber security. Greenhouse gas emissions were also listed as the largest area of ESG focus and improvement in the last year. Australian corporates have listed emissions in their top three areas of ESG focus and improvement each year since 2019, but only 40% have emissions targets in line with Paris Agreement goals.

While 81% of companies surveyed noted they had ESG inclusions in business strategy, 33% agreed that sustainability reporting was burdensome and less than half listed ESG targets as a key performance indicator of executive remuneration.

Although customers and shareholders are demanding more transparency from companies around their ESG measures, strategy and discussion is not enough – real action must be taken.

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