Warwick Business School The drivers of low carbon business strategies Andrew Sentance, Warwick Business School Warwick University Climate Policy Workshop 24 th February January, 2016

Warwick Business School Greenhouse gas emissions, by source Global GHG emissions in 2000 = 42GT CO 2 equivalent Source: Stern Review (2006)* Non-energy emissions

Warwick Business School Three key business sectors  Energy (3.7% of UK GDP)  Transport (4.5% of UK GDP)  Agriculture (0.7% of UK GDP)  Note: UK imports of food and fuels = 4.8% of GDP

Warwick Business School Climate change – the role of business  Reducing energy use and carbon footprint  Transformation of energy and transport sectors  Investing in low carbon technologies  Enabling consumers to make cost-effective low carbon choices

Warwick Business School Two related questions  What is currently driving business action on climate change?  What are likely to be the most effective mechanisms to influence future business action

Warwick Business School Potential business drivers  Price and cost  Regulation and taxation  Brand/reputation  Business strategy

Warwick Business School Business attitudes to climate change Source: McKinsey Survey, 2008 % of companies (N= c.2,000)

Warwick Business School Current business drivers  Strategic and reputational drivers seen as most important by majority of businesses  Brand/reputation, corporate strategy and new products are the most significant areas of action  Traditional economic drivers appear less significant in driving action  But current regulatory and price signals are weak and current business action likely to be inadequate

Warwick Business School Potential size of carbon markets Extending EU ETS to power and industrial sectors in Top 20 countries would create a market of US$ bn

Warwick Business School UK carbon “taxes” £/T of CO2, 2009 values

Warwick Business School Carbon emissions per head CO 2 per capita, 2005 values Source: OECD 2050 target T

World GDP growth and CO 2 emissions from energy Source: World Bank and BP Statistical Review Note: Carbon dioxide is measured in millions of tonnes Average annual growth rates, percent

Sustainable global emissions scenarios Source: Climate Change Commission 2016:4 trajectory with global emissions peaking in 2016 with subsequent reduction in total emissions of 4% Annual greenhouse gas emissions (GtCO 2 e)

Warwick Business School Strengthening business drivers  Strengthen regulatory and price signals  Reinforce strategic motivations for business action  These are not alternative approaches – they should be complementary

Warwick Business School Influencing business strategy  Laissez faire – let the market decide  Direct intervention and “picking winners”  Strategic policy frameworks

Warwick Business School Laissez-faire and “picking winners”  Market failures: Uncertainty Innovation externalities Environmental externalities Incomplete markets  Government failures: Lack of knowledge Poor cost control Delivery failures Political influence

Warwick Business School Strategic policy frameworks  Government sets overall objectives and identifies policy tools  Action taken is consistent with the framework  Clear and coherent communication to guide business expectations and planning  Credible institutions and processes with expert and independent input  Policy framework is stable and not subject to major paradigm shifts

Warwick Business School An example

Warwick Business School Climate policy frameworks - issues  International dimension and need for policy agreement and co-ordination  Long feedback horizon to ultimate policy goal  Short track record of development of policies and institutions  Multiple policy instruments  Important sectoral dimension (esp for energy, agriculture and transport)

Warwick Business School Climate policy - implications  International framework is critical to underpin national policy credibility  Focus on actions, not just targets and outcomes, to shorten feedback loop  Need to build institutions  Cannot rely on a single policy instrument (eg carbon tax or carbon price)  Framework needs to encompass vision for changes required in key sectors

Warwick Business School Why should business respond?  Potential for growth and new business opportunities  Consistency with regulatory, price and cost drivers  Anticipating future business environment  Strategic relationship with government(s)  Risk of stranded business model  Risk of stranded investments and products  Competitive threat

Warwick Business School Strategy: Porter’s Five Forces

Warwick Business School Conclusions  Strategic motivation is a potentially strong driver towards low carbon business models  Already an important influence on business thinking and action  Needs to complement more traditional price/cost and regulatory drivers  Credible, coherent and well-communicated policy frameworks are crucial to drive strategic behaviour  Design of frameworks needs to take into account specific characteristics of the climate policy issue, including international dimension