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Categories
| The impact of climate change on SMEs |
| Commentary | |||
| Written by CPA Australia | |||
| Wednesday, 27 May 2009 10:54 | |||
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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 Organisation for Economic Cooperation and Development (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. 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. US President Barack Obama has made a commitment to introducing 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 small and medium enterprises (SMEs) in Malaysia? 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. What are the challenges? For SMEs that have suppliers in countries where cap-and-trade schemes exist, 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, their products will become more competitive against those that do. However, competitors in countries with such a scheme will seek to improve their processes, which by itself can be a competitive advantage. With consumer sentiment in many developed countries now moving towards considering emissions, businesses that respond quickly to this trend will have a competitive advantage. If you have competitors in countries with such schemes, they are likely to receive some form of assistance from their governments. Another important challenge is that if you supply large businesses in countries with a scheme, it is increasingly likely that they will seek from you information on the emissions you generate. Therefore, 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 one is for businesses operating in countries that do not impose the additional cost that a scheme will impose on competitors. Such businesses can take advantage of this price distinction. Another opportunity is that businesses may be seeking suppliers from outside such countries or even to move production to non cap-and-trade countries. Businesses that produce with less emissions than their competitors will find that they have a competitive advantage as consumers and businesses will be looking for such products. The major opportunity will be for SMEs that can research, develop and commercialise new low-emission technology or processes. The opportunities globally are significant. The schemes will encourage businesses and governments to invest heavily 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 choose 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 Malaysia, there will be issues to consider. The importance of these issues depends on how exposed your business is to international competition and markets 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. This article appeared in The Edge Financial Daily, May 27, 2009.
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