The Cost of Climate Change on Business

by Terence Jeyaretnam

How prepared is your business for climate change?  Indeed, is climate change real? If so, what are the implications for your business?

Barack Obama’s United Nations Climate Change speech, started with the following words:

"That so many of us are here today is a recognition that the threat from climate change is serious, it is urgent, and it is growing. Our generation’s response to this challenge will be judged by history, for if we fail to meet it - boldly, swiftly, and together - we risk consigning future generations to an irreversible catastrophe. No nation, however large or small, wealthy or poor, can escape the impact of climate change. Rising sea levels threaten every coastline. More powerful storms and floods threaten every continent. More frequent drought and crop failures breed hunger and conflict in places where hunger and conflict already thrive. On shrinking islands, families are already being forced to flee their homes as climate refugees. The security and stability of each nation and all peoples -- our prosperity, our health, our safety -- are in jeopardy. And the time we have to reverse this tide is running out.”

Australia’s Parliamentary Multi-Party Climate Change Committee says this:

“The Committee acknowledges that Australia needs to reduce its carbon pollution, as part of global efforts to combat climate change. Cuts in global pollution are necessary to reduce the risks posed by unmitigated climate change. For Australia, these risks are large, threatening our economy, our natural heritage (including icons such as the World Heritage listed Great Barrier Reef), and our way of life.”

While there may be a continuing debate in mainstream media on whether climate change is human-induced or even if it exists, those with most to lose such as countries, businesses and communities have reached consensus that the threat of climate change is a real and significant threat.  Credible organisations from the CSIRO to the Bureau of Meteorology, to almost every large company in Australia, every State Government, and many Local Government Agencies are working on their response to climate change, both from the point of view of mitigation (reducing greenhouse gas emissions) and adaptation (building resilience to cope with the impacts of climate change). Insurance companies are modeling impacts so that they could price their premiums better.

So, the danger for someone owning or running a small to medium sized business is that there is little capacity to receive specific advice on what climate change may pose as a risk to your business.  My advice is for you is to begin by thinking about the implications of climate change in two possible ways:

  1. A price on carbon – there’s been talk of an emissions trading scheme, which was unceremoniously postponed by the then Rudd government.  The current government is committed to delivering a price on carbon, through emissions trading or a carbon tax.
  2. Direct impact of climate change on your business – whether it is increased frequency of floods and storms, increased temperature and number of days above 40 degrees or sea level rise, climate change impacts are on the increase and should be factored into day-to-day business operations.

Price on Carbon

Once a mechanism is proposed and accepted, a price will be put on each tonne of greenhouse gas emission.  Regardless of the type of business you may be in, a price on carbon will flow through to your business.  The way it works is that the price signal allows the market to reduce the reliance on fossil fuels, in turn assisting Australia in meeting its global commitments to keep emission levels globally below the two degree warming mark, as committed to by the major economies in Cancun Mexico late last year.  The likely implications are:

  • Rise in electricity, gas and fuel prices to reflect the cost of carbon.  This may be a direct operational cost on your business.
  • Rise in any goods or services sourced by the business that require energy to produce (at one level, this is almost anything we buy, but at another level, what you need to be concerned about are more energy intensive products – eg. Glass bottles and steel).
  • Where the business is large enough to trigger a compliance threshold, compliance costs such as those required to report against the National Greenhouse and Energy Reporting Act and the Energy Efficiency Opportunities Act.

The average increase though is likely to be less noticeable than the impact the rise in the Australian dollar has had over the last few months.  It is also important to note that some major economies have already in place a price on carbon (eg. European Union).  And, what’s more convincing about this cost being bearable is the more significant cost that may hit the business due to a direct impact (see section below).

Due to global warming being exactly that, a global issue, it is hard to visualize this.  My suggestion is to think of you being part of a global village.  An easy analogy is to think of a small village that is dependent on a reservoir for its water needs.  But also, the village including its industries have their wastewater drain to the water body, without a treatment plant treating the water first.  This was fine initially, but as the village grows, both water consumption and wastewater impact rises.  Now, think of the price on carbon as your contribution to constructing a treatment plant.  Think of direct impact (below) as the increasing severity of impact on your business that is reliant on water if left untreated.  Much easier decision, isn’t it? This is why the head of BHP Billiton recently called for a price on carbon.

Direct Impact of Climate Change on Business

This is harder to quantify, but likely to be more severe depending on the type of business you may have or where you may be located.  Here are some of the implications to think about in better managing your risk profile:

  • The severity of flood events along the east coast of Australia is set to increase.  This has flooding implications for businesses located in, or close to, flood zones.  Consider your insurance here to protect you against not only flood damage (not storm), but also loss of business due to flood damage.
  • If you are in zones (such as the west) which are likely to be drier, then think of the cost of water rising.
  • If you are close to the sea, particularly in cyclone-prone areas, both the frequency and severity of surges and cyclones are set to increase.  Again, insurance against losses, including loss of business is worth considering.
  • If your business is highly dependent on fresh produce, then think of the likely impacts above to your suppliers and how that may flow on to your business.
  • Think about the impact of your business being located in a bush fire zone. Again, insurance companies will be a wealth of information if you sit down and review risks with a consultant.
  • The number of hot days per year are set to rise. Think through the implications of customer comfort and the impact of this on your business.  It may be good if you are selling beer, but not that great if you are into hot curries.

These are, but just, some of the direct implications of what climate change may bring our way.  Regardless of the general ‘noise’ in the space on climate change, business managers must ignore the inaction and take time to quantify risks and implications taking actions to manage these with due care.

Terence Jeyaretnam is a Director of Net Balance (terence@netbalance.com),
one of the world’s leading sustainability advisory firms.
Terence is based in Melbourne.