Environment: Carbon accounting
Various studies to date have probed the global economics of climate change. However, for every business that turns to a climate-conscious means of production, these studies need to be relevant at a micro level. This article explains how publishing emissions and emission-based incentives can encourage a shift to carbon-neutral activities. In addition, a system of emission-based incentives and taxes may be a matter for actuaries to become involved in.
In a leaflet published in 2007, the European Commission (EC) expressed the need to provide consumers and other stakeholders with broader life-cycle information on products. To date, very few businesses are carbon neutral or display such information about their products. Consequently, there have been calls to make carbon reporting mandatory. It is a way to link global objectives such as those of the European Union Emission Trading System with emission-producing activities on the ground.
If all participants have to disclose a figure related to their carbon footprint, this will allow policymakers to tip the scales in favour of greener businesses. For example, if company emissions are reported in accounts, then tenders and incentives may be awarded to low emitters, and high emitters may be taxed. Emissions may be included in business projections. These projections can be used to measure the success of emission-reducing strategies. To influence demand, retail and services can be plied with incentives in addition to producers. Seeing an emission symbol next to prices may influence consumer purchase choices. An appropriate carbon measure for individual services or products can be calculated by adding up emissions during the production of raw materials and those during processing.
Advantages
Known obstacles for green business are high capital requirements, sluggish technology and uncompetitive prices. Emission projections can be a guide for capital allocation. In addition, economies of scale and technological advancements will follow sufficient demand for green products, which can be influenced as explained above. Some industries, for example those that rely heavily on burning fossil fuels, will forever have a handicap. Published emissions will identify industries that require technological innovation away from emission-producing activities.
Other producers, for example those of biofuels and high-starch food, stand to gain from emission-related incentives. These products lock in carbon from the air. An emission-based incentive strategy may therefore be a tool to address high energy and food inflation.
Challenges
A drawback for any incentive system is its unintended consequences, such as increased production costs and unhappiness about green taxes. The reality is that humanity’s smoking habits were passed over for two centuries. The bill for expensive interference to turn this habit around is now the responsibility of current generations. Policymakers face a challenge to communicate the long-term need of costly action now. Any new tax burden must therefore be spread carefully by assessing the consequences and fairness of such a suggestion.
A matter for actuaries
A natural system such as the carbon cycle cannot be modelled simply. All our activities are inherently dependent on burning fossil fuels. At best, we can reward business activities that do not increase carbon emissions further, or are less emissive than their competitors. Actuaries may identify simplifications such as these that are appropriate for financial models, so as to allocate incentives fairly and without increasing prices unduly.
The information about carbon emissions is inherently very scientific. Actuaries may translate this into a system that is simple to understand and closely linked to our pockets. Our main responsibility is to look for ways to overcome threats to the sustainability and profitability of green investments and strategies. Policymakers should look to us for advice.
Francois Marais is an actuarial modeller for CSC South Africa
Francois Marais
