Dr Mirabelle Muûls, Assistant Professor in Economics at Imperial College Business School, explains how businesses will need to adapt to the increasing importance of carbon markets following the 2015 climate change agreement.
In December 2015, 195 countries gathered at the COP 21 Paris Climate Conference and agreed to take significant action to combat climate change, signing up to the first-ever universal, legally binding global climate deal. Coming into force as of 2020, the agreement aims to keep global average temperature rises to well below 2°C above pre-industrial levels.
The historic deal is set to affect everyone across the globe, from individuals to policymakers and to businesses, and an effective framework for change, therefore, becomes vital.
Businesses are central within this debate as they must deliver the innovations and also develop new energy solutions to lead us to a zero-carbon world. They will be also facing new government policies arising as a result of the Paris climate agreement.
Some effects of climate change are inevitable and therefore businesses must also invest in adaptation accordingly.
A core challenge for business is set to be carbon pricing. The European Union currently runs the world’s biggest emissions-trading system and carbon markets are set to dramatically increase in importance as they are extended to China, possibly the US and other parts of the world. Other countries might also introduce carbon taxes in the near future. Such policy instruments, by putting a price on carbon, shift the incentives for companies to reduce the emissions resulting from their production process or the consumption of the goods they produce. This then impacts their investments and innovation decisions and hence the long term realisation of a low-carbon economy.
Imperial College Business School has the expertise to understand how firms react to carbon markets; for example, as part of a wider research programme we are currently interviewing 100 firms in China to understand how they deal with the pilot emissions trading system and how that policy interacts with anti-pollution measures. In the EU, we have analysed how companies alter their emissions as a result of the policy. We have found that they reduced these significantly by close to 15 per cent, despite the low price prevailing on the market. It is also key to understand how they adapt their management practices; their innovations and what they invest in. And by understanding this better, we can help businesses work with these carbon markets, to make the most out of them.