Sustainability and Climate Change

Disaster: the risk & the reward

The UN is calling for more action from the private sector on disaster risk reduction. A new report by  PwC & the UN International Strategy for Disaster Risk provides ample business case says Oz Ozturk, partner, PwC.

In the world of international diplomacy, we’re used to measured language, that seeks to inform, but doesn’t seek to shock.

So last week’s launch in New York by the UN Secretary General Ban Ki Moon of the bi-annual Global Assessment of Risk made for sobering listening. Economic losses from disasters were described as “out of control”, and the evidence I heard at the launch to back that statement, was equally stark. 

Mounting losses  this century from catastrophic events are topping $2.5 trillion. Direct losses from floods, earthquakes and drought were reported as under-estimated by at least 50%. Disaster risk was described in the GAR13 as ‘a new multi-trillion dollar asset class’.

The UNISDR/PwC report Working together to reduce disaster risk examined disaster risk management approaches and experiences in 14 leading global businesses. It’s  launched as part of a new initiative led by UNISDR and PwC to link private sector businesses of all sizes in disaster planning, offering an assessment tool to help companies identify where their companies’ plans stand, and where gaps exist in the management of disaster risk.

Businesses taking part in the report undertook a pilot assessment of their risk management activities which showed that while good practices existed for disaster risk reduction for corporate-owned assets, the level of understanding and ability to manage risks in local supply chains overseas was far lower.

Business growth in hazard-prone parts of the world is leaving the private sector more exposed to disaster risk. Large multinationals’ dependencies on international supply chains, infrastructure and markets poses a systemic risk to ‘business as usual’.

The private sector has witnessed increasing numbers of occasions of indirect impacts of natural disasters amplifying losses globally through commodity price rises, supply chain disruption, workforce dislocation, asset damage, and lost or damaged infrastructure.

Then there is climate change. It's widely expected that the coming decades will see significant shifts in the frequency, severity and distribution of extreme climate-related events. This could impact security of supply, business continuity, asset damage and operating conditions. If investment and risk management decisions are based on past experiences only, business will become increasingly more exposed to losses in the future.

The report highlights how even businesses with established risk management systems in place need to do more to protect themselves fully against natural disasters. Small more vulnerable enterprises in developing economies, do not have the capacity to strengthen their  risk management and overall supply chain resilience alone. Some large businesses rely on the insurance industry alone for risk assessments, with most having only limited access to disaster risk information on which to base investment decisions.

Globalisation, of almost every industry, means the risks posed by natural disasters go well beyond the boundaries of a company’s operations.  The businesses we interviewed understand they need to do more than just do business in the communities they are working in.

The report does identify encouraging signs of change. Public-private partnerships in risk management have proven their worth during several disasters, including the 2010 and 2011 earthquakes in Christchurch, New Zealand. Businesses are also collaborating together to deliver new solutions to improve resilience for others - from index insurance products, to water efficient irrigation technologies and disaster early warning text alerts.

This is ultimately about improving safety for all, and the security of supply chains and economic growth, and this initiative will provide a common platform for understanding disaster risk management in the private sector across businesses of all sizes, in any industry or sector.

View the full report: www.pwc.com/resilience

Freight Transport Association: The Logistics Report 2013

By Mark Thompson, Director, Sustainability and Climate Change

The Freight Transport Association (FTA) represents transport interests in the UK across all modes; road, rail, air & sea. 

We have been involved with the FTA for a number of years now, providing ad-hoc advice, hosting its board meeting in our offices and contributing to its annual Logistics Report.  This year Coolin Desai, our UK Transport & Logistics Leader, asked me to contribute to the discussion we have with FTA Board members at the round-table we host for them after their Board meeting.  I used this time to show "Sustainability Means Re-thinking Business" and to facilitate a discussion amongst members.

There was a lively debate around the likely impacts of climate change, increasing regulation, delivery models and the vital nature of an efficient transport network as a platform for economic recovery.  The room was roughly split between those keen to emphasise the steps the sector, led by the FTA, has already taken; citing the Logistics Carbon Reduction Scheme as evidence, and those who were clearly more concerned about identifying the future challenges and opportunities that would emerge and how the FTA might lead the sector in its response. 

Some of those themes are captured in the Logistic Report 2013, which you can read here: http://www.fta.co.uk/about/logistics_report.html

UK Carbon pricing: A taxing issue

A new UK carbon tax goes live this week to encourage low carbon investment from the country’s biggest energy users. Jonathan Grant and Jayne Harrold examine the law of unintended consequences in the latest round of national environmental regulations.

When a US president once said “Governments tend not to solve problems, only to rearrange them”, he could have applied the same thoughts to carbon pricing in the UK.

The Carbon Price Support Mechanism was launched in 2011, to provide a stronger carbon price signal to investors to encourage investment in low carbon power generation. This sounds very sensible, if we want to accelerate the transition to a low carbon economy. But the collapse in European carbon prices since 2011 means that consumers in the UK now face much higher carbon prices than elsewhere in Europe. So the focus of the attention has shifted from investment incentives for renewables to the impact of this mechanism on UK competitiveness.

The Carbon Price Support Mechanism is an additional tax, payable by power generators on the carbon content of fuels used in energy generation including gas, Liquefied Petroleum Gas, coal and oils. The support level is determined two years in advance, and is the difference between the government-set ‘carbon price floor’ and the price of EU Allowances (carbon permits) in the EU Emissions Trading Scheme futures market. Carbon price support, payable from 1 April 2013, will be collected through the UK’s climate change levy regulation.

The initial level of the carbon price floor was fixed at £16 per tonne of carbon dioxide, broadly in line with the EU Allowance price at that time, rising incrementally to £30/tonne by 2020 and £70/tonne by 2030. But Allowances are now trading at a fraction of that level, at around €5 (roughly £4 at current exchange rates).

This dramatic fall in EU carbon prices, together with the incremental increases built into the UK price floor, has led to a sharp increase in the level of ‘carbon price support’, from £4.94 per tonne of CO2 in 2013 to £18.08 per tonne in 2015. 

Coal, which currently accounting for around 40% of the UK’s generation needs, attracts the highest levy. A series unusually severe weather events in the UK has increased demand for energy, and provisional statistics for 2012 show a 31% rise in coal use at power stations since 2011.  

Critics of the support mechanism argue that this incremental tax on fossil fuel fired-generation in the UK represents an undue burden for energy users in the UK – consumer groups are rounding on anything that could add to already rising energy bills - and that the competitiveness of energy intensive industries will be particularly affected. On average, government estimates suggest an energy company could face an additional bill of £130,000 in 2013, rising to £1.1 million in 2020.

Critics also argue that there will be no overall environmental benefit from the mechanism, at least in the short term, because of so-called “carbon leakage” to continental Europe. Because of the way the EU Emissions Trading Scheme works – the overall number of Allowances is fixed in advance – any Allowances not used in the UK as a result of energy savings here will be available for use elsewhere in Europe.

At the same time, whilst everyone understands the wider economic pressures on government and the scale of the low carbon investment challenge, the projected revenues from the scheme - £0.8bn in 2013/14, £1.3bn in 2014/15, and £1.8bn in 2015/16 - are hardly going to touch the sides of what’s needed to fill the funding gap.

Calculating the impact of the support mechanism on energy prices is complex, because generators tend to hedge future commitments. But one thing is clear. If Brussels manages to push through anticipated reforms to the EU Emissions Trading Scheme and we see a recovery in carbon prices in Europe, the combined impact of the two schemes  would burst through the Carbon Price Floor trajectory set by the government in 2011, potentially putting UK business at a double disadvantage.

The answer in theory lies with action at a European level, to address the oversupply in the carbon market that has pushed down prices, not just by individual nations. Higher carbon prices across the board should be good for investment and good for the environment.

In practice, however, it remains to be seen whether there is any appetite in Europe for the sort of prices envisaged in the longer term by the UK price floor. To achieve the emissions targets of an 80% reduction by 2050, many analysts believe that a carbon price of €60-€100 is needed, to drive the level of investment needed in large scale renewables, nuclear and carbon capture and storage.

No matter what your view on the appropriate price, or the policy implications, with an EU Allowance trading today at around €5, you don’t have to be an economist to do the maths.

Read PwC’s quarterly review of global environmental tax and regulation

Going for growth - green or any colour

The UK often claims leadership on green policy, yet as Richard Gledhill reflects on the country's annual Budget announcement they couldn't claim this to be the greenest budget ever.

For all the talk in Rio last year about green growth, the focus in the corridors of power in Westminster this week was on growth, not on green. But I don't think anyone expected more than this.

On green taxes, the major change was a concession on fuel duties. This will have a bigger impact on household budgets than on the environment. High prices already provide a strong incentive for fuel efficiency.

In the small print of the budget report, HM Treasury also announced the UK Carbon Price Support rate for 2015/16. The Carbon Price Support is the difference between the Carbon Price Floor and the price of carbon permits in the EU Emissions Trading Scheme. It is a top-up tax on fossil fuels used to generate electricity, intended to support nuclear and renewables generation. The trajectory for the price floor was set in 2011, when the regulation was introduced - it starts at £16 this year and rises to £30 by 2020 - and this hasn't changed. 

But since the floor was  introduced, the carbon price in the EU ETS has fallen dramatically. EU Allowances are currently trading at less than 4 Euros, compared to around 15 Euros when the regulation was announced. So the support level required is now much higher - it is simple arithmetic. The Carbon Price Support rate for 2015/16 has therefore been set at £18.08 per tonne of carbon dioxide, compared to the starting point in 2013 of just £4.94.

This will mean higher energy prices for business and consumers, and a threat to competitiveness for British companies in energy intensive sectors. What is less obvious from the announcement is the risk of even higher prices to come. Because of the time lag in the process - the support price is set two years in advance - there is a risk that UK consumers will be hit twice, if steps currently being debated in Europe provide a boost to EU Allowance prices.

We do need higher carbon prices to accelerate the transition to a lower carbon economy. But not just in the UK. Otherwise there is a real risk of carbon leakage. With reductions in greenhouse gas emissions from power generators set in Brussels, any reductions achieved in the UK could be used by utilities in Europe.

Still in the energy sector, there was some positive news today on both carbon capture and storage and shale gas. The government announced the two preferred bidders in the UK's £1 billion CCS competition. Delivering the country's first CCS projects is proving to be a very long game. These projects won't be operational until the end of the decade and so will have a limited impact, both on the looming capacity crunch and on current carbon commitments. The government should be looking to accelerate the best projects, regardless of whether they are in the competitive process, to fast track the CCS industry which will deliver the cost reduction required to make CCS a viable long term low carbon generation option.

The government's support for shale gas has dismayed many environmentalists. But I think we need to be more pragmatic. Shale gas could play an important part in a green future for the UK,  but as a transition fuel, not a long term solution.  Gas alone can't deliver the scale of carbon cuts we will need in the longer term.

There were also helpful announcements extending tax breaks for low emissions vehicles and on plans for implementing 'zero carbon homes', but again that is a long game.

Overall, not a great green budget for the UK. But some things to celebrate. With a penny knocked off the cost of beer, make mine a pint.

For more of PwC's budget  analysis see www.pwc.co.uk/budget

Making an impact on strategy and reporting

Jose Retana delves into corporate moves on measuring socio-economic impacts. For some companies, the theory is becoming a reality but a balance approach is needed.

The World Business Council for Sustainable Development's (WBCSD)most recent guide to help businesses - Measuring socio-economic impacts - is very timely in moving the discussion about why and how companies should measure their impacts up a gear.

As active players on this space, PwC had a chance to review and comment on the guide. Speaking from our own experience, the number of companies that are not only interested but also actively measuring their impacts has grown significantly over the last 6-8 years. We have seen activity in most industries and not just the usual suspects.

For the businesses that have been leading this agenda, socio-economic impact analysis has been more than producing meaningful analysis to meet increasingly sophisticated stakeholders interests, or demands.

It has also been used to inform value creation in core business decisions in areas such as specifications of major investments, products and services opportunities, and supply chain risk management. Peter Bakker, WBCSD President, describes business as being at a tipping point on key planetary boundaries and social challenges. He says there is a need to "radically scale up action to avoid devastating consequences for society and our planet – and ultimately also for companies. His stark warning is that "business cannot succeed in societies that fail."

So is socio-economic impact analysis the answer? The business world would tell you 'what gets measured gets done' - or does it? I think that impact measurement is at the core of understanding how business can maximise social and commercial returns. However, the results may be far from optimal if a balance in three key areas is not achieved:

Total Impact: The silo mentality of separating business socio-economic impact analysis from from the environmental impact analysis should be overcome. I do applaud the efforts to measure at least one type of impact, particularly when high in materiality, and appreciate that business environmental awareness, reporting and analysis techniques have progressed faster. Companies create (or destroy) value as much via environmental practices as via community programmes or products. Focusing on just one part of the equation will only tell part of the story. Companies should be working towards measuring the totality of their material impacts which would aide not only their strategic decision making but their integrated reporting.

Sustainable Development Goals: While setting MDG’s and measuring their progress has helped immensely, many businesses struggle to link their impacts to the goals attainment. No wonder very few report on their contributions to MDGs. SDGs should be broad enough to facilitate the monitoring and measurement of the wide range of social, fiscal, economic and environmental impacts that businesses from different industries generate.

Commercial return: Yes, businesses would struggle to succeed in societies that fail. But in order for businesses to contribute to successful societies, in the longer term, they need to balance both commercial and societal (or total impact) return in their decisions. Stakeholders are having to open their minds to seeing commercial return as part of the social value of a business and businesses, in turn, should see societal value as long term commercial return.

We'll be returning to the subject of total impact reporting in our blog over the course of the year, so if you've any comments on issues you'd like us to feature, please let us know.

PwC wins award for Sustainability work with Puma

At last week’s Association of Management Consulting Firms (AMCF) Awards for Value and Excellence in Consulting, PwC won the Corporate Responsibility award for our work with PUMA. The awards are given to projects that best illustrate how consulting teams add value to their clients’ organisations and society at large.

With his sights set on creating one of the world’s most sustainable companies, the former PUMA executive chairman Jochen Zeitz, needed to find a way of calculating his company’s environmental impact and conceived the idea of an environmental profit & loss account .  No single methodology existed that was capable of delivering the enterprise and supply chain-wide view of environmental impacts PUMA wanted, so they designed and implemented their own.

Looking at the environmental impacts (including greenhouse gas emissions, water usage, land use, air pollutants and waste) throughout PUMA’s operations and  its supply chain, was a huge task. Working together with Trucost, we were able to measure the positive and negative impact of each activity and provide an overview.  The project helped PUMA to understand their total environmental impact and to focus their strategy on specific areas to make improvements.

This is  ground breaking and has attracted huge interest from governments and NGOs.  It comes at a time when more companies are thinking about the future.  Our latest Global CEO Survey, shows that 48% of CEOs plan to increase efforts to reduce their company's environmental impacts.  They may not all approach things with the same vision, but it’s  encouraging and shows  foresight. 

When business has such a complex relationship with the environment (and with society and the economy, for that matter), it’s good to see more companies taking an active interest not only in measuring their impact, but in reducing it too.

What's in a name?

The new brand announced today by global climate reporting NGO formerly known as the Carbon Disclosure Project reflects their much wider agenda.   CDP no longer works solely on the issues of carbon, energy and climate, but has expanded to cover a broader spectrum of the earth's natural capital, specifically water and forests.  In addition CDP assesses corporate supply chains and helps share good practice between municipal governments in their cities program.  They also have an increasing emphasis on performance in addition to disclosure.

Having worked on the CDP report for five years now and prepared a company response in a previous role, it's clear to me that companies' reports to the CDP aren't just "nice to have".  They are vital for sharing good practice between businesses, tracking emissions performance and highlighting investment in low carbon growth.   Many investors use these responses during their research and analysis of a company.

This year's report, on the world's largest 500 companies and the FTSE 350 in the UK, is already under development by CDP and PwC. The report delivers an annual international verdict on how companies are responding to climate change. Businesses' response to the climate challenge much like CDP's new brand, is about more than just the words.

Shale oil - dealing with the dividends

Few days go by without a new headline on shale, and today’s new analysis from PwC demonstrates why this could be the case. Shale oil production could boost global GDP by $2.7trn by 2035. Jonathan Grant examines the possible development dividends and environmental consequences.

New analysis from PwC, Shale Oil – the Next Energy Revolution, considers the potential impact of future growth in shale oil production on global oil prices and assesses how these changes could impact the wider economy, and the oil and gas industry over the period to 2035.

It suggests Shale Oil has the potential to revolutionise the world’s energy markets over the next couple of decades, resulting in significantly lower oil prices, higher global GDP and changing geopolitics.

Shale oil production could reach up to 12% of global oil production, equivalent to almost 14 million barrels a day. In this scenario, the extra supply could push global oil prices down by around 25%-40% in 2035 with a knock on increase in GDP of around 2.3%-3.7% ($1.7-2.7 trillion at today’s GDP values).

In a world craving growth, green or otherwise, the numbers are hard to ignore.

In the shale oil scenario examined, with a  glass half full point of view, the extra oil and the diversification of supply could push global oil prices down by around 25%-40% in 2035 (in real terms), bring short term relief to oil importers and enhance energy security.

More immediately, in PwC’s recent global CEO survey, concerns amongst business leaders in Africa and Asia Pacific about energy costs impacting their growth prospects were almost twice that of CEOs in North America.  Last year, our annual global power and utilities review showed that fuel poverty has moved up the agenda globally, with over half admitting it’s a fundamental industry concern. In the shale oil scenario examined in the report, a lower oil price could also bring a development dividend by making the transporting of people and goods more affordable in developing countries.

With a glass half empty view though, a lower oil price makes the financial investment case for renewables relatively less attractive. Governments will have important choices to make as to how to realise the benefits from shale oil production in a way that balances potentially conflicting objective of energy affordability and decarbonisation.

The use of fracking technology gives access to much greater fossil fuel reserves and is likely to increase total carbon in the atmosphere in the long term. While shale oil could give economies a high over the next few decades, it could worsen the low that will follow, with the potential for climate impacts to affect economic growth later this century. 

The World Bank report Turn Down the Heat(2012) described the implications of a 4 degree world and highlighted the potential impacts on the economy.  The Bank stated that scale and number of impacts grow with increasing global mean temperature, and that a climate shock on agricultural production “could, in turn, cascade into effects on economic development by reducing a population’s work capacity, which would then hinder growth in GDP”.  Furthermore a UNISDR report found that “in many regions, the risk of loss of wealth because of tropical cyclone disasters appears to be increasing faster than wealth.”

However, climate scientists who suggest leaving shale oil in the ground will probably lose the argument, as the world craves growth. The recent experience of the impact of shale gas on the US economy supports this view. But while the US is using more gas for power generation, it is now exporting more coal to Europe.  Globally the use of coal continues to rise in spite of the emergence of shale gas.

Shale oil could displace other sources of oil that could be argued to have higher environmental costs, like Arctic and Canadian tar sands.  But it still doesn’t hide the fact that as our report Too Late for Two Degrees showed, countries are not making the low carbon transition nearly fast enough, making the UNFCCC’s goal look highly unrealistic.

The irony of the enthusiasm around shale gas and oil won't be lost on some environmentalists. Governments, investors and business can be unified around a big opportunity that encourages access to new fossil fuel reserves, but cannot agree on how to drive a low carbon transition.  From an environmental point of view the report simply underlines the opportunity - and need - for governments to direct the economic windfalls from shale, to drive investment in carbon capture and storage and other low carbon technologies.

Will CEOs feel the heat in 2013?

With the findings of our CEO Survey having a focus on resilience and the World Economic Forum’s latest analysis reinforcing the potential of green investment to put the world on a climate-resilient pathway and underlined the need for this, with expectations of a global population of 9 billion expected by 2050, Jonathan Grant examines what 2013 holds both for the UK and international developments.

Getting ready for a warmer world...

A downward revision of projections for global temperatures over the next five years by the UK’s Met Office prompted claims of “we told you so” from climate sceptics over the New Year. But the projections still show near record temperatures in the next few years and don’t change the long-term prognosis. Meanwhile Australia continues to bake in record summer temperatures. So it is no time for complacency.

Our own research suggests that even the 2 degrees target agreed by the international community looks highly unrealistic, based on the current rate of progress on global decarbonisation.  In our view therefore it's time to plan for a warmer world.

For the business community that means more focus on resilience and adaptation to climate change. Pressure on costs has kept energy efficiency on the business agenda, but in 2013 CEOs will look beyond carbon reduction (or what is termed ‘mitigation’) when they look at climate change risks.

...and a wetter one, for the UK at least

In the UK, it’s official: 2012 was the wettest year ever in England, according to the Met Office.  The downpours caused widespread disruption with over 8,000 houses and businesses affected by flooding.  According to our analysis, this has left the insurance industry facing claims of about £1bn and property owners with the prospect of significantly higher premiums.

These may not be freak floods. Analysis by the Met Office suggests that the UK may continue to get wetter, as climate change causes warmer air to carry more water.

One implication of this in 2013 is that there will be added impetus to the discussions between the Government and the Insurance industry about providing affordable insurance cover for the high risk flooding areas of the UK.  The existing 2008 agreement is due to expire shortly without providing on-going insurance cover for those affected households.

Kick starting green growth – the UK experience

Battered by multiple crises, the one idea that politicians everywhere seem to be able to agree on is the green growth agenda. The vocabulary varies – green growth, sustainable development, low carbon and the like – but the underlying ambition is the same: more sustainable economic activity and, particularly, more green jobs.

It calls for a new approach to economic growth that is supportive of the earth’s ecosystems and contributes to poverty alleviation. Building green economies means changing the way we define and measure economic success and societal progress, so that they better reflect quality of life, social equity, and the need to maintain the natural systems and resources humans and other species need to thrive. We expect to see both countries and companies exploring new ways of measuring and reporting progress in 2013.

We should also see low-carbon and environmental industries growing in importance to the UK economy. They already contribute 8% to GDP and employ almost a million people – more than the motor trade and telecoms combined.  These sectors can be a catalyst for a sound and sustainable UK economic recovery.

We expect that the business community will continue to invest more in clean energy, sustainable transport, and energy and resource efficiency in an effort to build resilience to rising global commodity prices while mitigating environmental risks to the business, not least those associated with climate change.

One implication of this for 2013 is that there will be more discussions between the government and the industries on how to craft the right public policies and incentives to promote green jobs, technologies and infrastructure in the UK, and how to exploit the advantages in green development to expand the UK’s trading and investment opportunities worldwide.

Where next for the climate negotiations?

Targets, finance and ‘loss and damage’ will be high on the agenda at the climate negotiations in 2013.  New findings from the IPCC’s fifth Assessment Report (AR5) will highlight the gap between current emissions pledges and what the science tells us is necessary for 2 degrees.  At the next COP in Warsaw in November, countries are expected to propose measures to increase ambition in the short term, i.e. up to 2020, but it is likely that these discussions will remain largely qualitative in 2013.

Developing countries are calling for more money to tackle emissions growth and the impacts of climate change.  This year, we can expect to see some forensic level analysis of what funding has been delivered and whether it is additional to existing aid.  Developed countries are also expected to present plans in Warsaw on how they will scale up their current funding to mobilize $100bn per year by 2020.  The Green Climate Fund, newly established in South Korea, will seek to define some of the rules and funding mechanisms for channelling climate finance.  In 2013, though, it is likely that donor governments will use existing routes to deliver their financial commitments (i.e. through their own development departments or through the World Bank and similar institutions).

In Doha, governments agreed to establish a new institution or mechanism to address the issue of ‘Loss and Damage’.  There is the risk that these discussions could be a drag on the negotiations in 2013.  Loss and Damage could either become mainstreamed into climate finance, along with mitigation and adaptation, or descend into fractious and interminable discussions about liability and compensation.  If Loss and Damage raises expectations about financial flows unrealistically, it is possible that it could increase mistrust among negotiators when these expectations are not met.  By the time we reach Warsaw in November, we will see which direction these discussions have taken.

New coalitions of countries may emerge in 2013 which break down the traditional north south divide.  The EU, a self-proclaimed leader in the talks, may look to forge stronger links with other proactive developing countries such as the AILAC group (Association of Independent Latin American and Caribbean states which includes Chile, Costa Rica, Panama, Colombia, Peru and some others).

Increasing sophistication from climate science

Early drafts of the IPCC’s landmark report will be widely leaked and critiqued in 2013.  The Fifth Assessment Report is a comprehensive review of the science of climate change, its potential impacts and options for adaptation and mitigation.  The three working group reports will be finalised in late 2013 and early 2014[1].  Increasing sophistication in climate models will give more insight into climate forecasts for the coming decades and better geographical resolution in the longer term projections.  In a recent summary of the science, the New Scientist’s prognosis on climate change was that “it’s even worse than we thought”.

Carbon pricing – the only way is ...?

In the spring this year, the EU is expected to agree on the so-called backloading proposal to delay the auctions of a portion of 2013 and 2014 allowances.  Backloading could prop up prices in the short-term, but that prop will be removed later in Phase 3 as those allowances are reintroduced into the market.  So this is temporary medicine when the EU ETS needs major surgery. Our analysis last year showed that both bold policy intervention and economic growth above 2% are needed to prompt the market to return to historic levels of €15-20.  This suggests that the EU allowance price will stay in single digits over the course of 2013. Nor will 2013 bring any relief to the CER market, where prices are now measured in cents rather than Euros.

The chronic lack of demand for these credits is not new, but it has been exacerbated by the decision in Doha that only signatories to the 2^nd Kyoto period are eligible to use CERs.  It is easy to think with such low prices that the Clean Development Mechanism is broken and not worth fixing.  But market mechanisms will continue to feature prominently in the negotiations in 2013.  One bright spot on the horizon is work by the World Bank Partnership for Market Readiness to bring together major developed and emerging economies to support the implementation of new market mechanisms to tackle emissions growth.

Click here to read more on this and our other predictions and views on the key events that will or may be taking place this year.

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[1] Publications dates for the IPCC Fifth Annual Assessment Report: Working Group I – September 2013; Working Group II – March 2014; Working Group III – April 2014; Synthesis Report – October 2014

Is energy for all a basic right or an impossible dream?

Much of the talk here in Davos has been about an energy revolution. Not the long expected rise of renewables but the unbelievably fast emergence of fracking in the US. In just 12 months, gas has overtaken coal as the main source of power generation, and with gas prices now one third of that in Europe and one fifth of those in Asia, it's providing the US economy with a very welcome boom. There is even talk of energy self-sufficiency and exports. At the very least, it will help the US remain competitive on the global stage, underpin economic recovery and, in the short term, is driving a one-off reduction in carbon emissions.

However, none of this is going to help the 1.3 billion people who are not connected to the grid, mainly in Africa and developing Asia. For sure, expansion of grid infrastructure will reach some of these - perhaps as many as 550 million - but this could take decades.  And it ignores the remaining 800 million who will never be reached. So it's clear that new approaches, and new business models, are needed to fully tackle energy access. As Ban-Ki Moon said at the conclusion of the work of the influential UN Sustainable Energy for All initiative, new partnerships with the private sector are needed.

This was the topic of a session in Davos this week in which I participated. At first sight it was a slightly unusual gathering, who crossed the town on a cold morning to meet for an early breakfast. Not the usual international development or government representatives or the world's energy companies, although they were there, but a cross sector, cross border group made up of telecoms and technology groups, consumer electronics giants, renewables companies, donors and social entrepreneurs. The discussion was rich, and focused on a cross sector model that recognises the wider value chain when humans are connected to energy. The development benefits are well understood and much documented, from education and welfare to health, hygiene and enterprise, but less often understood and usually understated are the new markets it creates.  With electricity, people will buy a mobile phone, replace kerosene lighting with LED's, and in time purchase a fridge, a cooker and have the means to power a small business. And it is this which creates development opportunities for poor households, and also new markets for the providers of handsets and lighting and consumer electronics. Not to forget business distribution and maintenance models that bring in local entrepreneurs who understand local markets. Take Brazil for example: after 14 million people were connected to the grid, 2.2 million televisions and 2.1 million fridges were sold in the subsequent seven years.

Everyone agreed that the technologies exist today to give off-grid access to energy. And there is ample evidence that the poor are prepared to pay for energy; indeed, the poor spend US$37 billion a year on power, largely in the form of kerosene, equivalent to a US$150 annual bill per household. What is lacking are the enabling policies, business and distribution models that reach the last mile, financing, and high transaction costs of small scale energy deployment and the need to de-risk projects.

No wonder, therefore, that there was such interest in this topic. An approach that brings together all of those that will benefit from energy access, under an integrated business model, could really have a transformational impact on previously hard to reach communities - the rural poor. And in turn also deal with many of the barriers outlined above.

So I left the session feeling a sense of hope, confidence and expectation: hope that the agreements reached in Davos survive the journeys back home; confidence that a possible solution to energy access has been found; and high expectations of the pilot just starting in Kenya that could show the world how everyone can have energy.