Climate change adaptation strategies for international energy companies

Contents

Introduction

1. Climate change risks for energy sector companies and climate change governmental and institutional policies impact on energy companies operations

1.1 Climate change risks for energy sector companies

1.2 Climate change governmental and institutional policies impact on energy companies activities: incentives to switch to renewable energies

2. Energy companies reactions to climate change issues: PR strategies and business decisions

2.1 "Total" case study

2.2 "Engie" (ex-"GDF Suez”) case study

2.3 "Areva" case study

3. Climate change adaptation strategies for international energy companies

3.1 Impediments to transformation for energy sector companies

3.2 Climate change adaptation strategies for international energy companies

Conclusion

References

Appendix

Introduction

Climate change problem is one of the most topical issues nowadays. Environmental organizations and the countries’ presidents, CEOs of the companies and even actors receiving the Oscar awards - all of them are referring to the climate change problem in their speeches. In 2016 world economy forum in Davos climate change was for the first time addressed as the major threat to the world economy.  It was considered to have greater potential damage than weapons of mass destruction, water crises and large-scale involuntary migration.climate change issues are discussed on a global level by the countries’ leaders. Recently the Climate Conference in Paris (COP21) has been held. The conclusions of the Conference will definitely affect lives of people all over the world, since 196 parties are going to sign the Paris Agreement.it is impossible to imagine the modern economy without the global energy market. The fuel and energy complex plays a prominent role in the economy of every country ensuring its development and providing fuel and electricity for all industries. Hence, the problem of energy supply becomes a key issue for each independent country as well as for the whole world. However, it is energy sector which is usually considered to be the major contributor to climate change because of amount of carbon dioxide (CO2) emissions the industry causes. It means that energy companies should adjust their businesses to climate change policy by implementing adaptation strategies and even refocusing their activity.this research three French companies were chosen: "Total”, "Engie" and "Areva”. France can be addressed as one of the most developed countries as regards to energy sector and energy policies: the first public places of Paris were provided with electricity in 1877 and in the beginning of the XX-th century the construction of the first hydropower stations was held. Being the Europe’s largest producer and the net exporter of electricity, France has an experience in energy sector, which is impossible to overestimate. Besides, the main energy policies focuses of the country were rather controversial for a long period of time: nuclear sector development from the one side was accompanied by energy saving technologies and renewable energies (solar, wind, geothermal, etc.) promotion. As all three companies are closely connected to the government of the country (either through the state’s existing or former stakes or through collaboration and joint projects) it is quite important to analyze these companies activities and policies related to the environment and climate change.goal of the research is to examine how energy companies adapt to climate change addressing it as a risk and which strategies they choose to minimize this risk.order to achieve this goal the following objectives were set:

·        to systematize the basic risks the energy sector companies can face as well as their possible reactions;

·        to review the major institutional and global agreements on climate change and to analyze their impact on energy companies’ activities;

·        to analyze the peculiarities of three French international energy companies policies, projects and commitments in climate change adaptation;

·        to reveal the major impediments for a deep transformation of energy sector companies;

·        to suggest an adaptation strategy for energy sector companies.

The object of this work can be marked as climate change risks for international energy companies. The subject, in turn, reflects the main strategies implemented by major French energy companies to minimize climate change risks. Finally, the hypothesis of this research can be interfered in the following assumption: international energy companies have the constraints to refocus their businesses, to transform for climate change adaptation so their current activities and policies are inconsistent and insufficient to mitigate climate change consequences.confirm or to refute this hypothesis the following methods were used:

·        In the theoretical part of the research a deep analysis of the existing relevant literature was conducted. In particular, various publications by economists, scientists and journalists were consulted. Furthermore, the second subchapter of the theoretical part included the review of the institutional policies and global agreements, such as the United Nations Framework Convention on Climate Change, the Kyoto Protocol and the Paris Climate Change Agreement.

·        In the analytical part of the research qualitative and quantitative analyses were implemented for each case study. The former included the research of the companies’ websites and official publications (reports, policies, press releases) as well as provided criticism from ecologists and environmental organizations. The latter comprised carbon dioxide emissions dynamics and current investment in renewable energies by each company.

·        For the whole research relevant news, media and professional articles were reviewed and taken into account.

1. Climate change risks for energy sector companies and climate change governmental and institutional policies impact on energy companies operations

1.1 Climate change risks for energy sector companies

According to "The United Nations Framework Convention on Climate Change" (UNFCCC) climate change is a change of climate which "is attributed directly or indirectly to human activity that alters the composition of the global atmosphere and which is in addition to natural climate variability observed over comparable time periods" . Researchers and scientists still argue on whether the human activity is the only cause of climate change but the majority agrees that anthropogenic activity impacts climate change in a varying degree. This majority in 2010 accounted for more than 97% of all the researchers engaged in climate change issue. The Intergovernmental Panel on Climate Change (IPCC) also concluded, that human activities, particularly emissions of carbon dioxide, are very likely to be the dominant cause of climate change. This degree of probability in scientific world is equal to 95-100% and it means that scientists are nowadays as confident in anthropogenic causes of climate change as in the connection between smoking and lungs cancer.sector is usually considered as the major contributor to climate change because of amount of carbon dioxide emissions the industry causes. According to the National Oceanic and Atmospheric Administration (NOAA) there is a direct correlation between the anomalies of annual average temperatures of the planet and the CO2 concentration in the atmosphere (see p.55, Appendix, Graph 1). The energy sector influence might become evident if we observe the share of the world’s CO2 emissions from burning of fossil fuel: in 2013 it reached almost 90%. (see p.55, Appendix, Graph 2).the same time, these are energy companies who face major challenges from climate change. They are suffering climate change risks, recognizing the importance of the biophysical environment and implementing strategies into their regular management practices in order to combat environmental issues.  This phenomenon is known as corporate environmentalism - the process by which firms integrate environmental concerns into their decision-making process.are various perceptions of climate change interrelation to businesses. The British economist Nicholas Stern stated that climate change is "the largest market failure" and that "the benefits of strong, early action on climate change outweigh the costs”. In other words, he argued that climate change is a problem, which need to be fixed with policies and corporate actions. In his review, Stern proved, that although greenhouse gas (GHG) emissions are driven by economic growth, combating climate change is feasible and consistent with continued growth. It requires transition to low-carbon economy, which undoubtedly regards competitiveness challenges for corporations, but at the same time brings new opportunities for them.suggested the following actions, that corporations should take to minimize their impact and combat climate change:

·        emissions trading as a way of promoting cost-effective reduction;

·        development of "green" technologies through R&D;

·        actions to reduce deforestation;

·        implementation of adaptation strategies.

It seems that nowadays the majority of big corporations are concerned with climate change issues. According to the Carbon Disclosure Project (CDP) organization, in 2015 552 companies have responded to Carbon Action program and 77% of them have carbon-emissions reduction targets. Corporations implement sustainability programs and policies, create specific departments, market their products as "green" and organize tree-planting events as a part of their team-building and CSR (corporate social responsibility) activities.seek to make climate change manageable to improve the image of the company, they use the trend to increase the profits. Unfortunately, they also obstruct desperately needed and more radical alternatives, which mainly happens because of the reasons lying under such responses.

Corporate responses to climate change are often shaped by the need to react to a broad range of risks and opportunities. However, such responses sometimes produce further unforeseen consequences for companies. "British Petroleum" ("BP”) rebranding into "BP - Beyond Petroleum" in 2000 is probably one of the most famous examples of corporate engagements in climate change issue. The rebranding was meant to portray "BP” as an energy, not just an oil company. The new logo of the company was made to show the company’s "commitment to the environment and solar power" and promote the new "BP” as "the supermajor of choice for the environmentally-aware motorist”. However, in reality, "BP” did not disguise its plans to ever-increase its oil and gas exploration and to grow its core business. Furthermore, Beder criticized "BP” for using rebranding and emphasizing solar investments to withstand the critics against its Arctic exploration. She underlined, that though the company had invested in solar power, it spent even more money on "green" reputation. "An oil company might invest in solar energy and admit that global warming should be prevented, but it will do all it can to ensure it can go on drilling for fossil fuels and expanding its markets for them” - she stated. In 2007, "BP” disbanded its renewable energy divisions and refocused on oil exploration and production. In 2010, after an oil spill in the Gulf of Mexico the company was publicly accused in "greenwashing” and hypocrisy. Thus, using climate change and environmental issues to cover its reputational complications only brought new problems to the company.majority of corporations, however, take into account environmental issues because they consider climate change itself as a risk that should be assessed, managed and minimized.to Engel, Enkvist, and Henderson, climate change risks for companies can be divided into two major categories: value-chain risks and external stakeholder risks. The former include physical, prices and product risks which are mostly connected with extreme weather conditions and consequent damages to infrastructure, price volatility or losing market share of the product. In their research, Engel, Enkvist, and Henderson underline, that to minimize these risks the companies can either "design a sustainability approach” or change business strategy aligning its goals to climate change mitigation and adaptation. External stakeholder risks, in their turn, are divided into ratings, reputation and regulation risks. Ratings risks mean the probability of higher cost of capital due to carbon pricing. Regulation risks are connected with governmental and institutional climate policies affecting companies’ business activity. These policies will be reviewed in detail in the second part of this chapter. Finally, reputation risks are based on public opinion on the company’s activity. For instance, if the society considers the company’s actions to be harmful for the environment the company may lose its profits., Enkvist, and Henderson revealed the level of climate change risk that the companies from various sectors are exposed to. According to their evaluations, energy sector (oil and gas) companies are mostly exposed to regulation and reputation risks. These companies have moderate exposure in price and product risks and moderate-high exposure in physical and ratings risks. Furthermore, this evaluation proves that energy sector companies take more climate change risks than companies in any other industry. Thus, they are not only the world’s major producers of carbon dioxide emissions which forces climate change but the largest climate change risk-takers as well.and Nyberg considered the other differentiation and divided climate change risks in four categories: physical risks, regulatory risks, market risks and reputational risks. Let us revise all these types of risks in particular as well as suggest the possible corporate reactions to them.risk is a risk of extreme weather events provoked by climate change leading to threats to operations and infrastructure. For energy sector companies this risk might result in breaks in oil and gas pipelines, accidents at nuclear plants, etc. To manage this risk companies can use climate modelling, plan various scenarios for physical events, safeguard and relocate physical infrastructure, develop emergency strategies for extreme weather events or sell off physically vulnerable activities. Physical risk is probably the most addressed in all corporate climate change mitigation policies. It directly affects business operations leading to huge costs for companies. In 2015 the International Energy Agency even published "Making the energy sector more resilient to climate change” brochure in which the Agency provided various techniques for energy sector companies to prevent technical disruptions and infrastructure damages caused by extreme weather conditions and climate change consequences.risk is a risk of legislative regulation of carbon emissions via "carbon taxes”, pricing of greenhouse gas emissions in a carbon market or mandatory restrictions. Some examples of minimizing those risks can be: lobbying against carbon pollution regulation, building coalitions with opponents of action on climate change, investing in low-carbon technologies and renewable energy to reduce carbon emissions intensity, incorporating carbon pricing in investment decisions, adopting a ‘leadership’ position advocating market forms of carbon regulation, voluntary reporting of carbon emissions to avoid mandatory requirements.risk may happen when, for instance, competitors gain advantage via new "green" technologies and products. The majority of large international energy companies also embrace this type of risk because their customers might need low-carbon technologies or decrease in CO2 emissions. To mitigate this type of risk companies invest in R&D to identify and create "green" products and services, scan the market for competitive threats in order to mimic new technologies and products, takeover and acquire "green" companies.risk occurs when consumers view companies’ activities as environmentally harmful which may result in declining sales and reputation. The companies usually try to improve their image and reputation through "green" marketing and branding of products and services, developing alliances with environmental NGOs or focusing on job creation and various CSR programs emphasizing that a company is a responsible corporate citizen. However, for energy sector companies, who are historically considered as the major polluters it becomes rather hard and costly to cover reputational risks.translation of the issue into various types of risks has given energy companies to gain powerful advantages in engaging with climate change. It allowed to break the complex concept of climate change into smaller components with understandable probability which can be tackled in a short-term perspective with specific actions. In the second chapter we will see, how the companies can implement these risk-management strategies in their business activity responding on a particular type of climate change risk with a specific reaction However, Wright and Nyberg criticized such an approach as being not sustainable because the long-term risk of climate change activities for business is far greater than a simple "reaction” plan. They state, that climate uncertainties cannot be seen as manageable and regarded as opportunity for profit. According to them, such an approach closes off the possibility of the dramatic emissions reductions needed to avoid climate change because energy corporations keep "business as usual" scenario simply adding environmental features in their marketing strategies and climate change issues in their risk-management policies.

1.2 Climate change governmental and institutional policies impact on energy companies activities: incentives to switch to renewable energies

the following part of the research the influence of institutional global policies on climate change on energy sector will be reviewed and analyzed.

The first attempt to regulate the climate change issue on international level was taken by the United Nations Framework Convention on Climate Change (UNFCCC). It was an international environmental treaty negotiated in 1992 and entered into force in 1994. Its objective was to "stabilize greenhouse gas <https://en.wikipedia.org/wiki/Greenhouse_gas> concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference <https://en.wikipedia.org/wiki/Human_impact_on_the_environment> with the climate system <https://en.wikipedia.org/wiki/Climate_system>”. However, no limits on greenhouse gas emissions for individual countries were set in this agreement and no mechanisms to achieve this goal were previewed. The treaty was followed and extended in 1997 by the Kyoto protocol signed by 192 countries by 2009. The protocol established legally binding obligations for developed countries to reduce their greenhouse gas emissions in the period 2008-2012. Introducing no goals for developing countries the Protocol, at the same time, allowed nearly 40 developed countries to meet these targets by paying developing countries to cut emissions on their behalf, through an international market in carbon offsets. Many analysts consider that the Protocol’s biggest, most direct business impact was to spawn an international trade in emissions permits <#"905430.files/image001.gif">

Source: NOAA

Graph 2. CO2 emissions from burning fossil fuels and total CO2 concentration

Source: BP, NOAA

Graph 3. Cumulative emissions from 1854 to 2010 traced to historic fossil fuel production by the largest investor-owned and state-owned oil, gas and coal producers.

Source: Heede, 2014

Graph 4. Historic emissions performance of current largest utilities emitter reporting publicly to CDP since 2009.

: CDP, 2014

Graph 5. Greenhouse gas emissions by power generation source across the entire operating cycle.

Source: IPCC, 2014

Graph 6. Solar photovoltaic system global capacity.

: REN 21, 2015

Graph 7. Price per watt history for conventional solar cells since 1977.

Source: Bloomberg New Energy Finance, 2015

Graph 8. Levelised cost of electricity in Europe (2014-2040)

Source: Bloomberg New Energy Finance, 2015