Economics of Climate Change - BHP Billiton - Case Study Example

Economics of Climate Change Name: Tutor: Course: Date: Executive summary First, this report assessed and evaluated the impact of climate change arising from combustion of fossil fuels and the consequences of regulatory responses to cut down on greenhouse gas emissions. It specifically assess climate change impacts on financial performance, physical effects such as rising sea levels, water shortages, and changes in rainfall patterns, and increasing temperatures and storm penalties. Second, this report discussed the theoretical underpinnings and rationale of the carbon tax 2012 that was repealed in 2014 and compares it with the Direct Action Plan. This report provided a basis of understanding Carbon Tax 2012 and Direct Action Plan in green house gas mitigation. Third, in a carbon restrained world, this report unraveled the various risks and opportunities that BHP Billiton is exposed to or enjoys in addressing the effects of climate change. This was done through assessing the impacts of climate change on communities, environment, health and safety as well as opportunities for carbon credit trade with other nations and subsidies from mining activities. Lastly, the report focused on suitable adaptation strategies for BHP Billiton to tackle serious environmental challenges arising from climate change in areas of operation. Table of Contents Executive summary 2 Table of Contents 3 Introduction 4 Impacts of climate change on BHP Billiton 4 Carbon tax impact on BHP Billiton 6 Impact of Direct Action Plan on BHP Billiton 7 Risks and opportunities 9 Adaptation strategies 11 Reference list 12 Heede, R 2014, Tracing anthropogenic carbon dioxide and methane emissions to fossil fuel and cement producers, 1854–2010, in Climatic Change, Vol. 122, No. 1-2, p.229-24. 12 New South Wales Government, 2015, Current climate change research projects: adaptation, Science and Research. 12 BHP Billiton, 2014, Climate change: Portfolio analysis, http://www.bhpbilliton.com/~/media/5874999cef0a41a59403d13e3f8de4ee.ashx 12 Wright, C 2014, What Does Direct Action on Climate Change Really Look Like? University of Sydney. 12 Introduction BHP Billiton is an Australian mining company dealing with petroleum and minerals. It is the leading company in the mining sector of Australia and is headquartered in Melbourne, Victoria. The firm is dual listed in the United Kingdom as BHP Billiton Plc and in Australia as BHP Billiton Limited. Being in the mining sector, the firm processes and extracts gas, oil and minerals from production operations in Southern Africa, the Americas and Australia. In 2014, the firm had heavy presence in 130 locations in 21 countries employing more than 123,800 employees (BHP Billition, 2014). Although the sector is capital intensive will huge entry barriers, it allows for mergers and acquisitions to increase leverage. With $179 billion market capitalization, the firm competes with 16 other major players that are closely followed by Rio Tinto Ltd at market capitalization at $123 billion (BHP Billition, 2014). The firm is trade exposed with Europe and Asia with a record $67.2 billion revenue and $27 billion contribution to the Australian economy in employment, payments to shareholders, social responsibility and provision of taxes (BHP Billition, 2014). BHP Billiton is subject to carbon tax in global operations but not in Australia. However, the firm is trade exposed and will be affected by carbon tax legislations in South Africa in 2016 and policies on carbon pricing which is part of reform package in Chile. Some of the major competitors are Rio Tinto, Mitsubishi materials corp, Gold fields and Anglo American. BHP Billiton is enjoying a monopoly market in Australia (Heede, 2014). Despite the Australian government repealing carbon taxes in 2014, the proposed regulatory mechanisms in operational countries may impact directly or indirectly operations through its customers and suppliers in the introduced Direct Action Plan (Commonwealth of Australia, 2013). Moreover, stiffer regulatory penalties and loss of reputation may result from the breach of governance processes. Impacts of climate change on BHP Billiton The mining industry has experienced major impacts of climate change just like those expected in the agricultural industry. The effectiveness and stability of equipment and infrastructure in the mining sector are affected by climactic conditions (Nelson & Schuchard, 2010). As a result, the sector will be determined by the availability of transportation routes, site closure practices and environmental protection. Climate change impacts on the cost and stability of energy and water supplies (Heede, 2014). In BHP Billiton, warming temperatures will inhibit water-dependent operations in Australia and increased water scarcity in some locations such as Western Australia. As the company competes for water with local communities, it complicates site rehabilitation and bringing companies into direct conflict for water resources with communities (BHP Billiton, 2014). However, in subarctic areas such as the Jansen Potash project in Canada, warmer temperatures implies reduced heating costs and opening of exploration for new mineral-rich areas for BHP Billiton. Moreover, the sector’s international trade of products and high rate of energy consumption is likely to increase mining’s potential for energy regulation and greenhouse gas emission (BHP Billiton, 2014). This means that there will be increased public pressure during electricity generation on the mining industry to reduce greenhouse gas emissions. Some of the BHP Billiton’s mining projects in Texas, Arizona and Chile may have restricted access to water, despite most of its mining processes not requiring river water or high quality rain. In New South Wales where mining consumes over 1 percent of all water, the company will be forced to install desalination units to obtain high quality water for drinking and laundry use for workers. Although is widely accepted that climate change may not have a major direct impact on the mining industry, regulations on environmental issues regarding rehabilitation and water usage will affect BHP Billiton (Nelson & Schuchard, 2010). While mining processes do not require potable water, lack of access to water will affect some mining projects in Latin America and Australia. As observed in coastal areas of Western US and Latin America, hurricanes and sea storms have been changing in frequency and intensity. Such storm events potentially impact on mining operations. For example, in Haynesville Shale in Louisiana oil and gas exploration was affected by Hurricane Katrina in 2005 and more affected were erosion control, sediment and tailing dams. However, the mine’s water management plan was able to mitigate on severe weather events. Measures for the mine may require removal of dirt from getting into waterways. BHP Billiton owns Samarco iron ore in Brazil which may be vulnerable to frequent and intense natural disasters. According to Nelson and Schuchard (2010), disruption of construction and operations may damage transportation, mine, and energy equipment and infrastructure. Increased erosion and heavy rains in Colombia and Peru coal mines may affect slope stability of opencast mines. Moreover, coastal facilities may be harder to access such as the Liverpool bay oil and gas due to rising sea levels (Heede, 2014). Heavy rains and flash flooding in Pakistan can affect Zamzama gas fields and Queensland coal mines by degrading roads and transportation routes. Input materials delivery such as reagents, tires steel, consumables, timber, cyanide, hydrochloric acid and cement limit its efficiency or will curtail production (Wilson & Clark, 2015). Growing community concerns over environmental issues has high impact on the operations of BHP Billiton (BHP Billiton, 2014). For example, the Cerrejon coal mine may have challenges of approval in the future as mining operations lead to flow on effects to communities. This will likely affect the economic viability of individual mines in those areas such as decline in regional revenue and job losses. Increased summer temperatures linked to climate change may likely increase demand for electricity as businesses and people opt for air conditioners for comfort. BHP Billiton, through a number of copper mines such as Escondinda copper mine in Chile and Olympic Dam copper in South Australia will be under pressure to meet the new demand. Carbon tax impact on BHP Billiton Carbon price or tax may likely undermine the competitiveness of BHP Billiton globally (BHP Billiton, 2014). BHP Pays for carbon tax in its international operations. For example, BHP Billiton in the USA pays a carbon tax of not more than 1 percent of the annual revenues (Hugh, 2012). However, the company has been determined to resist payment of carbon tax and instead spend the 1 percent of pre-tax profits in corporate community projects in Australia. Ordinarily, to curb climate change, most governments are under accelerated action to pay $80/t carbon price in an extreme scenario (Wilson & Clark, 2015). Resources such as iron ore, petroleum and coal have high exposure to carbon price risks. Higher taxes through carbon tax will reduce on the company’s margins. The company may likely respond by cutting jobs in coal and iron ore mines which will hurt the economy of Australia. The company may not be competitive enough to counter the forces of competitors like Rio Tinto when it is paying higher for pollution than those global competitors. Carbon tax is also likely to increase the cost of power bills, mining costs and increase expenditure of the company, hence the output costs of minerals. In 2012 and 2013, BHP Billiton received 5.2 million free carbon units for Nickel, alumina and copper extraction under the jobs and competitiveness program. BHP Billiton did not pay carbon tax and was not eligible for coal fired generation assistance. This assistance was given to four coal plants in Victoria with average emissions intensity of 1.3 with no carbon tax for the first 20TWh. Impact of Direct Action Plan on BHP Billiton Direct Action Plan (DAP) was introduced to abolish most of the cleaner energy future programs, government funding for emissions, incentives, penalties and renewable energy target (Wright, 2014). According to Marren (2014), DAP plan has set five year average emissions in which emitters were given an option to sell their emissions through an auction process. Since the Government of Australia is intervening thorough the Emissions Reduction Fund (ERF), BHP Billiton will be cushioned from increased carbon taxes in excess of the baselines (NSW Government, 2015). Unlike carbon tax, Heede (2014) argues that a direct action to emissions will cater for high levels of C02 emissions but least considers that integrity and health of the natural world. In 2011 and 2012, BHP Billiton exceeded the baseline and would have been subjected to a fine. Being a high emitter and already reducing emissions, the company would have benefit without necessarily enjoying government subsidies (Turecek, 2011). The copper extraction in Olympic Dam in south Australia will be dealt a blow as renewable energies exploit wind energy which is dubbed to benefit a lot from the DAP (BHP Billiton, 2014). This is evidenced in the intention by the Australian government to issue $50 million per annum for solar rooftops as part of clean energy. DAP can pose a business risk to BHP Billiton because it require payments and costs only after verification of bidders who will partake emission reduction. If there is any delay to spend the $300 million allocated to the first year, which will also affect the financial performance of BHP Billiton (Tristan, 2013). Risks and opportunities Risk Description Opportunity Disturbance to mine infrastructure and operations Energy demand will be required in the situation of rising temperatures will increase to cool surface facilities and underground mines. Rising prices and greater demand is driven by expensive alternative energy sources, the imposition of carbon taxes and limited supply of natural gas that will add to costs. Warming ambient temperatures in cold and arctic climates will reduce heating costs and make it easier to operate Changing access to distribution routes and supply chains Port availability may be affected by frequent storms and sea-level rise. This interferes with timely transport to market. Alternative transportation mediums such as road networks and demand for rail will rise and as result increases cost. The need for water treatment could be reduced by higher evaporation rates and disposal. This will reduce costs and volumes such as in the treatment of acid mine drainage. Challenges to safety conditions and worker health The risk of heat-related illnesses increases with rising temperatures. This decreases productivity, increasing the likelihood of fatalities accidents and injuries and inhibit decision-making. Availability of water and energy and the changes in temperature may not be handled by inadequate underground cooling systems Increasing level of skills and expertise within the employee base Future growth and exploration Insurers, lenders and investors pressurize firms to develop adaptation plans and reduce carbon liabilities. Due diligence may not be incorporated into climate change risk. Access to capital and share price will be affected by management of climate impacts. Marine research and rehabilitation works at Cape York Peninsula, Australia. BHP Billiton and the Great Barrier Reef Foundation can take advantage of the AUD$7 million partnership to support critical at remote Raine Island. Challenges to mitigation and environmental management Heavy rainfall risks include: significant potential for reputational damage, impacts on community safety and health, increased environmental liability, accompanying remediation costs, discharge of contaminated water to neighborhoods and tailings dam failure. Mineral-rich Arctic will be opened to exploration due to warmer temperatures. Existing and future low-carbon energy is likely to experience increased demand for industrial technologies and materials used. Energy generation and technological innovation are new emerging business opportunities. Additional pressure points with community relations In host communities, there are increased requests for financial in response to natural disasters and employee support. The need for restoration of basic services and economic activity will be elevated due to damage to property livelihoods. If home communities for employee and contractor workforces then the incidences will directly affect worker health, attendance and productivity. Opportunity for more meaningful engagement with local communities and other key stakeholders in areas of land collaboration, water management and agriculture. Cyclone management Pilbara region expects increase in cyclone intensity. Lack of adaptive management practices for cyclone management may fail to maintain the Western Australia Iron Ore (WAIO). Management of climate change is a considerable opportunity to erect barriers to combat cyclones by combined effort of the industry and stakeholder collaboration. Slow development and deployment of renewable technologies Slow adoption of cleaner technologies potentially affects the operations and supply chains due to material emissions reductions. Currently, the company adoption of technologies is not available at commercial scale or acceptable cost due to limited skills and expertise. Due to new applications there is increased demand for other commodities and emerging technologies such as water purification, diesel emission control, fuel cells, and carbon reduction. Adaptation strategies Establish corporate climate change guidelines such as changes in facilities management, working with legislators to support adaptation and integration of climate considerations Collaboration and technical innovation: provide potable water through water reclamation joint ventures with Anglo-American in Mpumalanga, South Africa Develop technologies higher than the current BHP Billiton’s operational emissions to offer more material benefits and reduce emissions Maintain resilience of planning responses and physical assets to address downstream product use and operational emissions Contribute to the ability by devising solutions that help customers, stakeholders and suppliers adapt to a changing climate and pursue new revenue generating opportunities. Engage in carbon credits for international and state trading by obtaining federal renewable energy certificates Support market mechanisms and invest in low-emissions technologies that provide financial incentives for sustainable development and emissions reductions. Expansion plans: identify and assess risks such as storm surge levels and storm intensity and construct higher loading facilities such as the Hay Point coal terminal in Queensland, Australia. Reference list BHP Billiton, 2014, BHP Billiton Strategic Report 2014. http://www.bhpbilliton.com/~/media/bhp/documents/investors/annual-reports/bhpbillitonannualreport2014.pdf. Commonwealth of Australia, 2013, Emissions Reduction Fund Green Paper, Department of Environment. http://www.environment.gov.au/system/files/resources/66237232-3042-4cd8-99a3-040705fead3b/files/erf-green-paper_1.pdf. Heede, R 2014, Tracing anthropogenic carbon dioxide and methane emissions to fossil fuel and cement producers, 1854–2010, in Climatic Change, Vol. 122, No. 1-2, p.229-24. Hugh, T 2012, Carbon Tax Will Cripple Australian Coal Industry: New Study, Media Release. Institute of Public Affairs. Marren, S 2015, The government’s direct action plan, Uniting Justice Australia. http://ucaqld.com.au/wp-content/uploads/2012/11/UnitingJustice-DirectActionPlan.pdf Nelson, J & Schuchard, R 2010, Adapting to climate change: A guide for the mining industry, BSR. http://www.bsr.org/reports/BSR_Climate_Adaptation_Issue_Brief_Mining.pdf. New South Wales Government, 2015, Current climate change research projects: adaptation, Science and Research. BHP Billiton, 2014, Climate change: Portfolio analysis, http://www.bhpbilliton.com/~/media/5874999cef0a41a59403d13e3f8de4ee.ashx Tristan, E 2013, Climate Spectator, 10 July 2013. Turecek, J 2011, Carbon tax won't kill the economy, The Sydney Morning Herald, Fairfax Media. Wilson, J & Clark, P 2015, BHP Billiton confident of robust portfolio despite climate change action, Mining, http://www.ft.com/cms/s/0/33eec58a-66ae-11e5-a57f-21b88f7d973f.html#axzz3pkDcARdS Wright, C 2014, What Does Direct Action on Climate Change Really Look Like? University of Sydney. Read More