The biggest game on Earth

Like many deeply involved in the climate change issue for the past 20 years, I've been feeling disoriented. Suddenly it's a top-order political issue, nationally and globally, and arguably the defining issue of our times. Carbon trading is just around the corner, conservative green politics has arrived and for consumers, paying for your carbon will soon be normal operating procedure.

In 30 years' involvement in social and environmental issues, I have never seen an issue move so fast or so dramatically as did this one in the spring of 2006. Nor have I been so excited at the potential for rapid, far-reaching change. So what happened and, more important, what happens now? Is this a genuine global environmental spring or is this some kind of weird drought-influenced aberration that will pass and normal transmission will then return?

And carbon pricing - what does it mean and how will it work? What are the implications for Australia and for key industries? With the arrival of "conservative green", will politics in Australia be the same again?

Let's start with the science which is worth revisiting briefly for one reason. Unlike most other market and political questions, where the uncertainties of human behaviour, technology and political trends make predicting the future a dangerous though interesting activity, climate change is different. It is driven by science, by physical realities, like the heat-trapping nature of greenhouse gases. We put more CO2 pollution in the atmosphere and more heat will be trapped. If it gets hotter, the climate will change.

So as the science became accepted over recent years, the direction of the market became crystal clear. People, including some titans of industry, thought it through. They realised if this relationship is a fact, and the effects we see are already significantly negative, such as our hopefully soon-to-break drought, then the future suddenly looks deeply unstable, potentially catastrophically so. The conclusion: time to act.

Enter John Howard. The point that marked the end of the climate-change winter in Australian politics was the Prime Minister's long interview on Four Corners on August 28 last year. Our most brilliant politician looked unusually uncomfortable and clearly offside on a leading issue. Critically in this case, he looked out of touch with much of corporate Australia, whose interests he was defending.

People who monitor these issues had two reactions to the PM's interview. Some thought well, that's it, this long winter of inaction and denial will continue as long as Howard is in charge. He clearly will not shift and therefore this country will not shift for many years.

Others, including myself, said, "No, this is the end, the thaw is on." It's not just the icecaps that are melting. Howard, master of his craft, would not stay out of touch with the people in an election year. He'd flip like a circus acrobat, and make climate action look like part of the plan all along.

There was something else at work. For several years I have had many influential chiefs of Australian business talk to me privately about their increasing frustration with the Government's lack of action on climate. They saw the science, they saw the future and they were worried. They were worried for their children and yes, corporate chiefs do worry about their children's future and deeply so.

But more immediately they were worried about the Australian economy and their own companies' ability to grow and succeed. So they started to talk to each other, privately and in hushed tones, aware that they were coming up against the government of the day and a PM who had decreed supporting strong action on climate to be politically incorrect. Yet their frustrations were steadily building.

The dam started to crack when a group of large corporates, mainly Business Council of Australia members, teamed up to form the Business Roundtable on Climate Change. They hoped for safety in numbers.

Working with the Australian Conservation Foundation, they commissioned research into what needed to be done and what it would cost to act, or not to. They concluded heavily in favour of early action because it was cheaper. They released their report in April 2006, triggering a collapse in the business community's opposition to pricing carbon.

Mike Hawker from IAG, Gerry Hueston from BP, David Morgan from Westpac, Grant King from Origin and Harry Debney from Visy stood up and faced their political fears. They said, "We want dramatic cuts in CO2, we want a long, loud and clear legal framework to achieve those cuts and we want a tradeable price on carbon. And we want it soon." The politics of climate change started to tremble. Here was big business asking for regulation on an environmental issue. Things were getting interesting.

And they weren't alone. In August 2006, another recent convert to the cause of conservative green, John Schubert, chairman of the Commonwealth Bank, board member of Qantas and former head of the BCA, stood up at the Davos Connection's annual Hayman Island Leadership Retreat for business, political and media leaders and asked everyone to watch Al Gore's film, An Inconvenient Truth. To make it easier he'd arranged a pre-release screening that evening.

Schubert is deeply concerned that the Great Barrier Reef is threatened by climate change. (The irony of Schubert doing this was delicious, having built his career at Exxon, the company environmentalists unaffectionately refer to as the "death star" for its singular focus on preventing the world acting on climate change.)

The next day on Hayman Island, ANZ chief John McFarlane electrified the meeting with a speech in which he invoked the moral imperative, saying he stood there not as a business leader, but as a person. He called for urgent and significant unilateral action in Australia. The future is in our hands he said, so what will we do?

One by one, all these people went off to Canberra. Directly and indirectly the message got through to the PM's office. The people at resource giant Rio Tinto, who had picked up former WMC boss Hugh Morgan's mantle, as the strongest advocate to government for delay and prevarication, had been out manoeuvred. It was game on. The power of the market had spoken.

The rest is history. Gore's movie and his Australian tours sparked media attention. Nicholas Stern's report in Britain argued this was an issue with economic impact comparable to a depression and a couple of world wars simultaneously. The worst drought on record drove that point home, pointing out the cost of climate change and therefore the cost of not acting. The public engaged deeply and even the tabloid press and breakfast television picked it up.

And then the arrival of that most fascinating of political competitions between the two rising stars of Australian politics, Malcolm Turnbull and Peter Garrett.

So my belief is we will have a price on carbon in Australia, with a national trading scheme agreed to within a few years. The argument is only who pays it, who gets it for free to start with (known as "grandfathering" to protect existing industries and assets), and when do we start trading. Grandfathering is actually a good term, because it's about protecting the old fellas we're quite fond of, who worked hard in years gone by, but are now past their prime and need a bit of looking after.

So what will carbon trading look like, why do so many companies want it and what will it mean for consumers?

First, let's put to bed any doubt that this is a global business issue and not an Australian, drought-induced political phenomenon. In the US in January, an extraordinary coalition of companies with a combined market capitalisation of more than $US750 billion ($963 billion), called for strong climate action. If you think it was hard for our business leaders to confront Howard, imagine how US CEOs felt approaching George W. Bush. But they did: Alcoa, BP, Caterpillar, Duke Energy, GE, DuPont, PG&E, Lehman Brothers and others spoke loud and clear. They called for fast, strong national legislation mandating significant CO2 cuts and a cap and trade system to deliver it.

In Australia, there is also a powerful argument to have a national system now rather than waiting for the world. No one wants their nation to be the Argentina of the 21st century, falling from wealth and privilege to economic basket case through lack of foresight.

Resource-dependent, export-focused countries are risky long-term propositions. Australia's natural resource wealth is a good foundation that we should leverage, but unless we adapt to a changing market we could soon go into decline. To avoid this, we need to build a smart, adaptable, low-carbon economy. Carbon trading can facilitate this: for the country, for companies and for consumers. It prepares us for the inevitable transition.

The reason many in big business are excited about carbon trading, even though by definition putting a price on carbon increases costs, is that it allows clever companies to grab some of the value that gets transferred around the economy as a result. The opportunity in Australia alone is huge.

Consider these numbers. To stabilise the climate, we have to cut CO2 pollution dramatically to about 20 per cent to 40 per cent of 1990 levels by 2050. The gap between business-as-usual and even a 60 per cent cut by 2050 is about 13 billion tonnes of CO2 and its equivalents. Put a conservative price on carbon of say $15 a tonne and that's about $200 billion of value that can be applied to the infrastructure and technology developments we need to close that gap.

The economic impact, however, is even greater, because that value is applied not in isolation as an investment but to cover the incremental additional costs of clean technologies over dirty technologies.

Assume that's a 35 per cent increment and we're talking about facilitating $800 billion of investment in the solution. This is a very serious economic issue and a very serious business opportunity. From light bulbs to power stations, we're about to invest big-time. The corporate sector gets it and the consumer will soon feel it.

To understand how carbon trading works, just look at NSW, where a limited state carbon market is already operating. Since the system first started in 2003, about 37 million tonnes have been traded with a value of more than $400 million. Where does the money come from and where does it go? It comes from electricity users, who in NSW now pay a small amount extra on each kilowatt of power they use. That explains part of the future; we'll all pay more for our emissions of carbon, embedded into every thing we buy, and we'll all benefit from less pollution.

Where does the money go in the NSW scheme? It pays for activities that reduce future CO2 emissions. TRUenergy, for example, is building a new gas-fired power station at Tallawarra in NSW, that wouldn't have been economic except that it generates carbon credits they can sell, because it's so much cleaner than the best coal plant.

For consumers in NSW, it works out to be a good deal as well. They pay more per unit of electricity, but they get help to cut their actual electricity bill. A company I lead, Easy Being Green, distributed three million high-efficiency light bulbs in 2006 to 500,000 homes, cutting each of our customers' electricity bills. At our peak in that project we were employing 240 people to distribute the globes and also water-saving showerheads.

Now we're going into homes and installing the globes directly. Our people trade carbon with individuals every day. The transaction is simple. We'll give you this equipment that will cut your power consumption, therefore cut your indirect CO2 emissions and reduce your annual power bill, by more than $100. You give us the rights to the CO2 you save and we'll sell it under the NSW carbon trading scheme to pay for the globes and our costs. So even with a higher price per unit of electricity, their overall power bill can go down. Very good economics, and even better politics.

Roll this out across the economy and the transition begins. Large amounts of value are transferred around the economy. Those who cut emissions win and those who don't, pay.

Those companies that respond quickly to the opportunities will succeed; those that prevaricate will lose.

Entrepreneurs will seize the opportunity and massive amounts of capital will flow to those that get it right, while others will go broke trying. This is the creative destruction of capitalism at work, and it's why a well-designed market is our best hope. Getting the system design right is the key job for governments, which takes us back to politics.

Will Howard get it in time? Maybe, maybe not. He stumbled this week, and forgot his lines. He's not good when he doesn't believe what he's saying and on this one, he doesn't yet get it. His problem, and I suspect Kevin Rudd's as well, is that he sees the environment as an important issue to be managed, an issue the voters care about, so important for political reasons.

However, climate change is no longer just an environmental issue nor a temporary political issue. This is a geopolitical, economic and social challenge with the potential to redirect civilisation.

It's the biggest game on earth and many will be left in its wake, wondering what hit them, perhaps some of the world's most successful corporations such as ExxonMobil, and perhaps one of Australia's most successful politicians. We are entering a different world. Deep turbulence is ahead. Hold on for the ride.