Impact of Climate Change on a New Zealand Business - Case Study Example

Climate Change: Analyze The Impact Of Climate Change On A New Zealand Business And On The Wider New Zealand Society. Introduction Climate change which is also described as global warming refers to increases in the average temperature of the earth’s oceans and the air near the surface (Fonterra n.d.). Research indicates that climate change could have a significant impact on businesses like Fonterra and on the wider New Zealand Society. While it could have a positive impact on Fonterra because of the kind of business it is engaged in, the long term effects will be negative. In terms of the wider New Zealand society the overall effects will also be negative. According to Pewter Center (2011) agricultural production could increase with only minor warming in northern countries (e.g., USA and Canada) and is already on the decline in low latitude countries. However, climate change will have a negative effect on agricultural production everywhere with higher levels of warming which are caused by changes in precipitation (Pewter Center 2011). Scientists warn the expected impacts of climate change will include rising temperatures, sea-level rise, changing rainfall patterns and increased storminess (MFE, n.d.).  Climate change is expected to cause more frequent extreme weather events such as droughts and floods. In New Zealand we are likely to see an increase in temperature of over 1ºC by 2050 and of over 2ºC (compared with 1990 levels) by the end of the century. There are likely to be fewer frost days in winter and more hot days in summer (MFE, n.d.).  The greatest consequence of climate change, however, is the passage of the Cap and Trade. A cap and trade system is a market-based approach to controlling pollution that allows corporations or national governments to trade emissions allowances under an overall cap, or limit, on those emissions such as Emission Trading Scheme (ETS) is one of the methods. The ETS came into effect in 2008 where the initial area dealt with was forestry. The increased trade which has resulted from globalization has contributed significantly to climate change. At the last Climate Change conference held in Kyoto, Copenhagen approximately 40 industrialised countries signed an agreement to meet emission reduction targets by 2012 relative to 1990 levels. One of these countries was New Zealand. Developing countries are not expected to have reduction targets at this point. Consequences Despite the benefits of globalisation, there have been economic and social consequences. According to WTO (2008) globalisation relates to international integration in commodity, capital and labour markets. Globalisation results from the expansion of the industrial development model. This model is based on the intensive use of fuels for energy in order to facilitate drive production and distribution of goods. Climate change is a consequence of oil based economies. In addition to the high methane and nitrous oxide levels, the use of fuel in dairy production and transportation of goods is also a reason for the emissions intensive nature of Fonterra’s business specifically and for the New Zealand economy in general. The world is going green and this will affect Fonterra’s competitiveness. According to Skilling and Boven (2007), climate change has gone beyond the process of being a minor issue to being at the core of debates across the word. Climate change will result in social and economic consequences globally. The Kyoto agreement will effectively mean an additional cost to businesses and consumers. New Zealand government made plans and attempted to introduce a carbon tax to regulate the greenhouse gas emissions. This type of tax schemes may adversely affect many industries; especially dairy industry. The implementation of a carbon tax will mean that the cost of externalities will be included in the cost of the products. This is as a result of the emission producing methane from livestock, carbon dioxide from energy used in production of products like cheese, butter and other dairy products as well as fuel used in the transportation of these items by road and sea will be included in their cost (Myer, 2005). The company will then cover its cost by passing these costs to consumers by increasing their products price. Since Milk is an inelastic goods which mean it is one of necessity product and there is no close substitute therefore the demand will not be significantly altered. Fonterra is a price maker (Monopolistic), it is not monopoly but every practical sense it is, therefore the consumers have no other choice but to accept the price. As inequality theory in Social Science suggests, this price changes will not impact New Zealanders in the same way. The major impact will be on those persons in the lower income group. The government of New Zealand will have to intervene in the market but setting price ceilings. Otherwise, it will lead to inflation and wider economical issues with will have a negative effect on Fonterra’s profits. Emissions are externalities and so adding ETS will mean that the cost of externalities will be included in the cost of the products that Fonterra makes. Externalities are effects of a purchase or use decision by one set of parties on others who did not have a choice and whose interests were not taken into account. Fonterra’s externality is a result of the emission producing methane from livestock, carbon dioxide from energy used in production of products like cheese, butter and other dairy products. It also includes fuel used in the transportation of these items by road and sea will be included in their cost. This could make Fonterra’s products uncompetitive and affect their demand vis-à-vis other countries products. However, the government of New Zealand has sought to counter the effects on companies like Fonterra so that the price of their products will remain competitive on the world market. In order for Fonterra to compete globally or for New Zealand to avoid sanctions new technologies must be found for increased production of dairy production without increasing the levels of GHG emissions. This is a challenge for the Fonterra and for the New Zealand society in general as a reduction in the demand for some of its products internationally will result in job losses and reduction in GDP. Additionally, if the government keeps spending money on buying units instead of carrying out research in improving technologies to reduce GHG emissions, then there will be increasing environmental and social consequences for its population as summers get hotter and increased levels and frequency of natural disasters takes place. Environmental groups along with consumers around the world are particularly concerned about the effects of climate change. Governments along with these groups may seek to prevent importation of Fonterra’s products if they do not conform to green standards. According to Skilling and Boven (2008) New Zealand is exposed to the risk that international governmental action will require commitments form New Zealand in relation to reducing GHG emissions. Climate change is expected to result in increased rainfall in some instances resulting in flooding. It will also result in drought which will have implications for livestock farming. The greatest consequence of climate change, however, is the passage of the ETS. This legislation came into effect in 2008. The initial area dealt with in that legislation related to forestry. The second area which covers Fonterra’s business was transport fuels, energy emissions and industrial processing. Starting July Fonterra is expected to monitor the emission of greenhouse gas (GHG) from its livestock, and its use of fuel in transportation and industrial processing of goods for export and local consumption. According to the New Zealand Herald (2010) a recent survey reveals that concerns about climate change has slipped slightly from a year before. This indicates that other things are more important to New Zealanders than climate change. There has not been any notable change in behaviour even though there has been an increase in awareness (Skilling and Boven 2008). Skilling and Boven (2008) further points out that people are nor prepared to pay premium for low emission products and services and that there is a large gap between actions and rhetoric relating to climate change and its global implications. Economic Consequences The positive consequences for Fonterra in the short term include: increase production of milk and increased reproduction rates. Milk production will be increased as the cows will have more grass due to increased rainfall. Increased milk production per cow means less methane for a given volume of milk (Fonterra 2007). The temperature during the winter months will be warmer and so pasture growth rates are expected to be much higher. This means that Fonterra will have more products for local consumption and as well as for the exportation of its global brands. This increase in supply will cause shifts in the supply curve and it will lower the equilibrium price. As milk production per cattle increases, Fonterra can reduce number of cows to produce the same level of milk or keep the same numbers for more milk to reduce their cost to maximize their profit in some instances. This is a result of increased economies of scale gained from the increased per unit production of milk. This means that the income earned per unit of livestock will increase. More grass will be available and so this will mean lower expenditure on feed. This will make Fonterra’s products more competitive especially in this age of globalisation where companies compete at the global level. Despite these short term positive impacts, the long run consequences of globalisation can be devastating. According to Valtorta (n.d) climate affects animal production in many ways including: the impact on livestock grain availability and price; impact on livestock pastures and forage crop production and quality; changes in the distribution of livestock diseases and pests; the direct effects of weather and extreme events on animal health, growth and reproduction. Climate change will affect the quantity and quality of forage produced (Topp and Doyle 1996). The impact of climate change on pastures may also include a deterioration of the quality of pastures. This may result in the productivity of livestock falling (Buklin et al, 1991; Erkert et al 1995) if the climate gets too warm. This is a necessary consequential effect of global warming This can result in the death of livestock which will have devastating consequence on the ability of Fonterra to survive both locally and internationally. Additionally, Fonterra now faces increased costs due to the emissions trading scheme (ETS) which became applicable for transport fuels, energy emission and industrial processing in July 2010. Heat Stress will cause a number of changes to occur in livestock. It affects food intake especially of dry matter and also result in a decrease in the efficiency of feed nutrient utilisation. There is normally a decrease in milk production in cows that are under heat stress. Additionally, the reproductive levels of the cows will fall substantially. This effect can be prolonged and can affect the animal for months (Chase n.d.). Climate change results in a change in the environment and therefore the natural habitat for certain pests. Therefore, they are held in check along with the diseases they spread (Stem et al 1989). However, these pests and parasites will move to other regions and so these diseases will be spread there. This will lead to reduction in animal productivity and death in some cases. The price of grains on which livestock is fed changes based on demand and supply. It therefore means that the increased droughts and even flooding and soil erosion in some regions may result from climate change. These problems will lead to a shortage of grains which will increase price and therefore the cost of production of milk at Fonterra. New Zealand has also sought to implement its own emissions trading scheme (ETS) in an attempt to reduce emission by instituting tighter fuel efficiency standards and a 90% renewable electricity generation target (Skilling and Boven 2008). This took effect in 2010. The time table for other elements that will be affected by the ETS legislation are as follows: waste disposal – January 2013 and agricultural emissions, January 2015. Forestry was the first to be affected in January 2008. Participants in the scheme will be required to monitor, calculate and report the emissions they generate. According to Fonterra (2011) they will be responsible in the initial stages for reporting on farm emission and not the farmers. Participants are also required to buy emission units which are equal to their reported projected emission levels (Fonterra 2011). The cost of being clean and green is significant but as the New Zealand society becomes more aware they will realise the real benefits of supporting low emissions businesses. The cost of continuing disregard for the environment will have disastrous consequences ad so it is important that climate change not only becomes a buzz word but that the ‘Green Gap’ will be narrowed significantly before it is too late. Conclusion There is no doubt that climate change will have far reaching consequences for businesses and the wider New Zealand Society. New Zealand is an emission intensive country and if it does not take steps to alter this, the effects of climate change are like to present a substantial risk to its competitive position. We live in a Global environment and people around the world are gaining increased awareness of climate change. New Zealand’s contribution will play a role in determining how its products and it continuing attraction as a tourist destination, two emissions intensive product are impacted. References Adams, R.M., Rosenweig, C., Peart, R.M., Ritchie, J.T., McCarl, B.A., Glyer, J.D., Curry, R.B., Jones, J.W., Boote, K.J.; Allen, L.H., Jr., 1990. Global climate change and US agriculture. Nature 345, 219-224. Baker, B.B., Hanson, J.D., Bourdon, R.M., Eckert. J.B. (1993). The potential effects of climate change on ecosystem processes and cattle production on US rangelands. Climatic Change 25, 97-117 Bucklin, R.A., Hahn, G.L., Beede, D.K., Bray, D.R. (1992). Physical facilities for warm climates. 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