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Market News

 July 09, 2007
Carbon Emissions: What's Next and What You Should Know

 The world is abuzz with talk about carbon emissions, carbon neutrality, carbon offsets, carbon regulation, carbon taxes, and renewable energy certificates. With carbon dioxide the number one greenhouse gas responsible for global climate change, this buzz is more than just another market trend. In just the last six months:The debate around reducing carbon emissions is now crystallizing around two approaches: government regulation and market mechanisms.

Where We Are Today

Businesses prefer market-based mechanisms to find solutions to societal and environmental problems like climate change. In the absence of US carbon limits, over 331 companies, NGOs, universities, states, counties, cities and liquidity providers have chosen to participate in a voluntary cap-and-trade market for carbon emissions reductions called the Chicago Climate Exchange (CCX). Under the CCX system, members make a legally binding commitment to reduce their emissions 2% per year over the membership period. Participants that exceed their carbon reduction goals create a "carbon financial instrument," which they can sell to participants that aren't meeting their goals, thereby generating income above the energy and money savings already realized through making their reductions. This is a win-win approach that achieves total greenhouse gas reduction targets.

Several of the CCX companies and six NGOs then formed the Climate Action Partnership to call on the US Congress to address climate change through government regulation, through formal market-based solutions, and through technical innovation. And, even auto companies such as Chrysler, Ford, GM, and Toyota have pledged support for mandatory carbon caps. The companies made this call, in part, because they are now facing competing regulatory regimes in the New England states and California, with numerous carbon reduction bills circulating in Congress.

Where We're Headed

All this activity points to an almost certain outcome: the formation of federally mandated emissions limits that will be met through a national cap-and-trade system modeled after the CCX (and perhaps using its platform) that monetizes the value of carbon using a market-based mechanism.

Others are calling for a "carbon tax" to encourage reductions. Such a mechanism would be simpler to implement and manage, but politicians dread taxes of any kind, and such measures give little incentive to companies and others to innovate. This option will likely be too hot to handle.

So as not to overly burden all businesses, and to achieve the greatest amount of reductions as quickly as possible, the first phase of a national cap-and-trade system will likely only target heavy polluters, such as utilities, power plants, manufacturers, cement makers, landfills, and possibly airlines. This is the model chosen by California. Phase two would likely affect large multinational companies and other institutions whose carbon footprints exceed a certain threshold.

The Importance of Voluntary Carbon Offsets

Carbon offsets offer an avenue for companies and individuals to contribute to carbon reduction efforts beyond their own. Critics charge that purchasing offsets enables one to buy absolution without actually reducing emissions, and undermines "legitimate" carbon reduction efforts. Recent articles in Business Week and The Financial Times identified offset projects that failed the "additionality" test, calling into question the validity of the voluntary offset market. Various bloggers have used even more colorful language.

In an offset industry that is young and unregulated, "let the buyer beware" skepticism may help raise the integrity bar for the industry, and that's a good thing. And, until the industry is regulated, it highlights the criticality of purchasing offsets, credits, or RECs that are certified through third-party organizations such as the Center for Resource Solutions, The Gold Standard, or CCX's approved verifiers.

What Business Should Begin to Think About

Many companies are now measuring their carbon footprint for good reasons, among them: (a) identifying areas of greatest energy use or inefficiency in order to reduce operational expenses, (b) establishing a baseline and setting reduction targets, (c) demonstrating industry leadership, leading to improved reputation and brand, (d) reducing risk of shareholder activism from inaction, and (e) contributing to the Carbon Disclosure Project to foster cross-industry dialogue and identify an informed response to climate change.

Renowned author and environmental visionary L. Hunter Lovins has thoroughly documented the business case for climate protection [PDF], and will be publishing a Climate Protection Manual for Businesses. In her words, "The real challenges to companies are the enormous risks they face if they do not take aggressive action to protect the climate."
  • Form a task force of stakeholders from up and down the organization and establish a greenhouse gas management program, the bottom line benefits of which can be substantial.
  • Perform energy, waste, water, and greenhouse gas audits of all your business activities, such as (a) office operations, (b) employee commute and business travel, and (c) product R&D, manufacturing, transportation, use, and recycling/disposal. Some of these audits may be free through your local utilities or municipality.
  • Identify ways you can increase the efficiency of your entire operations, such as T-5 fluorescent lights, LED exit signs and bulbs, motion-sensors tied to lighting and heating/cooling, faucet aerators, video-conferencing, vanpools, and shuttles.
  • Implement these efficiency programs.
  • Purchase a percentage of your electricity from renewables.
  • Offset your remaining footprint through carbon offsets, credits, or RECs.
  • Educate your employees about the steps they can take to reduce their emissions at work and home. For emissions they can't reduce, provide carbon calculator and offset purchasing tools such as Cool It!, DriveNeutral, and TerraPass.
Some people are fearful that tomorrow's low-carbon world will disrupt economic growth and cause undue hardship. Increasingly, companies see it as an opportunity to create new jobs and innovative products and services that deliver a higher level of satisfaction without the negative social and environmental impacts.

It's time to get moving!

Steve Attinger is Principal and Founder of Tapfire, a management and sustainability consulting firm that specializes in designing company programs that capitalize on the bottom line benefits of sustainability. He was also in the pioneer MBA graduating class of Presidio School of Management.