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Market News

 February 02, 2012
How mandatory carbon reporting will help, not hinder, the market

 When he started out, Andreas Zachariah was trying to solve a green problem, but not the one he may have ended up solving. 'Zac' was a refugee from finance and had invested in telecoms during the scramble for 3G licences. During a career-switch studying industrial design at the Royal College of Art, he was searching for a project: "(I realised) that public transport is like broadband; the bottleneck is always at the local network." He started looking for a better way to co-ordinate public transport and cycling, initially with a new bike rack for trains.

Zac tried to work out how much carbon the scheme would save: "That's when I discovered how obscenely underwhelming carbon calculators were." He created a smart phone application, or 'app', that recorded someone's journey automatically. 'Carbon Diem' then works out what type of transport people are using depending on the speed of the journey and the patterns of GPS signals (if you disappear for a certain time and pop up near a tube station, it is likely you used the tube). This data is used to accurately measure a person's personal transport emissions, without having to resort to complex spreadsheets or clumsy computer estimators. Zac hoped it might offer a smarter alternative to the crude congestion charge.

When the pilot data trickled in, he realised that how people travelled was poorly understood. Traditional data was reliant on surveys at transport hubs or travel diaries. Neither was particularly reliable and failed to understand what happened when there was disruption, either weather or network-induced.

Zac's story feeds, somewhat obliquely, in to the ongoing policy debate about mandatory emissions reporting. Policy Exchange, in its report Boosting Energy IQ, called for the introduction of mandatory carbon reporting for the 24,000 largest UK firms and public sector organisations. Our analysis showed that carbon emissions only get managed - often through improving energy efficiency - when senior managers make it a priority. A good way to do that is to make big organisations report the data alongside financial data, creating pressure from investors, competitors, journalists, and NGOs to cut emissions.

Defra is consulting on reporting and is expected to make a decision by the Budget. Despite stressing that they have no preferences, the decision is likely to suffer from the unwritten rule of Impact Assessments - that policymakers take the middle option. In this case, that means 5,000 firms will be asked to report. Most of these organisations already have to report emissions under the ETS, Climate Change Agreements or the clumsy, unfair CRC Energy Efficiency Scheme.

Defra has found the cost of the wider-reaching option, which we advocate, to be high. But their Impact Assessment is based on flawed analysis, relying on estimates used in the complex, and more burdensome, CRC scheme. It was debunked by our report, and that of other organisations like the Aldersgate Group. The minister responsible, Richard Benyon, has recognised that the Impact Assessment needs to be revisited.

A key question in Defra's consultation is whether 'Scope 3 emissions' should also be included (this is where carbon reporting aficionados get excited and the rest of the world drifts into a coma). These are mainly emissions in organisation's supply chain and transport use. In its consultation, Defra has been cautious about requiring firms to report such emissions, arguing, for example, that it is difficult to measure staff transport emissions easily. Zac believes Carbon Diem already offers a potential, relatively cheap answer - give your staff the app, and they will do the measuring for you.

Of course, it is impossible to know whether the five people in Zac's Silicon Roundabout office will deliver the best solution. And the point is not that regulation is always the best tool to spark innovation. In fact, regulation should be used cautiously and only where there is clear evidence of market failure or, as in the case of mandatory reporting, behavioural or information barriers.

But Zac's example demonstrates how engineers, inventors, tinkerers and scientists can come up with - or apply from other areas - potential solutions if you put clear market or regulatory signals in place. Some ideas will fail and some will succeed. But a well-designed market will produce answers, most likely at a lower cost. "History is littered with stories about where constraints led to innovation," added Zac.

Mandatory carbon reporting would help make carbon a greater priority for senior managers (it may also help them save money). If they report emissions, people will start asking them how they are going to cut them. Onlookers will no longer be fobbed off with glossy but vacuous CSR reports. "We do not solve the problem just by doing measurement," Zac added. "But we have got to measure to manage to mitigate. It all starts with the measuring process."