Some have advocated placing a simple tax on carbon emissions as
opposed to the complexity of a carbon market. In recent years,
Wall Street market manipulation scandals and the failure of products
such as sub-prime mortgage-backed derivative securities
have tarnished the idea of a competitive market to achieve policy
goals. Taxes, at least for the foreseeable future, are not politically
feasible and don’t assure policy results. For example, a tax
on gasoline would probably need to be several dollars per gallon
to motivate consumers to change consumption habits enough to
reduce carbon emissions 10 or 20 percent over the next decade.
Moreover, taxes stifle innovation; they are paid grudgingly and
no one is motivated to find a lower-cost method of achieving the
same policy goal. Finally, without a cap on emissions, which does
exist in the cap-and-trade marketplace, there is no assurance that
the policy goals will be achieved.
Considering these points, both businesses and political leaders
have favored the market approach, and, given its track record
of success in reducing other pollutants over time, it is likely to
remain the policy option of choice in the United States as regulations
evolve in states and ultimately at the federal level. Moreover,
carbon markets have already gone global and will soon be linked.
These markets and the products that serve them, such as offsets,
will soon connect economic interests in the forests of Brazil with
energy producers in California, driving costs even lower as the
market, innovation, and competition expands. The total value
of these efforts is growing exponentially, even ahead of a coordinated
global system of regulations. In 2007, regulated market
trades were valued at around $64 billion. Even the voluntary market
that year topped $300 million, more than three times the
market value of the previous year.
It’s also likely that markets will grow faster in the next five
years as the U.S. and global markets follow the course being set by
California (and its partners in the Western Climate Initiative, as
described in Appendix C), setting rules that allow an installation
to meet up to half its obligations from offsets and other creative
carbon management tools traded on the open market. Keep an
eye on the development of those rules over future commitment
periods at WesternClimateInitiative.org. As Ben Franklin
said, we all belong to one of three classes: those that are immovable,
those that are movable, and those that move. Nothing could
be more true in terms of managing carbon.
To underscore the point that innovation comes from capping
emissions and allowing businesses to find the most cost-effective
means of compliance, following are several examples of both winners
and losers in the race to reduce carbon footprints.
Winners: Those Who Managed Their Carbon Footprints
Sun Microsystems found numerous ways to
shrink its carbon footprint, and then even more clever ways to
manage it. The software giant cut overall Scope 1 and 2 emissions
by about four percent in the second year after it began measuring,
which may not seem like much, but a steady four percent per year
decline will keep the company well ahead of regulators. Sun also
cut energy use by more than 50 million BTUs–adding money to
the bottom line–with measures such as HVAC upgrades, lighting
retrofits, building “tune-ups,” and installing variable speed
drives on motors. Sun then focused on two parts of its footprint
for management strategies, business travel and air freight shipping
of its products.
From 2007 to 2008, Sun was able to cut business
travel two percent–again, not a big number, but impressive
considering that business-as-usual would have seen that figure
rise by double digits. The company also boasts that some 3,000
employees in the United States signed up for mass transit programs
to cover their daily commutes. Finally, in FY2009, Sun
addressed the largest, most obvious, and measurable source of carbon
in its supply chain: air shipments. The company reduced the
weight of products and improved logistics so that products travel
shorter routes from manufacturing to end-users. The result? Sun
cut emissions from that source by a third in one year.
As companies look to carbon markets for hedging strategies,
the markets themselves will become very profitable. Climex
provides an online trading platform for carbon
credits of all kinds in Europe and will soon be expanding to
the United States The new “stock exchange” will give risk managers
options when they seek the lowest cost ton of carbon, offset,
or seek to hedge with derivatives.
Companies that help clients manage carbon liabilities with
strategies and offset products, along with companies that keep
these markets trustworthy, will do very well in coming years.
Two examples are Camco, a strategy
and offset product company, and APX, which
acts as a clearinghouse for buyers/sellers of these products, ensuring
proper recording and clearing of transactions so that money
changes hands properly and carbon credits are “retired” (used
only once for compliance with regulatory schemes).
Losers: Those Who Failed to Manage Their Carbon Footprints
The obvious losers in this category are energy companies that
can’t do much to reduce their carbon footprints and don’t have
many cost-effective strategies to deal with such a large shoe size.
A stark example exists in California, for example, where the
Los Angeles Department of Water and Power (LADWP) relies
on long-term contracts for coal-fired generation of more than
a third of its power, while other large utilities in the state have
already switched to cleaner sources such as natural gas, nuclear,
and hydro. LADWP will be forced to buy allowances or offsets
for its liability while the other utilities may have excess credits to
sell because of advance carbon planning. Ameren, Reliant, and Mirant
are other examples of mostly coal-fired generators that operate in
largely unregulated and highly competitive markets, giving them
few ways to pass along carbon costs (as utilities in highly regulated
regions can do) or to pay for hedging strategies (also very costly
when the carbon footprint is so enormous).
A less obvious loser in this category is a company such as WM
Barr, whose products will be impacted by
both carbon and general air pollution concerns. Like the utilities
that rely on coal-fired generation, there isn’t much this company
can do, dependent as it is for revenues on products like paints,
thinners, and industrial solvents that have a high content of volatile
organic compounds (VOCs) not easily replaced by other
constituents. In California, which usually precedes national and
international regulation, high-VOC-content products will be
reduced or eliminated over time, starting in 2012, and will carry
a much higher price because of inherent and unmanageable costs
of carbon and toxins.
A World Bank study depicts nations and regions (figure 5.1 below)
that can’t manage their carbon footprints and will become carbon
“losers.” “Impact vulnerability” refers to climate change hazards,
such as increased storms, droughts, floods, and sea-level rise.
“Source vulnerability” refers to a region’s access to fossil fuels
and the potential size of short-term economic impacts when carbon
has a global price. Source vulnerability makes countries less
likely to commit to new carbon regulation/pricing, while impact
vulnerability makes countries more likely to commit to carbon
regulation. Companies with economic ties to source vulnerability
are less likely to deal with carbon costs and present greater future
risk. Based on the World Bank’s assessment, the best places to
invest–in carbon terms–are likely to be those with some combination
of low impact vulnerability and high source vulnerability.
Managing your carbon footprint requires the same ingenuity as
cutting the carbon in the first place. As Fred Krupp and C. Boyden
Gray demonstrated several decades ago, even unlikely allies can
find common ground and solve complex problems. Because carbon
emissions are a waste product–and no company wants to be
inefficient–innovation is not a political issue, and managing a
carbon footprint provides ways to create new, profitable products
If you have cracked the Carbon Code up to this point you
have the right to feel proud–you know more than 99 percent of
investors and managers on the planet–but you’re not done yet.
How will evolving rules and markets change the way a company
is positioned on the carbon scale? Will a company that successfully
took the first steps have the resilience to remain ahead of the
pack? The only way to know for sure if your strategy is a long- or
short-term bet is to estimate your “carbon resilience.”
Excerpted from Cracking the Carbon Code: The Key to Sustainable Profits in the New Economy by Terry Tamminen. Copyright © 2010 by the author and reprinted by permission of Palgrave Macmillan, a division of Macmillan Publishers Limited.