I recently had the privilege of spending some time with the North American energy manager of one of the largest energy consumers in the world. On the table was the question of how a company should prepare itself in the face of the growing concern around climate change.
My February 2006 column looked at the basic challenge management faces in valuing investments that reduce greenhouse gases. Since then, we've seen a number of highly visible events that have brought climate change firmly onto the popular agenda, even in the United States.
Whatever one thinks of the science, Al Gores film, An Inconvenient Truth, was seen by millions around the world. Many evangelical churches have embraced climate risk as a question of our custodianship of the gifts of the planet. Alone, these could be written off as important, but unrelated to the day-to-day reality of running a company.
But theres more. California recently passed Assembly Bill 32, regulating greenhouse emissions and including Kyoto-like mechanisms such as greenhouse gas trading.
Following on the heels of GEs Ecomagination businesses, Wal-Mart surprised the critics by taking a strong stand on actively managing the carbon in its entire value chain. Richard Branson, chairman of Virgin, committed billions to mitigate the effect of his airliners exhaust.
Those were some of the events that made the more popular headlines. Hidden away on the pages of The Wall Street Journal and Financial Times was news that may have far-reaching and sustained effects on the way you do business. The European Union has laid down the challenge to implement aggressive energy-efficiency requirements for a wide range of appliances and equipment, including such things as standby power for TVs. Like the EU laws before them, these will affect manufacturers and other businesses far outside Europe. To underline this, Germans, who have the incoming EU presidency, have declared climate change to be the highest political priority.
The last straw may be the recent publication of the Stern Review by the UK government.
Freely available on the Web, this is an economists comprehensive view of the probabilities and risks of climate change. It paints a picture of high risk and associated costs within the next five decades, assessing the annual costs to be in the range of 7% of global GDP. It also estimates the annual investment needed to stabilize greenhouse gas concentration at about twice the pre-industrial level to be in the range of 1% of global GDP. With global GDP at about $44 trillion, these are big numbers by any measure.
If Nicholas Stern were a minor government bureaucrat with a personal agenda, it would be easy to dismiss this report, but he was chief economist at the World Bank. The Review draws on an impressive range of global scientific, business, political and economic resources in its preparation.
So what has all this got to do with the way energy should be managed in your company? First, as the weight of public and political opinion moves to managing climate risk, all companies need to be prepared for future regulation. They also need to become much more aware of the risks and opportunities for their business.
The first step is simple: establish a baseline of energy- and process-related emissions from the companys activities. With a good energy database, this is a relatively easy step.
As soon as possible, register a baseline year with a reputable climate registry, such as Californias.
The next step is to include carbon reduction in the prioritization decisions of the energy productivity plan. The quandary is, of course, that in the United States, these have no financial value, but that rationalization might be hard to defend with directors, corporate insurers, customers and stakeholders. Look for actions that clearly serve both energy cost and carbon dioxide reductions, at least in the first stages.
The third step is to understand fully the greenhouse effect of the activities of your major suppliers and customers. Begin to build bridges where reductions up and down the chain can be planned and implemented.
Last, but not least, if this growing awareness accelerates implementation of ever more comprehensive global standards for buildings, vehicles, energy supply systems and equipment, this will produce a myriad range of market opportunities in the years ahead. Theres also a sad reality that failure to manage the risk will bring a different range of risks and opportunities, so even the naysayers need to be evaluating the business landscape.
Peter Garforth is principal of Garforth International LLC, Toledo, Ohio. He can be reached at [email protected].