Energy and climate change: The executive’s quandary

Feb. 14, 2006
A good energy strategy can simultaneously support risk management, regulatory compliance and the bottom line.

The causes and consequences of greenhouse gases and global warming continue to be a hot topic in the scientific, business and popular media. Most greenhouse gases are the result of burning fossil fuel, with the most significant being carbon dioxide (a portion also can come from the process chemistry itself). At one extreme of the debate, the forecast is for catastrophic climate change in a relatively few years unless urgent and widespread global action is taken. The other extreme rejects the data and science as flawed or inadequate, and claims all we are seeing is nature’s normal long-term climate cycles. What is an appropriate stance for management to take in the midst of this debate?

First and foremost, the guiding management principle always should be to make the business as efficient and profitable as possible, which is not inconsistent with effectively managing the climate change challenge.

Irrespective of ones personal views, concern over global warming is changing the business and political landscape. On the regulatory front, much of the industrialized world is treating these emissions as regulated pollutants, with a strong initial focus on carbon dioxide. So far, this is not the case in the U.S., but there is growing belief that some regulation is inevitable here, probably starting at the state level with California, New York, and other New England states being likely first movers.

In the past two years, we also have seen a rising number of shareholder and stakeholder resolutions over climate change coming in two basic forms. The first is asking for clear statements on risk management in the event climate change negatively affects the company’s business. Second, there are questions over the company’s management of its own emissions. Even insurers are talking about differential liability premiums depending on the answers to these challenges.

However, the reality is that in the U.S. and elsewhere, it is very hard to put a clear financial value on carbon reduction until a clearer regulatory regime emerges. Voluntary trading of emissions reduction at the Chicago Climate Exchange is currently priced at about $1.50 per metric ton. In Europe, the market under the Kyoto Treaty is emerging following its start in 2005, with recent emissions allowances trading at about $30 per tonne. An investment to reduce carbon dioxide will have very different economics in a voluntary regime somewhere between zero and a couple of dollars a ton, and in a regulated regime at $30. This is the greenhouse gas investment quandary for management.

Fortunately, managing this quandary is relatively straightforward, as long as there is a commitment to long-term strategic management of energy productivity such as we have discussed in previous columns. A critical step of any energy program is to establish a baseline of current consumption of gas, electricity, oil, coal and other energy elements. Gathering this essential data is also the basis for developing a greenhouse gas baseline. With the support of an organization like the California Climate Action Registry, this baseline can be relatively easily established. As the energy management program delivers regular energy usage data, adding the consequential greenhouse gas data can become standardized.

Taking this step has a number of advantages, not least of which are getting ahead of any potential legislation, securing a publicly certified baseline for any future allocation negotiations and responding to stakeholder questions. It also demonstrates a commitment to understand and manage greenhouse emissions professionally.

In previous columns, we’ve discussed 20% to 30% energy productivity improvements, and that typically at least 75% of these come from energy demand reduction, which translates directly into greenhouse gas reduction. The remaining portion of productivity comes from procurement actions, and frequently sourcing decisions also can have positive impacts on greenhouse gas emissions. Remember, a company’s greenhouse gas baseline includes emissions attributed to its energy suppliers.

An energy productivity program typically will include projects for reliability, efficiency or economic reasons, such as large-scale heat recovery or installing combined heat and power. These can deliver greenhouse reductions far greater than indicated by the raw energy efficiency. These kinds of projects will stand on their own economically, with the added value that they yield over-proportional reductions in greenhouse emissions.

The bottom line is that a rigorous, well managed energy productivity program will deliver both competitive advantage and major reductions in greenhouse gases. The key incremental management action is to add appropriate registration and measurements. If various trading schemes and environmental credits add some financial value, that is an incremental benefit.

Peter Garforth is principal of Garforth International LLC, Toledo, Ohio. He can be reached at [email protected].

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