Greenhouse Gas Management: The Time to Act is Now
Faster than anyone can say "air emissions," requirements to reduce greenhouse gas emissions are upon us, and evolving at breakneck pace. Already, more than 30 states have established greenhouse gas reduction targets or have proposed 2007 legislation to establish targets and require reporting (see map below). At the same time, company shareholders, lenders, insurers, and rating agencies are speaking their minds about greenhouse gas management, with increasing demands for companies to reduce and report greenhouse gases. With both legislative and financial policies emerging rapidly, no one can afford to sit passively on the sidelines and wait for regulators and shareholders to require action. The time to act is now.
Manage Your Risk
Companies should immediately begin a three-step process to prepare for coming regulations and restrictions:
- Inventory emissions.
- Conduct a risk assessment.
- Develop a greenhouse gas management strategy.
These steps allow savvy companies to identify: a) their greenhouse gas emissions profile, b) where reductions might be possible, c) the costs and benefits of various actions, and d) whether they may need to buy carbon credits.
Step 1: Inventory Emissions: The first action is to inventory greenhouse gas emissions, which is more than simply counting emissions from stacks and boilers. As part of the inventory, companies should also answer seven critical questions to begin assessing their risk and opportunities.
- What are the company's direct and indirect greenhouse gas emissions?
- What are the regulations, financial policies and other standards the company will need to comply with in the near-term and long-term?
- What is the magnitude of the company's greenhouse gas emissions and "sinks"?
- What are the company's options for reducing its greenhouse gas emissions?
- How should the company shape its "carbon footprint" to maximize its opportunities and minimize its risks over the next several decades?
- For shared assets, who "owns" the carbon emissions, sinks or offsets - either as a liability or an asset?
- What is the appropriate baseline year to maximize credit for early reductions or avoid penalties for recently acquired carbon-intensive assets?
Step 2: Conduct a Risk Assessment: A thorough risk assessment allows companies to evaluate the costs and benefits of strategies to reduce or offset emissions and to integrate those strategies with overall business objectives. Through these tasks - the inventory emissions and risk assessment - organizations can make effective decisions and develop plans now to reduce long-term risks and costs.
Step 3: Develop a Greenhouse Gas Management Strategy: Prepared following the inventory and risk assessment, a greenhouse gas management strategy allows companies to proactively manage their opportunities and risks, implement cost-effective actions, anticipate regulations, measure performance and evaluate impacts that could directly and indirectly affect them. Additionally, the strategy establishes the framework for communicating plans and actions to investors and the public.
Action Now Can Reduce Future Compliance Costs
During the past few months, financial firms have moved to purchase more than $7 billion of carbon credits with the intent to buy low and sell high. And with the price of carbon credits beginning what is likely to be a long and steep climb, some companies may be tempted to lock them in now. This can be an excellent strategy for organizations that have completed the three-step process outlined above, are diligent about determining their need for carbon offsets and are extremely cautious about the source of any credits they purchase. In order to be useful, credits must be reliable over the long term, which means they must have clear title and ownership, meet regulatory standards, and be verifiable and quantifiable. Buyer beware!
It Costs How Much?
Some analysts believe that greenhouse gas regulations and financial standards will be the costliest requirements ever introduced in the history of environmental regulation, and that since these emissions stem from any form of combustion and other industrial processes, all companies will be affected. With emerging legislation requiring 20- to 30- percent reductions by 2020, and 60- to 90-percent reductions below 1990 levels by mid century - not to mention the fact that affordable, widely available low - emissions energy technologies and industrial processes are not expected to be available for another 20 to 30 years - compliance could become extraordinarily costly.
Companies should plan for both direct and indirect costs. Direct costs include complying with two types of greenhouse gas regulations: traditional, "end-of the pipe," mass- based emission targets and rapidly emerging "product-based" efficiency targets - enforced by regulators or influenced by investors, customers, and suppliers. Indirect impacts include costs passed along by suppliers that have to increase prices to compensate for their own expenses in meeting reduction targets.
Companies, especially those with operations in multiple states or countries, should assess their risks and opportunities and establish strategies now to protect and enhance their bottom line over the next several decades.
Greenhouse gas management appears to be shaping up as one of the greatest environmental challenges industry has faced in many years; and while regulations are emerging rapidly, many of the immediate pressures are financial. To be ready to excel in this competitive environment, companies should act early in understanding their emissions and risks, and in developing their strategies for steering through this complex new challenge.