The Bottom Line: Carbon can be a game changer—positively or negatively. Ignoring this issue is no longer an option. It’s time to develop holistic corporate and supply chain wide strategies that minimize business risk and maximize opportunities associated with carbon.

During the geological Carboniferous Period, between 300 and 360 million years ago, vast expanses of coal reserves were emplaced in the rock record. Fast-forward to 2009, where we are tracking toward a new Carboniferous Period—one in which carbon has been coming back out of the hydrocarbon reservoirs in the ground and moving into the atmosphere. We are rapidly approaching a tipping point at which carbon emissions are a key factor in corporate strategy, finances, and operations. A combination of increasingly international adaptation and mitigation strategies are being developed that propose to drive a wedge between economic growth, energy, and hydrocarbon-based greenhouse gas (GHG) emissions. This should deliver a new economy based on low- and no-carbon energy sources.

Over the past eight months, AMR Research has been covering the countdown to the internalization of carbon as a cost of doing business. The Obama administration and the U.S. legislature have set in progress a series of actions that, once signed into law, will significantly reduce uncertainty around the nature and timing of the internalization:

• President Obama’s initial budget calls for approximately $80B per year in “climatic revenue” from 2012 onward, setting a clear target date on the commencement of economy-wide carbon pricing.
• The Environmental Protection Agency (EPA) has declared carbon dioxide and other greenhouse gases as pollutants under the Clean Air Act (providing the opportunity for executive action without specific further legislation). The EPA has also published proposed guidelines for mandatory reporting of greenhouse gases. Mandatory reporting clearly defines who will be required to submit reports to the EPA and other government departments and sets January 2010 as the date to begin reporting.
• The proposed American Clean Energy and Security Act of 2009 (commonly referred to as the Waxman-Markey Bill) sets out the mechanism by which global warming pollution will be directly addressed. It establishes a market-based program of tradable federal pollution permits (allowances), which are required to be surrendered by heavily polluting (facility-scale) entities. These include all facilities that annually emit more than 25,000 tons of CO2 equivalents and are dominated by the electric utilities, oil and gas, and large industrial sectors. Emission reduction and an accelerated migration to efficient energy sources will be achieved by reducing the total number of allowances over time, delivering the much talked about cap-and-trade carbon pricing model.
• More generally, President Obama has made international commitments to large-scale reductions in GHG emissions and a transformation of the energy dependence of the economy moving forward. This transformation is a central element of the American Recovery and Reinvestment Act of 2009, more commonly referred to as the Federal stimulus package.

These moves herald the regulated introduction of carbon as a cost of doing business and radically changes relationships between corporations and environmental regulations. The change likewise brings associated costs, risks, challenges, and opportunities to organizations and their supply chains.

In a recent AMR Research survey, almost 90% of respondents believed that environmental regulations affect business. But how have manufacturers been preparing for this fundamental transformation? This Report serves as a summary of some key findings of our most recent research questionnaire on carbon management. We collected 313 responses from U.S.-based companies, both IT (26%) and line of business (74%) personnel. We also provide some advice on how to get on the rapidly changing carbon curve as we count down to the new age of carbon.

How is Corporate America dealing with this transformation?

For some, this new age of carbon started some time ago, with systematic actions and development of comprehensive measurement, management, and mitigation programs. For others, there are steep curves of both learning and action ahead. What follows are some of the key findings from our recent survey.

Green engagement is more about opportunities than risk mitigation

When asked the most important factors in engaging with the green agenda, the majority of respondents identify business opportunities, corporate brand, and competitive advantage (see Figure 1). This is something of a mixed signal. On one hand, the drive toward energy, emission, and resource efficiency is now recognized as a logical part of continuous process improvement, and corporations are increasingly finding it necessary to compete—with some ferocity—on a green-based playing field. In these regards, sustainability and the green agenda have well and truly migrated from a nice to have to a need to have for businesses.

On the other hand, given the potentially significant future cost increases and price volatility for both carbon and energy, what is somewhat surprising in our data is the low priority placed on compliance and strategic risk mitigation. Customer pressure also appears to play only a minor role in the contemporary green engagement process.

Environmental initiatives transitioning from tactical projects to strategic plans

Our analysis groups sustainability and environmental activities into two main categories: immediate tactical actions based on efficiency and waste and water reduction, and longer term strategic actions focused on emerging themes relating to systematic sustainability reporting, alternative energy and GHG footprint reduction, and carbon trading. We note significant variations between verticals (see Table 1), including the following:

• Statically low responses from automotive and A&D for carbon footprinting and sustainability reporting
• High response rates in waste reduction for industrial manufacturing, chemical, and life sciences

Notable patterns in the data set include the following:

• A focus on carbon trading from the energy-intensive oil and gas and energy verticals
• A focus on both alternative energy sources and carbon footprint reduction in retail
• A general lack of tactical or strategic actions in wholesale distribution

We also asked all respondents to prioritize environmental sustainable actions now and two years out. Responses again indicate that at the moment the dominant priorities are tactical actions focused on delivering immediate reductions in energy consumption and waste (see Figure 2).

Strategic actions around alternative energy sources and GHG emission reduction were less frequently noted. Looking forward, the trend is significantly reversed, with strategic actions, and GHG management in particular, predicted to be the single most frequently identified factor. This pattern is consistent both with the trends toward binding legislation in the marketplace and widespread growth in the carbon management services and software markets.

Who’s actually collecting data?

One the largest surprises from our survey is the relatively small number of organizations that are currently tracking and reporting GHG data (see Figure 3). Only 54% of respondents are tracking GHG emission data, and significantly fewer (34%) publicly report the information.

Despite the specific reporting protocol of GHG emission scopes, less than 10% of respondents found tracking of any scopes a straightforward exercise, with the majority experiencing some degree of difficulty in reporting. Scope 3 emissions are significantly less widely tracked than Scopes 1 and 2.

Why is GHG data being collected?

When asked why GHG data is being collected, companies again identify competitive advantage as a significant factor, emphasizing the strong marketing and messaging associated with the green agenda (see Figure 4).

Among other key findings, reporting and business improvement feature significantly, suggesting that corporations understand the connection between emission management and energy usage. The importance of state-level compliance also suggests that state- and region-based reporting and emission reduction programs have been an effective testing ground for future national reporting programs. According to our findings, the environmental health and safety (EH&S) office, shareholders, and non-governmental organizations (NGOs) had relatively limited significance.

Obstacles to implementing GHG emission management plans

There remains some resistance to the development of GHG emission management programs. Almost half of the companies surveyed have not yet commenced systematic tracking of emissions. Reasons given for not yet pursuing GHG emission management are widespread, with no single significant response category. They include lack of IT systems, lack of government incentives to offset costs, lack of legislative guidance, customer resistance to increased prices, challenges of collecting supplier-related data, and a lack of executive commitment (see Figure 5).

Envisioning a carbon-focused sustainability ecosystem

Political, environmental, economic, energy security, and GHG emission-related factors have converged over the past few years, accelerating during the meltdown of 2008–2009 to force a fundamental reorientation of policy directions relating to energy and emissions. If you are waiting for a recovery, you may be in for a long wait. We anticipate an economic transformation and a new economic environment—one with the strategic priorities around energy and emissions rising significantly, and with carbon as a fully internalized cost of doing business.

It is a common misconception that cap-and-trade and mandatory emission reporting will be applied across the entire economy. In reality, the future U.S. mandatory reporting and cap-and-trade program is shaping up in a fashion similar to the existing European emission trading scheme (ETS) system. In this system, only intensive Scope 1 GHG emitters will be required to trade and surrender emission allocations. In turn, the cost of carbon transactions will likely be passed through to the rest of the economy via price signals.

In other words, for most of the economy and consumers, energy, goods, and raw materials using energy or including hydrocarbon feedstocks are going to cost more—essentially an informal market-based carbon surcharge. For a future cost of carbon ranging from $10 to $50 per metric ton, simulations for coal and natural gas in power generation applications demonstrate that gross costs could increase by 1–5 c/kWh and 0.5–3.0 c/kWh, respectively (see Figure 6). Current energy costs of coal and gas are around 5.0 and 4.5 c/kWh, respectively. A future carbon cost of $50 per ton would result in an effective doubling of energy costs when the cost of emissions is incorporated. At the more commonly modeled carbon price of $15/ton, net energy cost increases would be to the order of 20%.

GHG emissions and energy in general are going to cost more. Compliance, mandatory reporting, and cap and trade are only part of a suite of business priorities that should be kept in focus when considering how companies engage with carbon management and environmental business intelligence more widely.

In previous sustainable management ecosystem models, we identified two additional key business priorities, corporate communications and operational efficiency, that link closely to GHG reporting and management (see Figure 7).

The merit in focusing on business priorities is the connection to business strategy, their ability to be monetized, and the link to both internal and external communities of responsibility and interest. Such an approach is also a powerful differentiator of verticals based on their performance, risk, and compliance priorities (see Table 1). Even if an industry is unlikely to be directly engaged in cap and trade, it undoubtedly should engage with a carbon measurement and management strategy as part of the development of future low-carbon growth strategies. It will do so to drive energy efficiency (and therefore cost) and for brand and both internal and external reputational factors.

Guidelines for a low-carbon growth strategy

Disruptions to business practices are increasingly the norm as IT, innovation, and R&D provoke new ideas. Few new paradigms have the potential transformational impact of global carbon management and the internalization of carbon within business. In addition to the perspective of potential cost, engagement with the new low-carbon agenda has vast new business opportunities. The arrival of the new age of carbon is delivering exciting and compelling new business propositions and a focus for innovation in clean tech, IT, and process engineering. Automation technology, energy efficiency, product redesign, recycling, clean technology generally, and carbon capture and storage (CCS) specifically are just a few examples.

So what should you be doing? We offer suggestions for building a low-carbon growth strategy below.

Get over it

Early action has been demonstrated to be the most effective decision in terms of both cost and overall emission reduction. It is also proven to deliver enhanced brand and shareholder value. The barriers to implementing GHG emission management strategies identified in Figure 5 require careful reevaluation and testing given the rapidly changing landscape. The carbon management software and service marketplace is exploding, legislative guidance and government incentives exist, and most executives understand the sustainability imperative.

While there may be some customer resistance to higher prices, the delivered cost reductions associated with energy and resource minimization programs should offset investment costs. Delaying action may result in damage to reputations and will ultimately be more expensive.

Link energy and emission strategies

A single focus on emission tracking and reporting is a poor proxy for using the new economic environment as a basis for continuous improvement. Emissions are a post-facto outcome of energy usage.

The more logical approach is to link energy and emission policies in a dynamic and interconnected fashion. We have previously talked of understanding the “metabolism” of an organization or supply chain. Basically, organizations inhale energy and raw or processed material inputs and they exhale emissions and products. The metabolic efficiency of manufacturing rather than the mere tracking of absolute emissions will come to define best practices in operational excellence. Ratios of emissions to energy usage (both green and conventional in origin) and further indexes of both to revenues more clearly communicate the actual fashion in which an organization effectively uses energy and manages emission levels.

Develop a portfolio approach

There is no silver bullet for emission reduction or energy efficiency. Leading companies like Coca-Cola, Procter & Gamble, Dell, and Dow Chemical are adopting approaches that integrate a range of actions. These actions should not be considered or incorporated in isolation. Instead, take a level approach to the cost and benefit of actions and quantitative ROI, economic and environmental.

We anticipate an economic transformation and a new economic environment—one with the strategic priorities around energy and emissions rising significantly, and with carbon as a fully internalized cost of doing business.

The development of cost abatement curves is one of the most useful tools in this approach. These can be constructed for energy and emissions.

They involve modeling both the cost and potential benefit of actions proposed to reduce energy usage, emission, or both. Financially modeling the costs, return periods, and implications of actions allow the clear identification of economically sound actions for a given discount rate and investment time horizon. It additionally allows more realistic forecasting of just what levels of energy use or emission reductions could be achieved. The approach has gained traction at the macroeconomic level, but it is rarely pursued as a key tool for corporate-based emission reduction programs.

Consider new revenue associated with carbon and the new economy

There are vast opportunities in direct engagement with the new economy. A few examples of the product and service transformations include the following:

• IBM’s smarter planet and its $1B annual investment in green initiatives
• GE’s ecoimagination and its green revenue stream topping $17B in the past year
• Dow Chemical’s spinout Dow Solar company and associated Solar PV roof tiles
• Dow Corning’s new commitments to move to a product portfolio comprising up to 50% of sustainable products

The Stern Review on the Economics of Climate Change, from the UK’s Office of Climate Change, estimates that the total value of this new market could easily reach $500B annually by 2050. Funding around economic recovery packages in the United States and elsewhere has been forecast to shorten this time base to 2020. Beyond the development of new products, it is crucial to recognize the significant additional opportunities that are now available. Tax incentives for renewable energy development projects are currently running at 30%, sales of green energy back to power utilities are commanding a premium courtesy of state and federal green power obligations, and carbon credit generation and sales (forecast to exceed a total value of more than $1 trillion by 2020) are all useful additional revenue streams that should be explored and potentially exploited.

Recognize compound risk factors and associated business priorities

Cap-and-trade, mandatory compliance, and other regulatory risks are likely to affect only a small portion of the marketplace. However, there are various other risks associated with carbon management that should be identified and tracked.

These include physical risks associated with the supply chain (e.g., impact of extreme weather events, changing temperature and rainfall patterns, sea level rise, security of supply and disease) and financial and other risks (e.g., carbon pricing, changing consumer demand, resource cost increases, reputation, and stakeholder).

That’s one small footprint for mankind…

The GHG Protocol for operational carbon is the currently accepted expectation for organizational reporting, requiring the reporting of emission Scopes 1 and 2. PAS2050 and other ISO-based protocols are emerging for embedded carbon-based product footprinting. Scope 3 and supply chain-wide carbon emissions are under discussion for protocol development at the World Resources Institute (WRI), the Carbon Disclosure Project (CDP), and elsewhere. The message here is that an expectation of transparency is part of the new economy. Businesses will be expected to report not just one but many footprints: operational carbon, supply chain carbon, product-based carbon, water, waste, and recycled content to start. The sooner companies start the learning curve required to deliver such footprints, the less total pain there will be and the greater the reputational enhancement will follow.

Modeling and simulation versus measurement

The current emphasis on trying to report specifically measured GHG emission values eventually must be superseded by a statistically based series of modeling and simulation exercises. The caveat here is that the current reporting approaches will still be required to pass robust verification standards in the compliance-focused areas.

This new approach requires an integrated understanding of energy usage and emission generation throughout the manufacturing process and levels of information gathering and automation to deliver test data sets. But these steps are a necessary rationalization to ensure accuracy is not overstated, and sufficient resources are channeled into the delivery of energy use and emission reductions rather than simply tracking carbon.

Build internal domain expertise

Buying carbon management guidance or strategy online is challenging because a major element of any program is based on the culture, operations, and processes of each specific company. Owning your own destiny in this new economy in part depends on having sufficient internal knowledge to remain agile and adaptable to a highly dynamic and increasingly contemporary business agenda.

Conclusion

You don’t have to believe in global climate change or its potential environmental impact to recognize that it presents serious risks to global and corporate-level economic development and well being. The transition to a low-carbon economy will bring challenges for competitiveness but also significant opportunities for growth. Carbon management is a core element of preparation for the new economic environment. Ignoring climate change or the carbon agenda will damage economic or business growth. Addressing energy usage and GHG emissions is a pro-growth strategy whose cost is proportional to the timing of actions. The internalization of carbon as a critical factor in economic growth is a unique challenge—and one which we urge all manufacturers to take seriously.

Appendix A: Survey methodology

We collected 313 responses from U.S.-based companies from a mix of IT (26%) and line of business (74%) personnel via a web-based survey on sustainability and carbon management.

Respondents were derived from a wide range of industries:

Discrete

• High tech (29)
• Industrial manufacturing (28)
• Auto/A&D (28)

Process

• Chemical (25)
• Oil and gas (39)
• Energy (32)
• Life sciences (28)
• Consumer packaged goods (26)

Services

• Retail (29)
• Wholesale distribution (28)
• Transportation (21)

Figures 8 and 9 contain additional demographic information.