From regulatory mandates to congressional actions to increasing pressures from shareholder activists, companies have more and more reasons for developing an effective way to manage carbon emissions. The question is just how to go about doing that.
Although some pioneers in sustainability have been tracking their carbon output for a while, “three years is the longest I know that anybody has been at it very seriously,” says Pat Concessi, a climate change leader at Deloitte Canada. Since most businesses need at least three years to get a firm grip on their carbon footprint, she says, most have a long way to go.
Concessi
That’s not surprising. Climate change and regulation of carbon emissions have historically been treated in an ad hoc way, Concessi says, so corporations have tended to manage them via working groups rather than through people who have that responsibility defined in their job description.
Those dedicated people now must be in place “quite soon,” Concessi says—as in, ideally within six months.
Blame the Environmental Protection Agency for the urgency. It issued a proposed rule in March that would require businesses and utilities to file reports if their greenhouse gas emissions exceed 25,000 metric tons annually. As Compliance Week has previously reported, that threshold would exclude most small companies, but still sweep up an estimated 13,000 facilities—oil refineries, chemical plants, power plants, heavy manufacturers, gas suppliers—that generate about 90 percent of all U.S. carbon emissions.
Hespenheide
Those actions could be just the beginning. It’s not a far-fetched idea for the United States to adopt a similar policy to Britain’s, which establishes regulations for thousands of businesses well beyond large emitters, says Eric Hespenheide, global leader of the corporate sustainability services group at Deloitte. The chance of such drastic regulation happening in the United States may be small, but “one might have argued a few years ago that it would never happen in the U.K.,” he says.
Actions are also unfolding on the legislative front. Most recently, in May the House Energy and Commerce Committee approved the American Clean Energy and Security Act (more commonly known as the Waxman-Markey bill). One aim of the ambitious measure, which is expected to reach the House floor this month, is to limit the total volume of carbon emissions that U.S. companies would be allowed to emit per year. In addition, the federal government would require companies to obtain pollution permits—whether that means “pay for” or “get for free” is still uncertain—which they would then be allowed to buy, sell, and trade.
DELOITTE DEBATES
Tackle Carbon Now—or Wait and See? Deloitte debates this topic below:
Point strong >
Counterpoint
We’ll worry about it when we have to. And right now, we don’t have to.
Strategic decisions about product development, manufacturing facilities, and distribution centers can take years to implement. Without a carbon strategy, a choice that looks smart today could tie your hands over the long term.
Carbon lifecycle regulations aren’t going to happen anytime soon. They look too much like taxes, which could send the economy into a tailspin. There’s no way governments are going to take that risk.
It depends on what you mean by “soon.” Forward-thinking global companies are already positioning themselves for reduced carbon footprints, even as they attempt to shape public policy to their advantage. It makes sense to get ahead on carbon emissions. That starts with benchmarking.
It costs real money to document our carbon baseline. Reporting performance isn’t cheap either. It’s not worth the trouble.
You’re already investing to improve energy efficiency. The incremental cost of creating a carbon strategy is trivial in comparison to its value potential. Why not do things right?
If we want to have a say about future regulatory policy, we need a seat at the table. That means taking carbon seriously.
That might be true for some companies, but most have zero chance of influencing policy. So why bother?
Manufacturing and supply chain decisions used to be simple. Cost (incentives, labor, taxation) and demand were all that mattered. But lifecycle carbon emission standards are coming. Any plan for the future has to factor that in.
Getting ready for something that may never happen doesn’t seem like a smart investment of time.
It’s the right thing to do. For our own financial benefit, as well as for the environment and the health of local communities. There’s more than one bottom line.
Doing the right thing doesn’t matter if my company doesn’t survive.
Source
Deloitte.
The Waxman-Markey bill could have a profound impact on sustainability, Concessi says. By pushing companies beyond mere reporting of greenhouse gas emissions to paying for them, the bill puts a de facto cost on compliance. Companies would then want to lower their cost of compliance, by curbing their carbon emissions.
Aside from regulatory and legislative action, activist shareholders will probably continue to hector companies with climate change–related shareholder resolutions. That could lead to reputation risks companies would rather avoid. “If you’re not disclosing and you’re not talking about this in some meaningful and informative way, companies will find themselves on the outside as it relates to some of these carbon questions,” Hespenheide says.
Cost-Cutting Measures
To better manage the cost of “carbon compliance,” a company should—as with any compliance challenge—first assess its individual risk profile. Those companies willing to assume more risk may want to spend less on the upfront costs on carbon compliance, with the understanding that “if things don’t work well, the costs could be substantially higher,” Concessi says. Risk-averse companies might pay more for their carbon solutions, for the comfort of knowing they have less uncertainty about the problem, she adds.
Yes, at this moment, the state of carbon regulation is still unclear. In that case, Concessi says, companies would be wise to play out multiple scenarios and see how possible regulations or carbon-containment solutions might work, and how potential costs could be reduced.
Another important cost-analysis measure: determining how much of the “cost of carbon” you can pass along to customers. “That, frankly, makes a really big difference to the company’s retained exposure,” Concessi says. The aviation sector, for example, may be able to pass on the cost of carbon to travelers. “So that’s something that companies definitely need to look at as they put their strategy together.”
Companies should also consider developing a diversified portfolio of carbon-compliant instruments, rather than simply finding the cheapest. That hedges their uncertainty around what offsets the government will ultimately expect, Concessi says, and it lets companies get acquainted with tools in the sustainability market and “learn about the characteristics of these different offset markets.”
As with any process, Hespenheide says, it’s easier said than done: “The sooner a company can get in there and start to understand what sort of exposures they have to greenhouse gas emissions, the better they can then effectively develop some scenarios that address that.”
He continues: “I think it’s hard today to be sitting on a board of a company and not have carbon and the implications of climate change as part of your topic.” Still, he admits, “there is still some evolution to go” before companies fully understand how to account for climate change in financial statements and related documents.
Concessi says companies are paying much more attention to climate change these days. While building a carbon footprint is not high on all companies’ lists yet, “it’s creeping up very quickly,” she says.
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