WV Executive

The specter of global climate change looms large on today’s business landscape. From the cover of Business Week to the pages of daily newspapers from around the world, significant analysis has been devoted to the plight of businesses and other entities in confronting the financial risks and uncertainty involved with greenhouse gas (GHG) emissions management.

At present, there are six GHGs recognized by international agreements—carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulfur hexafluoride. According to the US Department of Energy (DOE) Energy Information Administration, nearly 85 percent of man-made GHG emissions result from the burning of fossil fuels. Methane from landfills, coal mines, oil and gas operations and agriculture provides an additional 10 percent of GHG emissions. The remainder of GHG emissions comes from synthetic gases, including those produced by certain industrial processes.

Laws and regulations at the international, national and sub-national levels have sought to tame GHG emissions. These approaches, however, have differed, with some focusing on power plant emissions and carbon dioxide, for instance, while others take into account the impacts of various industrial processes. Additionally, marketplace pressures have begun to affect organizational decision making. The disparate efforts regarding GHGs, some complementary, others contradictory, leave enterprises unequipped with a common language or reference points which could assist them in discerning opportunities and actions to manage risk, improve financial performance and enhance environmental sustainability.

Requirements and Drivers

Weather and climatology may impact the scientific study of climate change, but the requirements and drivers for corporate GHG emissions management often result from a complex marriage of various marketplace pressures and public policy directives. Notably, key requirements and drivers include:

Corporate shareholder, director and executive management metrics for GHG emissions management

Financial and insurance sector mandates including those measures derived from GHG emissions reduction goals of commercial banks and insurers

Laws and regulations, including government-mandated GHG emissions limits and shareholder risk disclosure requirements drawn from the Sarbanes-Oxley Act and other similar enactments

Voluntary pacts and market mechanisms including the Chicago Climate Exchange

Global standards, including those documented in the World Resources Institute and World Business Council for Sustainable Development Greenhouse Gas Protocol

These requirements and drivers converge, forming a patchwork catalyst for corporate GHG emissions management activities. Some of these requirements and drivers merit additional detailing, starting with the legal and regulatory components.

In addition to the United Nations—backed Kyoto Protocol, set for adoption in 2008 by many nations (other than the United States and Australia), there are numerous other legal and regulation-based mandatory and voluntary drivers for GHG emissions management activities. For instance, in the European Union (EU), significant action by member states has already taken place and will be expanding in the coming years. For instance, the European Commission has moved forward to launch a regulatory system for GHG emissions with mandatory application to EU member states and select industrial sectors, which leverages earlier trading programs in the United Kingdom and Denmark.

Similarly, in the United States, there have been overtures from national policymakers and business leaders that voluntary, market-based solutions offer a realistic answer to reduce GHG emissions. For instance, in 2002, over 225 companies filed voluntary GHG emissions management reports through the USDOE Voluntary Report of Greenhouse Gases Program, which is better known as the “1605(b) Program,” its citation in the Energy Policy Act of 1992. Most major energy companies and many industrial companies are annual filers under this program. Among the notable participants are AES Corporation, American Electric Power, ChevronTexaco, Cinergy, CONSOL Energy, Consolidated Edison, Dominion, Dow Chemical, Duke Energy, Entergy, FPL Group, NiSource, PG&E Corporation, Southern Company, Tennessee Valley Authority and Xcel Energy, to name just a few.

Further, over half of the individual states within the US have developed or are developing strategies to reduce GHG emissions. For instance, Massachusetts, New Hampshire and Oregon have all mandated certain GHG emissions reductions for energy companies. Moreover, a group of nine northeastern state governors have formed the Regional Greenhouse Gas Initiative (RGGI) and committed to developing a regional cap-and-trade program for carbon emissions.

From the marketplace side, GHG emissions management activities advanced by a combination of corporate shareholder, corporate director and executive management directives are generating headlines in business publications, as are decisions by financial institutions and insurance firms to require GHG emissions disclosures, including the Carbon Disclosure Project powered by re-insurance giant, Swiss Re. Ultimately, concerns regarding the impacts of climate change on investments and the law-and-regulation drivers may be the leading agents of change behind these private-sector catalysts. However, due to the multitude of players and reference points for action, many attempts to advance GHG emissions management activities have been slow to develop for entities or proven more costly in application than necessary.

Information Overload

Given the complexities inherent in the requirements and drivers, it should be little surprise that a dialogue regarding corporate GHG emissions management would involve a fairly significant number of players—including internal players, external players and catalysts for action—who have their own reference points for framing the dialogue.

Among the internal players, or the classic “insiders” would be shareholders, directors, executive managers, environmental managers, financial managers, risk managers, in-house attorneys, facility engineers and strategic planners, among others. External players, i.e. those parties providing services as outside advisors or service providers, would include project developers, commodity traders, emissions brokers, consultants, verifiers and outside counsel attorneys, among others. In addition, these players also must communicate with the catalysts for action—governments and exchanges—in order to advance GHG emissions management activities.

These reference points for these parties come in the form of information and data related to the GHG emissions management and trading markets. Information and data include:

* Business operations information
* Business financial information
* Emissions information
* Emissions reduction investment information
* Emissions reduction project economic and financial data
* Emissions management risk analysis data
* Emissions and emissions reduction verification information
* Emissions commodity price projections
* Emissions reduction legal requirements information
* Voluntary emissions reduction goal information
* Contractual investment documentation
* Trading activity documentation

Regulatory filing documentation

Unfortunately, given the multitude of parties and their reference points, the present GHG emissions management environment is being conducted in a time when inaccessible, non-standard spreadsheets and reports are the modus operandi of corporations and their stakeholders.

The Need for a Common Language

Thus, the emerging arena of GHG emissions management poses not only great strategic challenges to many enterprises, including energy companies, utilities, electric cooperatives, oil and gas companies, chemical companies and manufacturers, among others, but also communication problems for the stakeholders and individuals tasked with managing and assisting in these emissions management activities.

Presently, most enterprises are using a combination of ill-equipped, non-standard spreadsheets and often-lost, or misplaced, documents to perform their internal tracking of GHG emissions management activities. In addition to making planning and action difficult for the stakeholders, these documents produce transparency problems that propel verification issues and drive up management costs.

Clearly, decisions regarding data collection methods are difficult enough given the shear volume of information that must be gathered, catalogued and tracked. However, the formulation of strategies to optimize an enterprise’s portfolio will likely prove to be especially arduous. When the gamut of project-specific investment or trading opportunities are analyzed with reference to the various regulatory and emissions trading mechanisms being implemented around the world, clear lines of connectivity may be difficult to discern.

For small companies, multinational enterprises and public entities, alike, these regulatory structures, investment possibilities and trading options raise serious questions. These questions presently can be answered only through time-consuming data management and running countless “what-if” scenarios to ensure appropriate site-specific strategies, followed by the synthesizing of these approaches into an effective, coherent strategy sensitive to the demands of each regulatory regime. This process requires significant financial investments by entities in numerous knowledgeable analysts and/or computing applications that are insufficiently equipped with the tools to execute on the multi-dimensional task at hand.

Nearly all enterprises would agree that their current methods involve sub-optimal tools and information to meet the demands of this emerging market and integrate the reference points into a common language. As regulations, voluntary measures, emerging energy technologies and trading mechanisms appear with increased speed, the time for the development of an integrated approach, a so-called “common language” for the reference points has arrived.

A Solution for Businesses

To effectively manage this risk, businesses must utilize a common framework and language for navigating the increasingly complex area of GHG emissions management through effective cataloging and strategic planning. More specifically, businesses must focus upon an integrated approach—a common language—that features:

* Entity GHG emissions management strategic planning
* GHG management goal achievement
* Strategic portfolio analysis
* Project-level economic analysis
* Entity and project-level risk analysis
* Emissions inventory cataloging
* Emissions management project cataloging

Verification tracking

This analysis must be driven by databases, market price data, regulatory information and entity-supplied environmental performance data, to ensure that an enterprise is presented with the best options for GHG emissions and climate change risk management investments or trading scenarios.

From the use of a common language platform, clear strengths, benefits and bottom line results can emerge for corporations and other entities. Strengths that would be present as a result of the utilization of a common language for GHG emissions management include the linkage of standard reference points into a consistent, entity-wide process. Benefits that emerge include alignment of internal and external player communication channels and knowledge, as well as development of transparent accounting and management processes leading to simplified verification and cost-effective GHG emissions management activities. Ultimately, the bottom line results for corporations and other entities engaged in GHG emissions management with a common language supporting their efforts are minimized financial risk, reduced environmental risk, optimized GHG emissions management portfolios and most significantly, environmental leadership.

Conclusions

Presently, GHG emissions management and trading activities are constrained by an overflow of reference points and a lack of common language for the involved parties, which are critical to the GHG emissions management arena. However, opportunities for aligning these reference points into a common language abound.

Appropriately structured integrated strategies can align corporate goals with emissions data, pricing information, project analysis and other variables to create a common language for companies and their partners and service providers to facilitate cost-effective GHG management activities. The more organizations can do to understand their GHG needs and goals and to speak the same language among internal and external financial, legal and technical audiences, the more likely they are to meet these goals. Meeting these goals can turn climate change concerns from an uncertain risk to a manageable outcome. At the end of the day, that is what most businesses need.