Friday, 9 January 2009

From Credit Crisis to Carbon Crisis

The original version of this article appeared in the November 2008 (No. 68) issue of The Environmentalist

As governments across the globe find a new role shoring up troubled financial institutions, those of us who advocate bold moves towards a sustainable energy transition have taken notice. The USA and the UK committed more than $700 billion and £400 billion, respectively, to the financial bailout. Consider the benefits if equivalent amounts were committed to securing a lower-carbon future.

When the Invisible Hand Gets it Wrong
There has been a major upheaval in the relationship between government and the private sector. The worldwide financial crisis has been sudden, systemic, and severe. The deep-seated belief that competition and free markets led by Adam Smith’s “invisible hand” will promote society’s interests has been shaken.

What happened? Economists argue that the invisible hand does not do a good job handling externalities – situations where private actors pay the cost and society benefits, or vice versa. In these situations government needs to step in. This was the case during the lending freeze, with banks afraid to lend to one another and the credit market on the brink of collapse. With no other solution in sight, governments stepped in to try and rescue the world’s financial system.

While the financial meltdown has been sobering (or punitive depending on your personal stake), the policy flip side is that we have witnessed how quickly events can catapult governments into concerted and coordinated action.

Past Precedents
The energy sector is no stranger to support from governments. Nuclear energy currently comprises about 17% of the UK’s electricity mix, and serves as an interesting example.

Put plainly, the economics of nuclear power would be questionable without governments’ financial support. In both the US and the UK, governments have artificially limited private companies’ legal liability for nuclear accidents. Despite concerns in some circles about another Three Mile Island or Chernobyl, in the US a nuclear power plant’s annual insurance bill might only run to $400,000. This is because Government shoulders much of the burden for catastrophic accidents.

Similarly, the cost of disposing of waste from the UK’s existing nuclear reactors is likely to cost £74 billion, discounted over a whopping 130 years (that's easily more than half a trillion pounds if you don't discount the cost to future generations). These environmental costs clearly fall outside of the time horizon for private sector investment. As a result, most nuclear power plants would never have been built without governments’ pivotal role taking on future liabilities.

Climate change is another area where governments have a critical role to play. Climate change - a “negative externality” from fossil fuel use - has been partially addressed through emissions-trading schemes that allow CO2 to be priced in a regulated market [see our article “Emissions Trading – Going Global?” in the environmentalist issue 60, 16 June 2008].

However, global emissions continue to rise, evidence that the market price of CO2 is not yet high enough and stable enough to encourage significant private investment in abatement measures. Similarly, renewable energy remains a small percentage of the UK’s and America’s energy mix, even though there are compelling environmental reasons and a strong economic basis to increase its use.

According to the Stern Review, the cost to limit severe temperature increases is estimated at 1% of global GDP. Inaction has far greater costs –Stern estimates damage costs from climate change exceeding $70 trillion over time. At an estimated $3.5 trillion, the cost of the global financial bailout looks like loose change in comparison. But private firms lack the incentive and ability to make the required investments on their own.

Investing in a low-carbon future
What would it look like if we could invest even a fraction of the global bailout amount into rapidly building a low-carbon economy? Here are just a few hypothetical examples of what could be done.

In the USA, about 40 million households rely on electric water heaters. For a $282 billion investment, the US government could replace all of these inefficient electric heaters with solar water heaters at no additional cost to homeowners. This investment would reduce CO2 emissions by 48.7 million tonnes each year. Moreover, each household would save about $220 per year, pumping an additional $9 billion per annum into the economy. These savings would likely increase as the price of electricity rises over time.

In the UK, the government has made a commitment to expand the use of wind power to generate electricity. Installing 33 GW of offshore wind would meet 20% of the country’s electricity needs. This measure would cost about £30 billion – a fraction of the British financial bailout – and reduce the need for a new generation of coal fired power plants. Government funding would mean firms would not need to raise expensive venture capital, and could pass the savings on to utility customers in the form of lower electricity bills. Moreover, with most renewable energy projects employing more people per GW of installed capacity than coal and nuclear power plants, such an initiative would boost jobs growth and provide broader benefits to the UK economy.

For an investment of just over $740 billion (1/5 the cost of the global bailout) the US government could target all families earning less than $35,000 and replace half their old vehicles with plug-in hybrids – for free . This investment would reap huge environmental, economic, and social benefits. Each family would save about $840 annually in petrol costs. Fuel savings from this initiative would total nearly $24 billion each year, and would be recycled into the economy. In addition, it would reduce annual CO2 emissions by over 65 million tonnes. With this level of increased household income and reduced emissions, such a government investment provides a reasonable pay-off, while achieving other sustainability objectives.

Meanwhile, in the developing world, two billion people – roughly 400 million families – cook over primitive wood stoves. For an investment of less than $10 billion (about £6 billion), we could replace every traditional cook stove in the world with efficient and cleaner burning models. This move would reduce labour burdens, improve health, help protect the world’s forests and reduce global CO2 emissions by over half a billion tonnes each year.

For these examples, we assumed that governments would pay the entire cost and give the product – electricity from wind turbines, household solar water heaters, hybrid cars, and cook stoves – away for free. We chose this assumption to show that even such radical measures cost less than the recent financial bailout. In reality, even partial subsidies could drive a massive shift towards a low-energy future.

In today’s challenging economic climate, the private sector has neither the resources nor the appetite to even contemplate this scale of investment. Nevertheless, the public benefits - cost savings, job creation, combating climate change, and reduced dependence on imported fossil fuels - are huge. Because governments enjoy a longer time horizon, they can realise these benefits by acting creatively on a grand scale.

The financial bailout was justified because the threat to private banks put the entire global economy at risk. But we face other threats as well. The social, environmental and economic risks from climate change are vast. The measures we have proposed here are merely illustrative, but they show that we have the means to make fast and meaningful reductions in global greenhouse gas emissions.

What we need now is the will.

Suzy Hodgson, AIEMA, is a principal consultant and Jamal Gore, AIEMA is the managing director at specialist carbon management company, Carbon Clear Limited.

Thursday, 8 January 2009

New Carbon Clear Website Launched

Carbon Clear's new corporate website is now up and running. The site provides increased functionality, much more detail about our carbon offset projects, and a clearer description of Carbon Clear's range of carbon footprint and carbon reduction services to companies.

There are still a few tweaks and additions to come over the next several days - including a Frequently Asked Questions page and a comprehensive glossary for all the "carbon jargon" you're likely to come across. So take a look, and check in again over the next few days as we continue to improve the site. And as always, let us have your comments and suggestions.

Electricity Generation Decreases in China

Last year, I mentioned on this blog that China had finally passed the United States as the largest greenhouse-gas emitting nation. Among the largest emissions sources in China are coal-fired power stations and construction (the joke is that the construction crane is the national bird).

Now the economic downturn is acting as a brake on China's growth. According to the New York Times, Chinese power generation has declined for the first time since 2002.

Researchers estimate this drop in electrical production will result in 1.9 and 2.6 billion tonnes fewer CO2 emission between 2008 and 2012 than under a "business as usual" scenario.

While this is good news for the climate, we shouldn't necessarily celebrate. You can reduce emissions from electricity generation by using fewer electricity-consuming services (where fewer services means more suffering). You can also reduce emissions from electricity generation by using electricity more efficiently (without the need to suffer). Finally, you can reduce emissions from electricity generation by using lower-carbon power sources like wind and solar.

Unfortunately, China's carbon footprint is shrinking due to more suffering -factories are closing and people are losing their jobs. We could see similar reductions through greater investments in renewable energy and energy efficiency - indeed, China hosts more carbon offset projects than any other country.

There are a host of ways to reach a low-carbon future. It would be a shame if it were associated only with job loss and economic hardship.

(Carbon Clear homepage)

Monday, 5 January 2009

Carbon Offsets: A "Last Resort"?

The original version of this article appeared in the September 2008 (No. 64) issue of "The Environmentalist".

The voluntary carbon offset market trebled in size between 2006 and 2007. Sales have been growing steadily throughout 2008, with no end in sight. Climate change is clearly on the global agenda, and more and more companies are buying carbon offsets to help meet their environmental objectives. Nevertheless, many environmentalists appear lukewarm – at best – on their use. In this article, we explore these concerns and consider the role of carbon offsets in corporate footprint reduction plans.

What Are Carbon Offsets?
Increasing energy efficiency and installing rooftop solar panels are two of the many ways that organisations and households can reduce their carbon footprint. When you spend time and money on these measures at your corporate HQ in say, Liverpool, it’s considered an internal emissions reduction. Paying to enact similar measures somewhere like Lagos makes it an external emissions reduction – a carbon offset. It’s important to bear in mind that emissions reductions help the climate regardless of location. Whether in Liverpool or Lagos, it’s the size of the CO2 reduction that matters to the global climate, not the location.

So why do companies offset? The key idea is simple: some footprint reduction measures cost more than others. All else being equal, it makes sense to focus first on the cheapest and fastest ways to cut carbon, wherever they occur. When Carbon Clear works with companies to cut their carbon footprint, we help them implement a wide array of these internal reductions.

However, the lowest-hanging fruit may be in someone else’s factory or home. The Kyoto Protocol established the idea of carbon offsetting to help maximise greenhouse gas savings at the lowest cost to the economy. Carbon offsets help organisations with emissions reduction targets to meet part of their obligation by funding emissions reductions in developing countries.

Are Offsets Effective?
Stories like the Financial Times’ May 2007 exposé on a handful of “carbon cowboys” have contributed to the impression of carbon offsets as a potentially ineffective footprint reduction tool.

The reality, of course, is that there are both good and bad carbon offsets. An effective carbon credit can generally pass four key tests:
  • The carbon credit comes from a project with real and measurable emissions reductions;
  • emissions reductions can be measured against a credible baseline by independent third party auditors;
  • the project that generated the carbon credit would not have happened anyway; and
  • the emissions reductions are permanent –they won’t be reversed at some point in the foreseeable future.

The most widely respected carbon credit standards include the Clean Development Mechanism (CDM), the Gold Standard, and the Voluntary Carbon Standard (VCS). Each evaluates projects against these criteria, and is administered by an independent not-for-profit secretariat to ensure impartiality. Their ultimate aim is to ensure that each carbon credit represents one less tonne of CO2 in the atmosphere.

Many people worry about carbon offsets with tree planting schemes. In reality, credits from planting and protecting trees accounted for only 15% of voluntary offsets sales last year, with most of those offset sales in the United States.

Meanwhile, carbon offset providers have been working to improve the quality of carbon offsets. Carbon Clear earlier this year helped found the International Carbon Reduction and Offsetting Alliance (ICROA) to encourage best practice in the voluntary carbon reduction industry. ICROA specifies the standards that carbon credits must meet, requires members to offer carbon offsets as part of an integrated “reduce and offset” approach, and obliges members to submit to regular audits to demonstrate compliance with the ICROA Code of Practice. Organisations that choose to reduce internal emissions and offset with ICROA members include Eurostar, Land Rover, Sky, and Ford.

When to Offset
Even where offsets are recognised as an effective way to fight climate change, they are labelled a “last resort”. There seem to be two reasons for this approach. First is the concern that offsets are somehow less effective than internal reductions when it comes to fighting climate change. As Chris Shearlock, environment manager for the Co-operative Group noted recently, “When we build a wind farm in England we’re applauded, but when we build one in India we’re criticised.” But as we have already seen, a tonne of CO2 reduction has the same climate change benefit wherever it occurs, and stringent standards can ensure the quality of purchased reductions.

The second reason offsets tend to be considered a “last resort” is the belief that internal measures somehow demonstrate a greater commitment to fighting climate change. In the 6 May 2008 “EMA in Practice” article of The Environmentalist, the question was raised “whether a company should be purchasing offsets or actually working to reduce emissions of their own operations.” Implicit in this line of argument is an assumption that offsetting comes at the expense of any and all internal emissions reductions. Allowing companies to offset, the thinking goes, means they won’t take action at home.

But is this true? Will a company that can reduce emissions and cut costs by increasing efficiency really forego that option in order to purchase carbon offsets? Our experience is that companies would rather cut their energy bill than incur an extra expense. What is more, having to pay for offsets draws the attention of the finance director and operations manager. Announcing a goal to become “carbon-neutral” and understanding the cost of carbon provides an even stronger business incentive to achieve cost-effective ways internal reductions.

Carbon Clear's view is that the either-or approach to emissions reductions is a red herring that makes it harder for corporate teams to make informed decisions and raises more questions than it answers.

One of these questions is deceptively simple: how much of a reduction is enough? If a company wants to become carbon-neutral, what level of internal reduction is required before they can offset with a clear conscience? Is this level of internal reductions the same for an office-based consultancy, an investment bank, and a heavy manufacturing plant? And with only a decade or two left to achieve major global reductions, how long can companies take to achieve their internal reductions before they can fund additional reductions beyond their boundaries?

The second question is also difficult to answer: how much should it cost?

HSBC’s corporate greening programme includes installation of solar panels on the roofs of their Canary Wharf headquarters and their DirectLine building in Leeds. We calculate that HSBC (or if HSBC is leasing, then whomever owns the panels) is paying more than £100 (€125) per tonne to reduce emissions with PV panels, even using conservative assumptions and taking into account the savings on their electricity bill.

By comparison, economist Nicholas Stern places the 2007 social cost of climate change at around €40 per tonne of CO2 and HSBC could buy high quality carbon offsets for around €20 per tonne. In other words, HSBC could fight climate change six times more cost-effectively by sourcing carbon credits beyond their corporate boundary.

Carbon Clear recommends that companies seek the most cost-effective and credible reductions, wherever they may occur. In many cases, the best reductions will come from internal operational improvements. In other cases, they will come from changes in the corporate supply chain – either by switching suppliers or encouraging existing suppliers to reduce their own carbon footprints. And in many other cases the most cost-effective will come from high quality offsets that achieve external reductions beyond the corporate boundary.

There are other reasons companies may choose to focus on either internal emissions or offsets. Both types of emission reductions bring a wealth of co-benefits beyond fighting climate change. Investing in sustainability initiatives close to the corporate headquarters can help businesses reach out to employees, customers, and other stakeholders. The stakeholder engagement benefits of these high-visibility measures might justify paying a premium for those reductions.

Similarly, investing in emission reduction projects overseas can provide much-needed livelihoods benefits to poor communities suffering energy poverty. Providing clean energy technologies in developing countries can simultaneously contribute to a company’s corporate social responsibility objectives and help local people make the transition to a lower-carbon future.

In July, Sir Nicholas Stern warned that the cost of failing to curb climate change had doubled (Environmentalist News 21 July 2008). Our view is that “last resort” language only serves to limit the range of tools we can bring to bear to tackle this global problem. A multi-pronged approach that includes both internal reductions and carbon offsets can provide the flexibility needed to achieve large, global emissions reductions.

Suzy Hodgson, AIEMA, is a principal consultant and Jamal Gore, AIEMA is the managing director at specialist carbon management company, Carbon Clear Limited.

Friday, 2 January 2009

Happy New Year from Carbon Clear

Happy New Year from the Carbon Clear team. In 2008 we helped more companies than ever control their carbon impact. We're looking forward to a great 2009, and hope you are, too.

(Carbon Clear homepage)

Dell, Carbon Footprints, and Boundaries

I saw this one coming.

Dell Computers has been criticised in The Wall Street Journal and other newspapers over its recent "carbon neutral" claims.

Dell made headlines first by setting a goal to become "carbon neutral" and then again by announcing that it reached its target ahead of schedule. However, critics argue that the company's reported footprint only covers a fraction of the emissions associated with their computers.

Dell's carbon footprint includes emissions from its on-site boilers, company cars, building electricity use, and staff business travel. These categories comply with the requirements of ISO 14064, which states that organisations must include emissions from on-site energy generation, own vehicles and purchased electricity. 14064 states that organisations may choose to include third-party emissions from suppliers, customers and other stakeholders. Dell chose not to include these emissions sources, and this decision has landed them in hot water.

As we have noted previously, setting a narrow boundary may result in a smaller reported carbon footprint (and a smaller carbon offset bill), but can represent a false saving. In this case, Dell excluded all of the outsourced emissions from the suppliers who manufacture their computer parts, as well as the energy emissions from consumers using the computers. While these emissions are not Dell's direct responsibility, the Wall Street Journal's criticism stems from the fact that at least some of them are material to the company's business success. What's more, these emissions are so large that excluding them appears to have saved the company money on its offsetting bill. Unfortunately, this decision has had a reputational cost.

As we predicted way back in December 2007: "Much of the pressure to measure carbon footprints comes from investors, customers, and regulators, and they expect this information to be made publicly available. An unreasonably narrow boundary may attract criticism from outside reviewers concerned about potential corporate 'greenwash'."

One point the WSJ gets wrong is their claim that "there is no universally accepted standard for what a footprint should include, and so every company calculates its differently". In fact, the International Standards Organization (ISO) issued ISO 14064-1 in Spring 2006, and companies around the world are using it and the related GHG Protocol to calculate emissions consistently.

Carbon Clear uses these standards to calculate corporate carbon footprints. We employ a number of specialised tools to help companies to determine which third-party emissions are material - and thus should be included in their own footprint, and which they can be relatively comfortable placing outside their boundaries. As was the case with Dell, we are good at anticipating and addressing the problems that stem from incomplete carbon management planning and helping to protect our clients from reputational risk. Our aim, as ever, is to help companies measure and reduce their carbon footprints in a robust and credible manner.