The Business of Climate Change : Corporate Responses to Kyoto 9781909493483, 9781874719571

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Tomorrow’s History: Selected Writings of Simon Zadek 1993–2003 Simon Zadek ISBN 1 874719 86 1 (hardback) ISBN 1 874719 85 3 (paperback) Teaching Business Sustainability: From Theory to Practice Edited by Chris Galea ISBN 1 874719 54 3 (hardback) Corporate Social Opportunity! Seven Steps to Make Corporate Social Responsibility Work for your Business David Grayson and Adrian Hodges ISBN 1 874719 84 5 (hardback) ISBN 1 874719 83 7 (paperback) Learning to Talk: Corporate Citizenship and the Development of the UN Global Compact Edited by Malcolm McIntosh, Sandra Waddock and Georg Kell; with a Foreword by Kofi Annan ISBN 1 874719 75 6 (hardback)

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IN RECENT YEARS climate change has become a leading issue on both the business and political agenda. With the Kyoto Protocol to the UN Framework Convention on Climate Change now ratified, business is bracing itself for the reality of serious regulation on the reduction of greenhouse gas emissions. The Business of Climate Change presents a state-of-the-art analysis of corporate responses to the climate change issue. The book describes and assesses a number of recent business approaches that will help to identify effective strategies and promote the dissemination of proactive corporate practices on climate change worldwide.By identifying the factors that cause companies to pursue low-carbon strategies and support the Kyoto process, the book will also be helpful to governments in formulating policy. Business and industry have a crucial role to play in the implementation of the Kyoto Protocol. They are major emitters of greenhouse gases, and pressure is mounting for them to engage in a range of mitigation strategies, from emission inventorying and trading schemes to investments in low-carbon technologies. Behind the scenes a number of companies have started to develop strategies to curtail greenhouse gas emissions. These strategies can be very diverse in nature. At a political level, companies try to influence policy implementation and, more specifically, to test ideas in anticipation of possible regulation on the climate change issue. At a more practical level, there are a burgeoning number of initiatives to conserve energy use in production, transportation and buildings, to develop renewable sources of energy, to measure carbon emissions and sequestration at a detailed level, and to develop various markets for trading carbon credits among companies and countries.Some technologies,such as hybrid cars and compact fluorescent lighting, are now market realities. Common to all of these initiatives is that they operate in an environment of high complexity and uncertainty.The political implementation of the Kyoto Protocol remains uncertain and many details remain unspecified. Economic instruments such as emissions trading are favoured, but their mechanisms are still hotly debated and the future price of credits is unknown. New markets for low-emission products and technologies are beginning to appear, but there are currently few regulatory drivers to assist their development. The impact of potential regulation on business will vary tremendously between companies and sectors.The fossil fuel and energy sectors fear the economics of action, while sectors such as insurance and agriculture fear the economics of inaction. Combined with the remaining uncertainties about what form climate change may take, corporate responses to reduce risks have to differentiate between sectors and have to be flexible. For individual companies, these big uncertainties demand new thinking and contingency planning. The Business of Climate Change is split into four sections:‘Introduction and overview’ presents a broad perspective on business and climate policies.‘Policy instruments’ outlines early experiences with different types of policy instruments to curb greenhouse gas emissions, ranging from emission trading to voluntary agreements. ‘Sector analysis’ assesses developments within sectors of industry that are likely to play an important role in future climate policies: oil, cement, chemical, automotive and insurance. Finally, ‘Case studies’ discusses bottom-up initiatives to combat climate change in five different organisations. This book will be essential reading for policy-makers searching for instruments that have proven business support; academics and researchers analysing the complexity of how business is responding to the challenge of climate change; and businesses wishing to learn about best practice in the sectors most likely to be seriously affected.

{ Corporate Responses to Climate Change provides valuable and insightful guidance concerning real-world experience in response to the emerging risks of climate change. It will undoubtedly prove to be a helpful companion for those attempting to chart a fiscally and environmentally responsible course through the unexplored territory of the evolving climate regime.| Irving Mintzer, Amber Leonard

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From 1980–84 Frans van der Woerd was Policy Advisor at the Dutch Ministry of Transport, and from 1985 onward Senior Researcher at the Institute for Environmental Studies, Vrije Universiteit Amsterdam. He has published widely on matters of environmental policy and was the editor of the Environmental Management Manual (Handboek integrale milieuzorg; Kluwer).

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Katie Begg joined the Institute for Energy and Sustainable Development (IESD) at De Montfort University, UK, in May 2003 as a principal lecturer from the Centre for Environmental Strategy at University of Surrey. Her recent research programmes include ‘Encouraging CDM Projects for Poverty Alleviation’ for DFID, advice to the UK Department of Trade and Industry on ‘Project Entry for the UKETS’ and procedures for accounting for energy projects (PROBASE) under the EU. She is on the UNFCCC list of experts for JI and the CDM.

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Implementing Codes of Conduct: How Businesses Manage Social Performance in Global Supply Chains Ivanka Mamic ISBN 1 874719 89 6 (hardback)

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KATHRYN BEGG, FRANS VAN DER WOERD and DAVID LEVY

David Levy is currently Professor of Management at the University of Massachusetts, Boston. His research examines the intersection of business strategy, technology and politics in the international arena. In the last few years, he has studied the engagement of US and European multinationals with the international regime to control greenhouse gases. Dr Levy is currently researching the potential of the renewable energy business cluster in Massachusetts.

The Business of Climate Change Corporate Responses to Kyoto

THE BUSINESS OF

C L I M AT E C H A NG E C O R P O R AT E R E S P O N S E S TO K YOTO EDITED BY

KATHRYN BEGG, FRANS VAN DER WOERD and DAVID LEVY

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© 2005 Greenleaf Publishing Ltd Published by Greenleaf Publishing Limited Aizlewood’s Mill Nursery Street Sheffield S3 8GG UK www.greenleaf-publishing.com Printed on paper made from at least 75% post-consumer waste using TCF and ECF bleaching. Printed in Great Britain by William Clowes Ltd, Beccles, Suffolk. Cover by LaliAbril.com. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission in writing of the publishers. British Library Cataloguing in Publication Data: A catalogue record for this book is available from the British Library. ISBN 1874719 57 8

contents

Foreword

...................................................................................9

Irving Mintzer, Amber Leonard

Introduction

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Frans van der Woerd, Vrije Universiteit, The Netherlands Katie Begg, De Montfort University, UK David Levy, University of Massachusetts, USA

Part 1 Introduction and overview

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

1 2003: the end of the beginning? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Jorund Buen, Atle Chr. Christiansen, Kristian Tangen and Anders Skogen, Point Carbon, Norway

2 Down to business on climate change: an overview of corporate strategies

. . . 31

Seth Dunn, Worldwatch Institute, USA

3 Organising business: industry NGOs in the climate debates . . . . . . . . . . . . . . . . . . . . 47 Simone Pulver, University of California, Berkeley, USA

4 Best corporate responses to climate change: opportunities for converging climate and biodiversity protecting solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Michael Totten and Sonal I. Pandya, Center for Environmental Leadership in Business, USA

Part 2 Policy instruments

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

5 Early experiences with emissions trading in the UK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 Frauke Roeser, WSP Environmental, UK Tim Jackson, University of Surrey, UK

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6 Building a greenhouse gas management programme: a framework based on real-world corporate responses

. . . . . . . . . . . . . . . . . . . . . . . . . 90

The Partnership for Climate Action with Environmental Defense

7 Governmental and industrial responses to climate change: the case of Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 Axel Michaelowa, Sonja Butzengeiger and Sven Bode, Hamburg Institute of International Economics, Germany

8 Environmental management systems and their influence on corporate responses to climate change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117 Rory Sullivan, Insight Investment, UK John M. Sullivan, Alcan Engineering (Australia)

Part 3 Sector analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131 9 Three big Cs: climate, cement and China

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132

Joakim Nordqvist, Lund University, Sweden Christopher Boyd, Lafarge, France Howard Klee, World Business Council for Sustainable Development, Switzerland

10 Climate change and the insurance sector: its role in adaptation and mitigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147 Andrew Dlugolecki, University of East Anglia, UK Mojdeh Keykhah, University of Oxford, UK

11 An institutional comparison of two sectoral responses to the political economy of climate change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166 Jesse Uzzell, DNV, Norway

12 The chemical industry’s response to climate change

. . . . . . . . . . . . . . . . . . . . . . . . . . 189

Frans van der Woerd, Vrije Universiteit, The Netherlands

13 Multinational responses to climate change in the automotive and oil industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196 David Levy, University of Massachusetts, Boston, USA Ans Kolk, Amsterdam Graduate Business School, The Netherlands

contents

Part 4 Case studies

7

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209

14 Becoming a first mover in green electricity supply: corporate change driven by liberalisation and climate change . . . . . . . . . . . . . . . 210 Peter S. Hofman, Center for Clean Technology and Environmental Policy, The Netherlands

15 Corporate responses to climate change: the case of Fortum . . . . . . . . . . . . . . . . . . 222 Hanne Siikavirta, Helsinki University of Technology, Finland Pekka Järvinen and Arto Heikkinen, Enprima Ltd, Finland Heikki Niininen, Fortum Corporation, Finland

16 The Emissions/Biodiversity Exchange: a corporate sustainable development programme in New Zealand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231 Bob Frame, Richard Gordon and Ian Turney, Landcare Research, New Zealand

17 Rent sharing in the Clean Development Mechanism: the case of the Tahumanu hydroelectric project in Bolivia . . . . . . . . . . . . . . . . . . . . 242 Christophe de Gouvello, Centre International de Recherche en Environnement et Développement, France Pierre Mollon, EDF-E7, France Sandrine Mathy, Centre International de Recherche en Environnement et Développement, France

18 An early corporate response to climate change: a review of a US electric company-sponsored Joint Implementation pilot project . . . . . . . . . . . . . 254 Naoko Kubo, Global Reporting Initiative, The Netherlands

Biographies

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264

Abbreviations

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274

foreword

The risks of climate change are reshaping the business environment for corporations around the globe. The direct impacts of climate change—along with the actions that governments take to address these impacts—will confront companies with complex and unfamiliar challenges. Forward-looking businesses in developing and industrialised countries are experimenting today with innovative responses to these challenges, working to protect both profitability and the environment. In Corporate Responses to Climate Change, editors Katie Begg, David Levy and Frans van der Woerd bring together a useful compendium of the principal approaches being deployed today in industries that are likely to be strongly influenced by climate change and climate change issues. The authors in this volume provide data, experience and analysis from a variety of perspectives that will be helpful to public policy-makers and private-sector decision-makers. They identify robust and effective strategies for coping with the unavoidable uncertainty and turmoil that future climate change promises to bring. In addition, these chapters offer surprises for those who think climate change brings neither challenges nor business opportunities for their industry. Seth Dunn profiles the historical role of the business community in international debates on climate change, highlighting evidence of divergence and prospects for convergence among the responses of different regions and sectors. He emphasises the crucial influence of proactive leadership by senior executives in shaping international efforts to promote sustainable development. Early experiences have yielded both successes and failures; lessons can be learned from each. For example, Roeser and Jackson critique the initial structure and early performance of the British experiment with a national emissions trading market, and document how compromises made to gain political acceptance of the trading system will limit its success. In the United States, much recent literature on the economic and business implications of climate change has highlighted the economic burdens of emissions

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control measures and the consequent reductions in forecast rates of national economic growth. But detailed case studies presented in this volume demonstrate that leading companies in the cement, insurance and electric power industries have discovered profitable strategic opportunities. These path-breaking businesses have captured first-mover advantages and reaped multiple benefits through careful investments in emissions-reducing projects that strengthen long-term relationships and increase market share. The UNFCCC (United Nations Framework Convention on Climate Change)’s Kyoto Protocol initiated one of the most promising new approaches to reducing the risks of climate change while promoting sustainable development. The Protocol’s Clean Development Mechanism (CDM) encourages cost-effective investment by industrialised-country companies in developing countries, simultaneously advancing national economic development priorities in the developing countries and promoting project-based activities that reduce or sequester greenhouse gas emissions. As an example, de Gouvello, Mollon and Mathy outline a hydroelectric project in Bolivia, undertaken by a consortium of the industrial world’s largest electric power companies. The proposed project, which would replace diesel-generated power with hydroelectricity, demonstrates how the transfer of emissions reduction credits can improve the economics of a project (and its attractiveness to investors), allowing the participants to further both national and international objectives. Corporate Responses to Climate Change provides valuable and insightful guidance concerning real-world experience in response to the emerging risks of climate change. It will undoubtedly prove to be a helpful companion for those attempting to chart a fiscally and environmentally responsible course through the unexplored territory of the evolving climate regime. Irving Mintzer Amber Leonard May 2004

Introduction* Frans van der Woerd Vrije Universiteit, The Netherlands

Katie Begg De Montfort University, UK

David Levy University of Massachusetts, USA

It is an uncomfortable fact that reductions in greenhouse gas (GHG) emissions are needed on a large scale and in a relatively short time if we are to avoid the more extreme risks associated with higher CO2 equivalent concentrations in the atmosphere. This has been articulated in the UK government’s target of reducing GHG emissions to 60% of 1990 levels by 2050. Given this background, awareness that action will be required by corporations at all levels has been relatively low. However, climate change has been climbing up the business and political agenda in recent years. The 2001 Marrakech Accords were a significant step forward in assuring the continued progress of countries (with the notable exceptions of the United States and Australia) towards meeting targets agreed under the Kyoto Protocol to the UN Framework Convention on Climate Change. While the Rio+10 Conference in Johannesburg in 2002 reinforced the need for progress towards ratification, now that Russia has come on board and the Kyoto Protocol has been ratified, there is even greater impetus for the development of national and EU emissions trading schemes, forcing organisations to consider their strategies for responding to these pressures. With these drivers in place, emission reduction targets of GHGs are now becoming a reality, with the focus for action turning to the private sector. Business and industry have a crucial role to play in the implementation of the Kyoto Protocol and emissions trading schemes. They are major emitters of GHGs and pressure is mounting for them to engage in a range of mitigation strategies, from emission inventories and trading schemes to development of and investments in low carbon technologies. *

The chapters in this book were written before the entry into force of the Kyoto Protocol on 16 February 2005. Many of the initiatives described in these pages will now become key elements in helping 35 industrialised countries and the European Community to reduce their combined emissions of six major greenhouse gases during the five-year period 2008–12 to below 1990 levels.

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Behind the scenes a number of companies have started to construct strategies to curtail GHG emissions in advance of these developments. These strategies can be very diverse in nature. At a political level, companies try to influence policy implementation and, more specifically, to test ideas in anticipation of possible regulation on the climate change issue. At a more practical level, there are a burgeoning number of initiatives to conserve energy use in production, transportation and buildings, to develop renewable sources of energy, to measure carbon emissions and sequestration at a detailed level, and to develop various markets for trading carbon credits among companies and countries. Some technologies are entering the marketplace, such as hybrid cars and compact fluorescent lighting. At the same time, one must acknowledge that many companies have taken a wait-and-see approach. Incumbent companies, particularly in fossil fuel-related industries, are interested in protecting their existing assets and competences. Even the more progressive oil companies are firmly committed to stay in and even expand their presence in oil and gas markets while diversifying on a small scale. Common to all these initiatives is that they operate in an environment of high complexity and uncertainty. The political implementation of the Kyoto Protocol is far from certain and many details remain unspecified. Economic instruments such as emissions trading are favoured and their implementation is becoming clear, though the future price of credits is unknown. New markets for low-emission products and technologies appear, but there are currently few regulatory drivers for these markets. Whatever the regulatory climate, the impact of potential regulation on business will vary tremendously between companies and between sectors of industry. Indeed, direct and indirect contributions of companies to GHG emissions vary a lot. It is not a surprise that sectors with large direct emissions are often at the forefront of climate change discussions, but sectors with large indirect emissions, such as the retail sector with its substantial need for energy for heating and cooling, also need to be part of the debate. Last but not least, the impact of climate change on businesses can be very substantial: for example, in the insurance and agricultural sectors. In the context of remaining uncertainties about climate change itself, strategies to reduce risks in the long run have to differentiate between sectors and have to be flexible. For individual companies, the sharp uncertainties demand some type of contingency planning. On the eve of climate policy implementation, it is appropriate to present early corporate experiences with the climate change issue. Description and assessment of various approaches will help to identify more effective strategies and promote the diffusion of proactive corporate practices. Moreover, identifying the factors that cause companies to pursue low-carbon strategies and support the Kyoto process will be helpful in formulating policy. Present climate strategies are in their infancy and are characterised by their great variety and disparity. We will not hide from this unsettled state of the art. Rather, we hope to pick out some trends and present some promising ways forward.

introduction 13

About this book The contributions to this book follow from a call for contributions in 2002. From over 50 proposals, the editors invited 20 authors to write full papers. The contributions in the book move from a more general, abstract plane towards more concrete and specific examples. In ‘Part 1: Introduction and overview’ four chapters present a broad perspective on climate policies and organisations of industry. The four chapters in ‘Part 2: Policy instruments’ present early experiences with different types of policy instrument to curb GHG emissions. Examples range from emissions trading to voluntary agreements. ‘Part 3: Sector analysis’ contains five chapters that assess developments within sectors of industry that are expected to play an important role in future climate policies: oil, cement, chemical, automotive and insurance. The final section, ‘Part 4: Case studies’, discusses the bottom-up initiatives to combat climate change of five different organisations.

Part 1: Introduction and overview Part 1 introduces the playing field for GHG policies at the corporate level. Contributions cover political, economic and technological dimensions of climate policies. Political developments around the Kyoto Protocol are assessed as well as industry initiatives to influence government policies. Part 1 ends with an oft-forgotten aspect of climate policies, the climate–biodiversity interface. Buen, Christiansen, Skogen and Tangen start with the prospects for the Kyoto Protocol. Based on a business-as-usual scenario for economic developments, the authors expect in the period 2008–2012 a considerable oversupply of allowances from countries such as Russia, Ukraine and new EU Member States. As a consequence, carbon prices will remain modest, with a mean estimate of US$10/t CO2e (ton of carbon dioxide equivalent). Next, Buen et al. provide an up-to-date market round-up of developments in the carbon trading market. They discuss the expected effect of the EU emissions trading scheme and predict an increase in market activity with a value increasing to more than 47 billion by 2007. The imminent submission of the national allocation plans will provide clarity on companies’ positions for moving to the new carbon-constrained future. In comparison, the performance of the existing trading schemes in the UK and Denmark are disappointing. As discussed in detail by Roeser and Jackson in Part 2, there are problems with the UK scheme. Similar constraints have affected the Danish emissions trading scheme so that neither have delivered the required market liquidity. Project-based mechanisms have not developed to the extent expected but there are signs of improvement after the problems of approvals of CDM (Clean Development Mechanism) projects from the executive board. The uncertainty surrounding the ratification of the Protocol continues to affect the carbon markets; although traded volumes decreased from 2002 to 2003, the value

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of the global carbon market increased from 463 million in 2002 to 496 million in 2003, an increase of 50%. Seth Dunn’s contribution discusses the emerging business responses to the climate issue, focusing on engagement with the international negotiations and particularly the design and implementation of the Kyoto mechanisms. Responses are differentiated across sectors, countries and companies, revealing evidence of divergence, prospects for convergence and the importance of leadership. The technological and economic dimensions of climate change are essential to understanding and formulating corporate responses. Over the past decade, progress in greenhouse gas mitigation technologies, the refinement of economic models and their underlying assumptions, and the emergence of emissions trading and other flexible market-based policy instruments have significantly improved understanding of the potential for innovative technologies and policies to limit the costs of reducing emissions. These developments, accompanied by growing scientific evidence of climate risks and political momentum towards binding emissions requirements, have prompted an increase and diversification of corporate responses.

Pulver’s chapter compares the advocacy activities of the business and environmental communities in the multilateral climate change negotiations. Pulver finds that while environmental NGOs campaigning on climate change have successfully organised consensus across national boundaries and participate in the climate debates through a single international network (the Climate Action Network), the business community has been riven by conflicts and represented by a changing array of business and industry associations. Focusing on the oil industry, she argues that the particular demands placed on business and industry groups by their member companies in the climate negotiations make it difficult for them to accommodate internal conflict and to generate consensus between oil companies grounded in different national policy environments. Totten and Pandya focus our attention on the need to consider not just climate change issues and measures but also the concurrent global problem of biodiversity loss and the interrelationship between biodiversity and climate change. They highlight the need for land use projects that maximise benefits for both climate change and biodiversity, and they point to practices within two major companies that can act as examples for others to follow. However, there are many poorly implemented climate actions that are producing adverse biodiversity impacts. Corporate actions can reduce this problem through good practice including early action, maximising all benefits to include biodiversity, and pursuit of suitable projects with a biodiversity conservation strategy. The recent establishment of the WWF gold standard approach to projects will aid this process. It is important that there is growing awareness that corporations can make a difference to two major global problems while generating carbon returns and reducing their compliance costs and risks.

introduction 15

Part 2: Policy instruments The Kyoto Protocol offers new policy instruments, among which emissions trading schemes (ETSs) are most prominent. Awaiting the EU ETS in 2005, the first chapter assesses results of a pilot ETS in the United Kingdom. Of course, traditional instruments of environmental policy will also play a role in climate policies. This section contains contributions about specific GHG management systems, the role of voluntary agreements and GHG policies embedded in business environmental management systems. Roeser and Jackson examine early experiences with the first ever national, industry-wide ETS, launched in April 2002 by the British Government. In their opinion, the scheme has serious weaknesses. The voluntary approach, exclusion of key industry sectors and incentive payments for companies willing to participate reduce the scheme’s environmental credibility. Low emissions monitoring and reporting standards within UK businesses do not improve the picture either. Looking at the limited number of direct participants in the emissions market, it will not be possible to establish an efficient market. The authors conclude that the UK ETS fails to facilitate short-term emission reductions and also does not provide credible incentives to move the economy into a low-carbon future. In their opinion, a fundamental review of the ETS is required, not only to improve its effectiveness and efficiency but especially to bring it in line with the planned EU-wide trading scheme. In the chapter titled ‘Building a greenhouse gas management programme’ the Partnership for Climate Action (PCA) reports on its activities. This is a partnership of major companies over a diverse range of sectors (Alcan, DuPont, BP, Entergy, Ontario Power, Pechiney, Shell, Suncor Energy and Environmental Defense). Environmental Defense is an environmental NGO that receives less than 1% of its income from corporate donors. The companies involved in the PCA have voluntarily undertaken actions to reduce greenhouse gases in their operations. The chapter describes a project undertaken by the PCA to compare the range of greenhouse gas reduction programmes across the companies, which will be of interest to other companies considering moving in this direction. Common elements of these programmes included target setting, emissions measurement, mitigation actions and accountability. These key elements were all considered to be important in the design of any programme, and are interdependent, so that all are needed to perform well to produce a successful programme. Each of these major areas is described in detail in the chapter, raising some questions on related topics such as minimum reporting. Naturally the policy environment and the company strategies have developed further since the compilation of the cross-company comparison. It nevertheless provides insights into the key areas that companies must address in moving to a low-carbon future and the internal incentives to be put in place to achieve change. The resistance of German companies to emissions trading is astonishing, given that estimates of German emission reduction costs are generally below the European average. Michaelowa, Butzengeiger and Bode argue in their chapter that resistance is due to the specific situation of German climate policy, which started in the late 1980s with a declaration of an ambitious emissions reduction target. The chapter focuses on the specific situation in Germany after reunification; it examines

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the voluntary agreements that did not go (far) beyond business-as-usual and finishes with the reactions of German industry to the proposal for a directive on a mandatory EU-wide emissions trading system presented by the EU Commission in 2001. A case study on the Hamburg Electricity Utility describes how a formerly proactive company has been preparing for emissions trading and how the company’s attitude changed after becoming one of the largest emitters in Germany following some mergers and acquisitions. In their chapter, Rory Sullivan and John M. Sullivan examine the potential contribution that environmental management systems (EMSs) can make to corporate performance on greenhouse gas and energy management. Their analysis demonstrates the important role that can be played by EMSs in assisting companies to identify cost-effective opportunities for greenhouse gas emission reductions, to implement emission reduction strategies, and to monitor, assess and report on performance. However, their chapter also highlights the limitations inherent in relying solely on voluntary approaches to reduce greenhouse gas emissions. The evidence that they present regarding the Australian Greenhouse Challenge and the ISO 14001 Specification for Environmental Management Systems indicates that, in situations where energy prices are low and where there is a lack of strong regulatory or other drivers, companies tend not to set ambitious targets or to diverge from business-as-usual performance on greenhouse gas emissions. They conclude that measures such as taxes, tax rebates, emission limits or emissions trading have a critical role to play in debates around corporate responses to climate change.

Part 3: Sector analysis In Part 3, we take a closer look at sectors of industry that are major emitters of GHGs (cement, oil, chemical) or have an important role to play in endeavours to curb GHGs (automobile, insurance). It is clear that responses so far have been far from uniform, even from industries that superficially face identical challenges. Several authors try to explain why responses have been so different. Social and cultural differences certainly play a role here, as do different systems of business government relations and variations in economic structure. Nordqvist, Boyd and Klee focus on cement production, which is a large source of non-energy CO2 emissions. The chapter shows a dividing line that is splitting the sector in two. On the one hand, large cement groups in the Western world initiated the Cement Sustainability Initiative. Almost unobserved by the public, the Initiative elaborated plans for a 10–20% reduction of greenhouse gases in the period 1990– 2010. On closer inspection, energy efficiency improvements and fuel substitution seem sufficient to reach this target. All in all, it can be viewed as a clever initiative to get public acclaim for an almost business-as-usual scenario. On the other hand, cement production in China is large, includes mainly small producers and is based on outdated technology. How do we approach this fast-

introduction 17

growing market that has no commitments under the Kyoto Protocol? Nordqvist et al. hope that an ongoing restructuring of Chinese cement production can go hand in hand with energy and greenhouse gas improvements. However, effective tools to deliver win–win options are not available yet. Dlugolecki and Keykhah examine responses to climate change in the insurance industry. Although insurance companies were among the earliest business observers to the UNFCCC (UN Framework Convention on Climate Change) negotiations, the insurance industry has been slow to take action to address climate change. With a focus on adaptation, a few reinsurers have carried out awareness raising and research, while the UK insurance industry has been active in terms of risk reduction. Mitigation will mean redirection of investment away from fossil fuel. This will involve institutional investors, such as pension funds, because of the huge assets they control. Again, the leading-edge activity is occurring in the UK through initiatives such as the Carbon Disclosure Project. The UNEP (UN Environment Programme) Insurance Industry Initiative seeks to discover best practice globally and inform the international policy-making process. Its research reveals that public– private collaboration is the most effective way to engage the insurance industry in reducing vulnerability. The same principle can help to avert the further progression of climate change through more enlightened investment policies. Uzzell compares the 1990–2002 responses to the climate debate of the oil and cement industries. Both sectors have much in common: they are an essential component of economic infrastructure, dominated by a handful of companies, with conservative business cultures, and they are major emitters of greenhouse gases. For his study, Uzzell uses institutional theory, which focuses on the influence that external stakeholders (the organisational field) have on organisations. From literature and interviews, he finds remarkable differences between the oil and cement sectors. NGOs immediately targeted the petroleum industry as the ‘bad guys’. After fighting an uphill struggle, BP and Shell broke away from the anti-Kyoto lobby and pioneered a proactive engagement strategy. In spite of the political schism among the oil majors, recent observers state that actual strategies of proand anti-Kyoto companies are rather similar: an emphasis on risk mitigation and relatively low investments in renewable energies. Evidently, policy statements are not enough to change business cultures. In contrast to the oil industry, cement companies drew little public attention. Alarmed by events around the oil industry, major cement companies decided to operate in concert to develop proactive policies for climate change. In this process, personal contacts in the Geneva-based World Business Council for Sustainable Development (WBCSD) played a decisive role. By the late 1990s there were no longer any major American-owned cement companies. Results of the 1999–2002 Cement Sustainability Initiative seem a solid basis for partnerships with, for example, WWF International. Evidently, the cement sector succeeded in a clever initiative to retain public acceptance. Van der Woerd compares the climate strategies of six major corporations in the chemical industry. He observes that the US–Europe dichotomy of anti- and proKyoto lobbies, dominant in, for example, the petroleum industry, does not exist in the chemical sector. Heterogeneity in the product mix of chemical companies offers an explanation. Corporations can shift production from highly GHG-intensive bulk

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chemicals (basic chemicals, plastics, fertilisers) to less GHG-intensive speciality chemicals (paints, additives, healthcare). In the 1995–2003 period, two of the six companies followed such a strategy, while a third plans to follow suit. CFC production before 1995 offers a trump card for some chemical companies. Because these highly potent GHGs are included in the Kyoto Protocol, three of the six companies are able to present GHG emission reductions since 1990 of 30–68%. CFC reductions far outweigh relatively stable CO2 emissions. As for monitoring, all companies worked hard to get a complete picture of both CO2 and non-CO2 GHGs. The chemical companies under review seem to be ready for emissions trading. Levy and Kolk analyse the strategic responses by US and European multinational enterprises (MNEs) in the oil and automobile industries to the global climate change issue. The authors examine the differences across regions and industries, and the changes over time. Traditional economic drivers of strategy do not provide a satisfactory account for these differences, and the chapter focuses instead on the conflicting institutional pressures on MNEs and the implications for their climate strategy. The home-country institutional context and individual corporate histories can create divergent pressures on strategy for MNEs based in different countries. At the same time, the location of MNEs in global industries and their participation in ‘global issues arenas’ such as climate change generate institutional forces for strategic convergence. It appears that local context influenced initial corporate reactions, but that convergent pressures predominate as the issue matures.

Part 4: Case studies Low-carbon projects are still in an experimental phase. Part 4 of the book presents five case studies. The first two cases originate in the electricity sector. Next, we present a creative way to use indigenous forest sinks. Part 4 ends with two early examples of Kyoto flexibility instruments, a Clean Development Mechanism (CDM) project and a Joint Implementation (JI) project. Among others, these examples show that bottom-up initiatives are necessary to enable smooth implementation of the Kyoto Protocol. Hofman analyses the strategy and successes of a first mover on green electricity supply. A company in the electricity sector in the Netherlands defined an innovative response to the combined influence of liberalisation and climate change. The company invented the concept of ‘green electricity for consumers’ and developed an innovative facility for biomass combustion. Internally, these new practices were facilitated by changes in corporate culture and strategy. Externally, corporate changes enabled the company to influence policy frameworks and to build networks of technical competence. The author concludes that social networks have been key elements in the momentum towards green electricity. Two remarks remain. Attractiveness of green electricity still very much depends on government policies: for example, tax exceptions. In a recent government reshuffling, this system almost broke down. Furthermore, it will be difficult to enlarge biomass combustion in the Netherlands. In the absence of substantial forests, import of

introduction 19

biomass is essential to increase production. The discussion on biomass trade is still in its infancy. Siikavirta et al. describe the early experiences with climate policies of an energy company. The Finland-based Fortum corporation launched its Climate Initiative in 2000. A ten-year programme contains a mixture of technical developments (biofuels, wind power) and emissions trading (pilots for JI/CDM, investments in the Prototype Carbon Fund of the World Bank). It must be kept in mind that in 2000 non-carbon sources already produced the majority of Fortum’s electricity. Siikavirta et al. conclude that the main contribution of the Climate Initiative so far has been to direct company thinking towards climate-benign decisions in investments and acquisitions. As for climate-benign products, it is easier to develop new products than to find a market for them. Early JI/CDM pilots suggest that Fortum is too small to develop this type of project on its own. Because of uncertainties in markets and in flexible mechanisms, it is very difficult to say how the 2010 picture will look. Frame, Gordon and Turney present an interesting initiative to combine corporate climate policies with biodiversity restoration. The Emission/Biodiversity Exchange (EBEX21®) programme operates in New Zealand. On the one hand, the project helps organisations to improve their GHG footprint. On the other hand, EBEX21 offers GHG compensation through the regeneration of indigenous forests. Adapted to the New Zealand situation, reversion of marginal hill farmland to scrub is used as an indigenous CO2 forest sink. In preparation for Kyoto, EBEX21 started a ‘grey’ market for carbon certificates. Future projects will co-operate with local governments, electricity providers, retailers and the tourist sector. De Gouvello, Mollon and Mathy investigate opportunities for private investors under the CDM. The CDM is a flexible mechanism of the Kyoto Protocol with the double aim of providing developing countries with investment funds for sustainable development and of reducing the costs of Kyoto commitments for industrialised countries. De Gouvello et al. argue that CDM projects will be implemented only if the objectives of both host-country authorities and private investors are accomplished. They distinguish between classical commercial rent, social or developmental rent in the host country and a carbon rent in the form of CDM certificates. Sale of CDM certificates at future carbon markets improves the commercial attractiveness of CDM projects. The chapter elaborates on a project for a hydroelectric power plant in Bolivia, to be built instead of diesel plants and to be co-financed by electricity companies from industrialised countries. In simulations the authors show that there are several possibilities for sharing the carbon rent between host country and private investor. This choice depends not only on the (as yet unknown) market price of CDM certificates but also on the host-country government decision either to maximise direct carbon income by retaining a high share of certificates or to maximise capacity to attract additional foreign investment by leaving the certificates to project developers. In the final chapter, Kubo presents the potentials and pitfalls of Joint Implementation (JI). This is a project mechanism similar to the CDM where a host country receives the investment flow while the investing company can use the carbon reductions to offset its target reductions. In this case the host country is an Annex B country with targets rather than a developing country without targets, as in the

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CDM in De Gouvello’s chapter above. The chapter reviews a case study of a US

electric company-sponsored forestry project in Southeast Asia, which began in 1992, as an example of an early corporate response to climate change. The key question is how to address accountability for our actions and to implement strategies to take responsibility in practice, rather than inventing new accounting practices to justify massive GHG emissions.

Concluding remarks Taken together, the material presented here shows the large variety of corporate responses and points towards conceptual frameworks for understanding them. The editors hope this book offers insight into an emerging field and provides both companies and academics with inspiration for future development of corporate climate strategies. As we mentioned above, climate strategies are still in their infancy. We expect that a full spectrum of business strategies will unfold in the years to come. That will certainly become a fruitful source of practical learning and theoretical reflection. This book was elaborated as a co-operative effort of three editors. As is common nowadays, co-operation mostly took place in virtual reality. However, we could not have progressed without several individuals and organisations. We appreciate the support of the managing editor John Stuart and staff at Greenleaf Publishing. But, most importantly, we thank the people who answered our call for proposals and, more specifically, the people who wrote the chapters.

Part 1 Introduction and overview

1 2003: the end of the beginning? Jorund Buen, Atle Chr. Christiansen, Kristian Tangen and Anders Skogen Point Carbon, Norway

In our round-up of ‘lessons learned’ in the emerging carbon markets during 2002, developments were summarised as ‘remarkable and unprecedented’ (Point Carbon 2002). This was justified by a series of events. First and foremost, the adoption and entry into force of the EU emissions trading directive meant that the notion of a carbon-constrained future is soon to become reality for European industry. As a consequence, we have seen the contours of an early (yet embryonic) market for trading of EU Allowance Units (EAUs), with prices quoted in the market increasing from about 46/t CO2 (tons of carbon dioxide) in April to the current level of 412.5/t CO2. Interestingly, the bid–offer spread has narrowed over time, which contributes to substantiating the market and provides clearer price signals. Even though traded volumes in the global carbon market fell short of our expectations at the beginning of 2003, investments in CDM (the Clean Development Mechanism of the Kyoto Protocol) and JI (Joint Implementation mechanism of the Protocol) projects increased considerably in the second half of 2003. After a ‘low point’ in June/July, following rejections of methodologies by the CDM Executive Board, activities have picked up and several large-scale CDM projects are to be among the first to be registered. In total, while traded volumes in fact decreased somewhat from 2002 to 2003, the value of the global carbon market increased from 463 million to 496 million, an increase of 50%. CDM investments nearly tripled and represented the lion’s share of the growth (Figure 1.1). Despite encouraging signals regarding investment activity, Russia’s wavering on the prospects of ratifying the Kyoto Protocol continues to cast shadows on the future of the international climate regime. On the domestic scene(s), activity has been low in the UK and Danish emissions trading schemes (ETS), allowing for some remarks to be made with respect to the ability of domestic schemes to deliver against expectations. In brief, both schemes have clearly suffered from systemic deficiencies and imbalanced demand/supply that have impaired market efficiency and liquidity.

1. 2003: the end of the beginning? Buen et al.

23

Against this backdrop, the objective of this analysis is to highlight some of the lessons learned in the carbon markets at the international, regional and domestic level. Efforts are also made to assess the quality of our own assessments and forecasts. In brief, the chapter highlights developments and experiences from the following market segments • Kyoto Protocol • EU ETS • Selected ‘small’ schemes • CDM/JI

Prospects for the Kyoto Protocol On the international scene, developments in 2003 could be summarised in somewhat cynical language as ‘waiting for Russia’. Russian officials on numerous occasions stated that Russia was progressing towards ratification, only to see the statements contradicted by another official a day or two later. However, there was a considerable change in attitudes in the Russian Parliament, the Duma, and in Russian industry circles over the last six months of 2003, in the sense that Russian ratification was largely seen as beneficial. The Duma is no longer considered a major bottleneck for ratification. Even though the September 2003 Climate Conference in Moscow largely received negative attention in the media, Putin’s address at the conference demonstrated that the decision of whether and when to ratify was on his table, meaning that it is no longer stuck amid bureaucrats in the Ministry of Economy and Trade. Putin also raised the issue at the EU–Russia summit in November 2003, although ratification was linked to issues such as Russian gas exports and membership in the WTO (World Trade Organisation). Preliminary assessments of the consequences of implementing Kyoto concluded that ratification would not have any negative (economic) consequences for Russia. The ninth Conference of the Parties (COP 9) in Milan was also overshadowed by conflicting signals from Russia, even though important decisions were taken on technical issues such as rules for the use of sinks (afforestation and deforestation) in the CDM in the first commitment period. In order to resolve the contentious issue of non-permanence, the COP decision was to define two types of sink credits: temporary CERs (tCERs) and long-term CERs (lCERs). For both, one can choose between a crediting period of 30 years or one of 20 years, which can be renewed twice. With regard to discussions about a multilateral framework for the post-2012 period, differences in positions and opinions between Parties prevented any real progress. Interestingly, though, there were signals from developing countries that they might consider taking on commitments along the lines of those that currently apply to Annex I countries. In this regard, it is hardly coincidental that Argentina agreed to host COP 10 in December 2004.

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the business of climate change 100 90

Other

million

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50 40 30 20 10 0 1995

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figure 1.1 Value of the global carbon market in the period 1995–2003

EU ETS Directive adopted—against all odds? Following hefty debates and extensive consultations at the EU and Member State level, the European Council on 22 July 2003 adopted the proposed framework directive establishing a pan-European emissions trading scheme (ETS) from 2005. The Directive was published in the Official Journal on 25 October, after which it formally entered into force. To observers of Brussels and EU politics, the speed at which the policy-making process evolved was truly astonishing. Following the submission of the Green Paper on emissions trading in March 2000, it took about three years to reach an agreement on this landmark piece of legislation. There are clearly lessons to be learned from this process, most notably with regard to predicting the outcome of (EU) policy processes. For instance, an argument over the assessment of the proposed directive of September 2001 was that ‘the entry into force of a mandatory cap-and-trade system by the year 2005 is a low-probability scenario’ (Point Carbon 2001). Our opinion at the time was partly based on an assessment of the complicated design and policy issues that would have to be resolved. Moreover, we recognised the opposition from key Member States and part of European industry; the difficulties involved in adopting other policies and measures at the EU level; and the fact that the EU has historically been rather sceptical about the use of ‘flexibility mechanisms’ as instruments in climate policy. Against that backdrop, we expected

1. 2003: the end of the beginning? Buen et al.

25

the process of facilitating multi-level negotiations and overcoming institutional inertia to be difficult and time-consuming, and having an EU-wide emissions trading system in place by 2005 seemed a tall order. Owing to its much wider coverage and diversity of companies, one would intuitively expect the EU ETS to become more liquid than the UK and Danish schemes. However, there is a risk that factors such as lenient reduction targets and opportunities for companies to borrow allowances from next year’s allocation may impede liquidity.

Market activity: waiting for the NAPs Even though the first forward trade in EU allowances was announced in February 2003, trades in 2003 were few and far between. In total, we have recorded in excess of 20 trades to date, not including bilateral trades for which little information is available. Among the most important explanations for the modest activity were prevailing uncertainties about the outcome of the National Allocation Plans (NAPs). Companies were also reluctant to commit on the sell side, reflecting uncertainty about the companies’ position and fears that entering into agreements at this point could affect the distribution of allowances. Even though trading activity has largely comprised ‘test trades’ for relatively small volumes, interest from market players picked up somewhat at the end of 2003. As a consequence, prices quoted in the market increased from 45–7/t CO2 in March/April to 412–13/t CO2 in December 2003 (see Figure 1.2). That said, the recent increase in prices probably reflects a bit of gaming: that is, actors aiming to identify a level at which sellers are willing to commit. Whereas offers in the early phase were mostly indicative, there are now firm offers in the market that can be lifted. Interestingly, the bid–offer spread narrowed to a level of about 40.6/t CO2 in December 2003, as shown in Figure 1.2. Figure 1.3 illustrates the notional value of EU Allowance Units (EAUs) traded over 2003. The number of transactions increased from one single trade in the first quarter to almost 20 in the fourth quarter. The increasing number of trades, in combination with higher prices, implied that the value of carbon traded in the EU ETS has nearly quadrupled from the first to the fourth quarter, even though the average number of allowances in each trade has declined. However, including details about trades that we have been unable to record could change the picture.

Is small (and voluntary) beautiful? The introduction of the Danish and UK emissions trading schemes has put to test the ability of small schemes to deliver efficient and liquid emissions markets. In the UK activity dropped substantially in 2003. There have been no trades reported in 2003 under the Danish scheme.

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the business of climate change 16

Offer Close Bid

14 12

4/tCO2

10 8 6 4 2

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ec e

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be 19 D

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figure 1.2 Price development in the EU emissions trading market

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2003 EU ETS = European Union emissions trading scheme

figure 1.3 Value of the EU market in 2003 by quarter (4 thousands)

Q4

1. 2003: the end of the beginning? Buen et al.

27

In order to analyse and assess the merits of the Danish emissions trading scheme, one should first recognise that it has by and large been a cap on fossil-fuelled power generation. Second, the scheme has covered a rather limited number of companies, of which the two major Danish power producers (Elsam and E2) were allocated more than 80% of the total quantity of allowances for the period 2001–2003. Third, one needs to understand that power production in Denmark fluctuates with hydropower resources in Norway and Sweden. In brief, Denmark is a net exporter in ‘dry years’ and a net importer in ‘wet years’. As a result, most companies covered by the scheme are likely to be short (long) allowances at the same time. The above-mentioned features have had an impact on trading activity. For instance, during the first year of trading, the market was long allowances (despite being a net exporter). In consequence, a surplus of allowances was banked into the next compliance year. In years 2002 and 2003, however, representing rather dry years with high prices in the Nordic market, Denmark’s power production and net exports increased compared with 2001, leaving most companies short in allowances. This explains to a large extent the lack of liquidity and meagre trading activity. Between 20 and 30 transactions, including ‘clean trades’ and swaps, have been reported (no trades in 2003), representing a turnover of 2–3% of the total quantity of allowances. Moreover, prices are in practice capped by the penalty level of DK40/t CO2 (US$5, 44). The UK ETS covered a much wider range of sectors and gases, for which one could expect a more balanced supply and demand side and a potentially more liquid market. In practice, however, because of a rather generous allocation, many of the 34 ‘direct participants’ (companies with hard caps) were structurally long in allowances. The 5,500 companies with Climate Change Agreements (CAA), on the other hand, from which significant demand was expected, face a compliance period of two years with bi-annual milestone years. Partly as a consequence of these design features, the UK ETS witnessed a rush to the market in the fourth quarter of 2002, only to see demand wane as the true-up period came to a close in the first quarter of 2003. In total, about 600 trades had been recorded up to the end of 2003. Activity has essentially been limited to ‘one-off’ trades and small volumes, seeing prices drop from a high of £12.40/t CO2 in October 2002 to about £2/t CO2 in late 2003. Since the next milestone year for the CAA companies ends in December 2004, activity will probably remain low for the next two years. From a market point of view, it seems fair to say that neither the UK nor the Danish ETS has delivered in terms of market liquidity. Facing the risk of generalising on the grounds of relatively meagre empirical evidence, the experience from the UK and Danish schemes demonstrates by example the need to design systems with a sufficiently large number of participants. Experience also highlights the need to ensure a balanced demand and supply side and to avoid a structural ‘bias’ in terms of market concentration on the seller or buyer side. That said, engaging in trading activity has probably been helpful for the companies with respect to features such as developing internal systems and learning about the functionality of registries.

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the business of climate change

CDM/JI Estimating traded volumes and value Developments during 2003 (again) illustrated that estimating future volumes from the project mechanisms is a challenging and difficult endeavour. On the basis of reports stating that several fairly large CDM contracts had been signed in late 2002, we assumed in the beginning of 2003 that activity would remain at a relatively high level throughout the year. This was not the case, however, and our initial forecast for 2003 proved to be overly optimistic. On the basis of new and revised information, our estimate of traded volumes for 2002 was reduced from 102 Mt CO2e (Point Carbon 2003h) to about 40 Mt CO2e (Point Carbon 2003g). There are several reasons for these substantial revisions. At the end of 2003 several large-scale CDM transactions were reported and reflected in our estimates. However, a more thorough examination showed that only shares of the expected CERs had been sold for many projects. Moreover, several contracts were not as advanced as the project developers indicated. As it turned out, only term-sheets had been signed for several projects, while final purchase agreements were, at the time of writing, still pending. These projects were removed from the database until evidence of signed purchase agreements is provided. In the light of these developments, we have also reduced our forecast/estimate of traded volumes for 2003 from 158 Mt CO2e (16 February) to 35 Mt CO2e. The main reason for this was a far lower contribution from CDM initiatives other than the Dutch government and public–private partnerships such as the Prototype Carbon Fund. As shown in Figure 1.4, forecasting reduction volumes in the category ‘other CDM’ projects has proved to be the most difficult and, consequently the most uncertain. This is due chiefly to the large number of actors and initiatives, for which the task of obtaining and maintaining reliable information is challenging. In comparison, discrepancies for the other categories are much lower. However, as is the case with the PCF (Prototype Carbon Fund) and Dutch credit purchasing programme Erupt and the North American market, activity has been lower than expected at the beginning of the year. Compared with estimates reported in the State and Trends of the Carbon Market 2003, published by the PCF (World Bank 2003), our estimate of the volume of project-based emission reductions in 2003 was lower (i.e. 35 versus 70 Mt CO2e). The main reason for the discrepancy was that we base our estimate on signed purchase agreements, while the PCF uses signed term-sheets. That said, estimates for traded volumes in 2002 compare well.

Bottom-up or top-down? We have in the past been rather sceptical about the use of ‘top-down’ models and marginal abatement cost (MAC) curves in estimating potential supply of credits from CDM projects. Instead, we have argued that a ‘bottom-up’ approach is more appropriate, since this allows for a more careful assessment of project pipelines and institutional factors at the level of host countries.

1. 2003: the end of the beginning? Buen et al.

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PCF Other CDM Other NSW ETS Volume by November 2003 Forecast September 2003 Forecast February 2003

North America EU ETS Erupt Denmark Cerupt 0

10

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40

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MtCO2 e CDM = Clean Development Mechanism; EU ETS = European Union emissions trading scheme; NSW ETS = New South Wales emissions trading scheme; PCF = Prototype Carbon Fund

figure 1.4 Comparison of previous forecasts of traded volumes in the carbon market until 2003 The CDM represents the most attractive investment opportunity among the Kyoto mechanisms. Crediting from 2000 and an established framework make CDM more attractive than JI (with crediting from 2008) or trading of AAUs (Assigned Amount Units) (between countries that are still not eligible for trading). CERs could be used for compliance purposes in domestic (e.g. Canada) and regional (EU) schemes regardless of the fate of the Kyoto Protocol. Moreover, investing in CDM projects provides a natural hedge for companies covered by the EU ETS, to the extent that it could offset the risk of high prices in the second period. Finally, the fact that the EU ETS will cover a range of installations in Central and Eastern Europe further limits the scope for JI projects. Even though some actors may have been disappointed by the ‘slow’ progress in the CDM EB (Executive Board) and the fact that some baseline and monitoring methodologies for CDM projects have been rejected, the conservative approach adopted should not come as a surprise. We are still in the early stages of developing a robust scheme for the development, implementation and verification of CDM projects, for which learning-by-doing is a prerequisite. However, the attractiveness of the CDM is highly case-specific, depending on the characteristics of each contract. Experiences under the Dutch (CERUPT and ERUPT) and PCF schemes suggest that it takes about 3–5 years from project identification to the ultimate issuance of CERs (noting that no CERs have been issued thus far!). Since institutional factors play a key role in project development, assessments of hostcountry CDM policies and institutions are critical in identifying whether (and which) CDM and JI projects are attractive as investment opportunities.

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Concluding remarks The present analysis has highlighted some of the key developments observed in the emerging carbon markets in 2003. The entry into force of the EU emissions trading directive on 25 October 2003 meant that the notion of a carbon-constrained future became reality for European industries. The market remained thin, however. On the other hand, the markets for project-based mechanisms developed somewhat more slowly than we expected. We therefore reduced our estimates of traded volumes for 2002 and 2003. That said, we also observed an increase in investment activity during the second half of 2003, including the emergence of several largescale CDM projects and new public and private funds. Even though analysis shows that traded volumes decreased somewhat from 2002 to 2003, there was a healthy development when measured in monetary terms. More specifically, the value of the global carbon market increased from 463 million in 2002 to 496 million in 2003, an increase of 50%. With respect to the Kyoto Protocol, Russian wavering over ratification continued to cast shadows on the future of the international climate regime in 2003. Finally, we have assessed experiences and lessons learned from domestic emissions trading schemes in Denmark and the UK. On the basis of relatively meagre market activity and structural deficiencies, it seems fair to say that neither the UK nor the Danish ETS has delivered in terms of market liquidity.

References Point Carbon (2001) The Carbon Market Analyst, 25 September 2001. —— (2002) The Carbon Market Analyst, 23 December 2002. —— (2003a) The Carbon Market Analyst, 27 June 2003. —— (2003b) The Carbon Market Analyst, 27 March 2003. —— (2003c) The Carbon Market Analyst, 29 October 2003. —— (2003d) The Carbon Market News, 11 December 2003. —— (2003e) The Carbon Market Analyst, 14 July 2003. —— (2003f) The Carbon Market Analyst, 1 May 2003. —— (2003g) The Carbon Market Analyst, 8 December 2003. —— (2003h) The Carbon Market Analyst, 16 February 2003. World Bank (2003) State and Trends of the Carbon Market 2003 (Prototype Carbon Fund; Washington, DC: World Bank).

2 Down to business on climate change an overview of corporate strategies Seth Dunn Worldwatch Institute, USA

Climate politics saw some strange bedfellows at the 2002 World Summit on Sustainable Development in Johannesburg, South Africa. A Europe-led business association, the World Business Council for Sustainable Development (WBCSD), and the global environmental organisation Greenpeace issued a joint statement calling for an ‘international framework’ to address the issue of climate change. While not openly calling for ratification of the Kyoto Protocol, the WBCSD voiced support for the pending agreement as the basis for a set of new common rules to combat the problem (see Ball 2002a). At the press conference, WBCSD President Björn Stigson stressed the economic importance of ensuring that companies in countries that mandate greenhouse gas emission reductions would not be penalised by competition with firms in countries lacking such restrictions. ‘For us, it is not good if we end up with a situation where there are different frameworks in different countries. Otherwise, you might end up with a playing field that is not level.’ Two European members, BP and Lafarge SA, lent their support to the announcement. The response from US members was mixed. General Motors distanced itself, stating ‘we would not support any kind of Kyoto-like framework that would put limitations on developed economies’. But Tom Jacobs of DuPont echoed Stigson: ‘We do need a global approach ultimately.’ In an accompanying position paper, the WBCSD spelled out the key elements of an international framework: one global system of rules, using processes to bridge the ‘EU–US divide’, and incentives for early action and implementation (see WBCSD 2002). The paper emphasised minimising bureaucracy through clear rules, definitions and procedures that would ensure efficient markets under the three Kyoto mechanisms—emissions trading, Activities Implemented Jointly (AIJ) and the Clean Development Mechanism (CDM). This episode illustrates a trend toward constructive corporate engagement with climate negotiations—a trend driven by technological, economic and regulatory considerations. Early business responses to climate change were hindered by the

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prevalence of pessimistic economic models—which business associations touted— and by limited understanding and evidence of the potential of new technologies and policies to lower the cost of mitigation. Over the past decade, however, models have been refined, emissions-reducing technologies have advanced toward or entered the market, and innovative policies such as emissions trading have proven effective in addressing other problems, suggesting their potential applicability to the climate issue. Meanwhile, progress in the Kyoto Protocol negotiations has increased the probability of government regulations, leading more firms to place climate strategy within the realm of risk management. Other ancillary motivations exist for taking action—demonstrating environmental leadership, learning-by-doing, seeking out side benefits. But these interests are subordinate to the three key strategic drivers of technology, economics and policy. These three dimensions of the climate issue, and their ongoing uncertainties, help to shed light on the variation in corporate climate strategies to date. Not surprisingly, sectors with distinct technological and economic challenges have exhibited varying responses. The diverging policy paths of North America and Europe have both shaped and been shaped by the strategies of firms headquartered within their borders. And firms themselves interpret the technical and economic stakes of the issue differently, leading to divergent approaches. While there are trends toward convergence, the extent to which competition and policy further narrow the divide depends on whether the current fragmented patchwork of rules evolves into a robust, efficient global regime for managing climate change. This, in turn, points to the need for greater corporate leadership in the design and implementation of climate policies.

Evolving technologies and economics Lowering global greenhouse gas emissions will require major changes in existing patterns of energy resource development. Fortunately, the potential of new technologies and policies to slow climate change has grown dramatically over the past decade. In its 2001 Third Assessment Report, the Intergovernmental Panel on Climate Change (IPCC) observes that—since the panel’s previous report, in 1995—‘significant progress relevant to greenhouse gas emissions reduction has been made and has been faster than anticipated’ (see Metz et al. 2001). The IPCC reports advances in a wide range of technologies at varying stages of development. These include the market introduction of wind turbines, the elimination of industrial by-product gases, the emergence of highly efficient hybrid-electric cars, and the advance of fuel-cell technology. The IPCC also points to a range of technologies that are already cost-effective. Summarising hundreds of studies, it concludes that global emissions could be reduced well below 2000 levels between 2010 and 2020—by 1.9–2.6 billion tonnes of carbon equivalent by 2010, and by 3.6–5.5 billion tonnes by 2020. (Currently, emissions are projected to reach 11.5–14 billion tonnes by 2010 and 12–16 billion

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tonnes by 2010.) The panel found that half of the reductions by 2020 could be achieved in cost-effective fashion (Metz et al. 2001). The low-cost opportunities lie predominantly in the hundreds of technologies and practices that promote efficient energy use in buildings, transportation and manufacturing. In addition, natural gas is expected to play an important role in tandem with power plant efficiency improvements and greater use of co-generation (the combined use of heat and power). Important contributions can also be made by low-carbon energy systems, such as biomass from forestry and agricultural byproducts, landfill methane, wind and solar power, hydropower and other renewable sources of energy. However, the short-term potential for some options, such as solar power, is limited by high costs. The potential also exists for reducing other greenhouse gases within agriculture and industry. Methane and nitrous oxide emissions can be cut from livestock fermentation, rice paddies, nitrogen fertiliser use and animal wastes, while process changes and the use of alternative compounds can minimise the emissions of fluorinated gases. Using these available or near-ready technologies, most models suggest that atmospheric carbon dioxide (CO2) concentrations could be stabilised at 450–550 parts per million volume—which some scientists consider to be the range for avoiding dangerous climate change—or lower, over the next 100 years (Metz et al. 2001). Bringing this about, however, would require major socioeconomic and institutional changes. It would imply an accelerated decoupling of economic development and carbon emissions, or ‘decarbonisation’ and reduction in carbon intensity. And it would necessitate that the supply and conversion of energy no longer be dominated by low-priced fossil fuels. Analyses of the costs and benefits of cutting emissions vary widely, given different methodologies and underlying assumptions. Estimates depend, for example, on whether the revenue of carbon taxes is recycled back into the economy through reductions in other taxes; whether the ancillary benefits of mitigating climate change—energy savings, reduced local and regional air pollution, energy security and employment—are factored in; and whether the external costs and damages of climate change are incorporated into market prices. Other assumptions shaping models of the economics of climate change include demographic, economic and technological trends; the level and timing of the agreed target; and the degree of reliance on various implementation measures, such as emissions trading. John Weyant of Stanford notes that varying assumptions explain why cost projections vary across models by a factor of two to four (Weyant 2000). There is a consensus among experts that some greenhouse gas emissions can be limited at no cost—or even at a net benefit—to society through ‘no regrets’ policies that address imperfections in the market. Lack of information can prevent consumers and businesses from adopting efficient technologies that lower overall energy costs. If carbon taxes or auctioned emissions permits are used to finance reduced income and labour taxes, the benefits become larger. Several studies employing this ‘double dividend’ show a net or negative mitigation cost. The ancillary benefits can in some instances balance out the costs of the policies themselves: reducing carbon emissions can also provide major human health benefits through lower emissions of particulates, ozone, and nitrogen and sulphur oxides.

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Government studies have reinforced the potential for low-cost or no-cost emissions cuts. A US Department of Energy study estimated that the nation could meet the majority of its Kyoto target at no net cost, primarily by removing market barriers to the adoption of energy-efficient and renewable energy technologies (see Interlaboratory Working Group 2000). The policies would also reduce air pollution, petroleum dependence and inefficiencies in energy use, leading to economic benefits comparable to overall costs. The Climate Change Programme of the European Union has concluded that the region could achieve its target through costeffective measures—primarily involving energy efficiency—amounting to no more than $18 per tonne of carbon dioxide, or 0.6% of the region’s GDP (see ECCP 2001). Another area of broad consensus among economists is that allowing emissions trading between countries would reduce costs. Without emissions trading between Annex B countries, global studies show reductions in projected GDP of 0.2–2.0% in 2010. With full emissions trading, the reductions would be 0.1–1.1%—likely to be lost in the noise of natural variations in the economy. According to conventional economic models, the cost of reducing emissions rises as the target for stabilising greenhouse gas concentrations drops. But these models ignore the potential of ambitious targets to bring about deep technological change by spurring industry to make large rather than incremental innovations. Models that account for this ‘induced technological change’ suggest that stabilisation of carbon dioxide concentrations and GDP growth need not be a zero-sum game. But many studies, including the integrated assessment models, continue to make unrealistic assumptions about market forces, technological innovation and company behaviour that drive up the estimated cost of dealing with climate change (see Dunn 2002). The most important point of corporate relevance regarding the economics of climate change is that, however the costs and benefits add up, they will be spread unevenly among different sectors of the economy, and even potentially within sectors. It is easier to identify the sectors likely to face economic costs than to pinpoint those that may benefit. In addition, the costs are more immediate, concentrated and certain, even if the benefits prove to be greater. Coal, oil and certain energy-intensive sectors—such as chemicals, paper and steel production—are most likely to suffer an economic disadvantage. Others, including the renewable energy industry, are expected to benefit over the long term from price changes and the availability of financial and other resources that might otherwise have been committed to carbon-intensive energy sectors. But, while these firms are relative newcomers to the policy process, the companies that stand to lose the most—at least in the short term—have from the beginning been the most prominent and influential business voices in the climate negotiations.

Business engagement with negotiations The evolving technology and economics of the climate issue form an important backdrop to business engagement with international negotiations. Trade associa-

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tions opposing emissions limits, such as the Global Climate Coalition, initially employed the argument that climate change mitigation would inflict significant economic damage. However, past evidence of overstating the costs of environmental protection, accumulating evidence of the costs of inaction, and the apparent effectiveness of market-based instruments such as emissions trading eventually made these economic arguments less viable. For these and other reasons, between 1997 and 2000, BP, DuPont, Ford, DaimlerChrysler, Texaco and General Motors withdrew from the group, which closed its doors to individual companies in 2002 (see Dunn and Flavin 2002). In addition to the changing technological and economic outlook, the momentum of the policy process—and the opportunity to influence implementation rules—has prompted the formation of business groups more constructively engaged with negotiations. Thirty-seven companies, including BP, Boeing, Hewlett Packard, IBM, Intel, Shell, United Technologies and Whirlpool, have joined the Business Environmental Leadership Council of the Pew Center on Global Climate Change, which supports the Protocol as ‘a first step in the international process to address climate change’ and agrees that ‘Businesses can and should take concrete steps now in the US and abroad to assess opportunities for emission reduction, establish and meet emission reduction objectives, and invest in new, more efficient products, practices and technologies.’ Other groups stating support for the Kyoto Protocol include the EU–Japan Business Dialogue, the US and European Business Councils for Sustainable Energy, the US-based Social Venture Network and ‘e-mission 55’, a coalition of 150 European and Japanese firms, including Deutsche Telekom and the insurance firm Gerling Group. For some companies, the economic risks had long become apparent. Insurance and reinsurance companies are confronted with enormous liabilities from rising weather-related claims. German reinsurer Munich Re estimates that climate change could cost $300 billion annually by 2050, through weather damage and impacts on industry and agriculture (see Cortese 2002). These entities have become active participants in the UN talks. The World Resources Institute estimates that shareholders in leading oil and gas companies may lose 6% or more of the value of their investments because of regulatory efforts to address climate change. Innovest Strategic Advisors estimates that about 15% of the total market capitalisation of major companies could be placed at risk by climate change (Cortese 2002). As these risks have been better quantified, the financial sector’s perceived self-interest in negotiations has risen. Overall, corporate positions have revealed a transatlantic divide (see Levy and Newell 2000), resulting from differing government policies and views on the economic feasibility of reducing emissions. Through late 2002, the fallback position of most European companies had been to support the Protocol, while in the US most companies had remained silent. This has created rifts within some companies. Ford has opposed Kyoto, while its Volvo Car unit has supported it. Coca-Cola belongs to the US Council for International Business, which has not endorsed the pact, while a Spanish subsidiary has stated, ‘We are in line with the general idea of the Kyoto Protocol . . . It’s the price of entry [to an emissions trading system]’ (see Ball 2001). By and large, business groups in Australia, Canada, Japan and New Zealand have followed the cue of their counterparts in the US. But the US withdrawal from the

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Kyoto Protocol process in early 2001 has weakened their stance and their ability to counteract political will. This was demonstrated in 2002, when parliaments in Japan, Canada and New Zealand all ratified the Protocol over trade association complaints. Thus the resistant element of business engagement has seen its negotiating clout diminish, while the more pragmatic elements have sought with growing success to influence the terms of the debate.

Business engagement with flexibility mechanisms In addition to influencing government policy individually and through trade associations, business responses to climate change include a range of internal and external control measures. Internal controls include greenhouse gas inventory and management systems; internal greenhouse gas reduction targets; internal emissions trading systems; consideration of climate change in outside investments; and research and investment into energy efficiency, fuel switching and new technologies. BP and Shell have, for example, established internal cap-and-trade systems for all their business units. Indeed, involvement in trading or other flexibility mechanisms is becoming a common external control. Over the past five years, governments have increasingly accepted emissions trading as a policy of choice to address climate change. At the same time, progress in the international negotiations and the increasing likelihood of emissions limitations have driven the emergence of a market for greenhouse gas emissions. This trend toward greenhouse gas trading is motivated by both economic theory and empirical evidence, notably the successes of the US sulphur dioxide (SO2) emissions trading programme that was incorporated in the acid rain programme of the 1990 US Clean Air Act Amendments. The cap-and-trade programme, which has created a $4 billion market, has helped reduce SO2 emissions much faster, and at lower cost, than expected: emissions in 2010 are projected to be roughly half their 1980 levels. While the cost to industry is estimated at $1 billion per year, the health benefits are projected to reach $50 billion by 2010 (see Murphy 2002). While the sulphur emissions trading market arose from legislation, the early greenhouse gas emissions market has come in advance of finalised government rules. Motivations for firms to trade are similar to those for adopting climate response strategies in general: demonstrating environmental leadership, learningby-doing, hedging and managing risk, and generating revenue. According to the global energy brokerage firm Natsource, an estimated 200 million tonnes of CO2 equivalent (CO2e) were traded between mid-1997 and mid-2002. (This number includes trades of reductions as well as financial derivatives based on reductions, but excludes internal corporate trades and small trades of less than 1,000 tonnes of CO2e.) Some of this involvement may be related to bullish estimates of the size of the greenhouse gas (GHG) market, which have been furnished by potential beneficiaries. The World Bank, which is developing a Prototype Carbon Fund, predicts a $10 billion market by 2005. Corinne Boone of CO2e.com, a division of Cantor Fitzgerald

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with a 24 hour Internet trading marketplace, expects a fully commoditised GHG market by 2010. Her firm estimates that the EU emissions trading market alone could be generating $7 billion in annual trading volume by the time it matures in 2012. The greenhouse gas market is evolving in fragmented fashion, however, as few governments have formalised trading rules. It has arisen from project-based emissions trading programmes, which have been voluntary but may serve as precursors to formal regulations. The market has also emerged from a number of public and private trading programmes under development in Europe and North America. While a number of private firms, such as Ontario Power and US Gen, have experimented with early trading, their experience indicates that a lack of clear trading rules has increased transaction costs and prevented the emergence of a robust trading market. Uncertainty about rules and the size of future caps has also limited demand, keeping trading prices low and limiting impact on corporate investment decisions. While the Danish and UK systems are spurring trading activity, they also reveal the drawbacks of concurrently developing systems. The Danish and UK systems trade different gases, encompass different sectors and use different blends of allowance- and credit-based trading. Nonetheless, the first trade between these two schemes was recorded in May 2002, between Royal Dutch/Shell and Elsam, Denmark’s largest electricity generator and the first company to trade under the Danish system in December 2001 (see Buchan 2002). Some experts viewed this swap as evidence that firms could trade government-backed emissions allowances between jurisdictions, even in the absence of clear rules. The British system, launched in April 2002, is the first to cover all six greenhouse gases. Firms may participate in a variety of ways, from purely voluntary participation to agreements with government that yield energy tax exemptions and financial incentives. Thirty-four organisations across the finance, energy, manufacturing and automotive sectors—including Barclays, BP, Shell and Rolls Royce—voluntarily assumed a legally binding obligation to reduce emissions against 1998–2000 levels (see DEFRA 2002b and Box 2.1). The scheme, expected to eventually deliver reductions of over 4 million tonnes of CO2e annually, was in September 2002 reporting two or three trades per day and an average size of 7,500 tonnes of CO2e (Murphy 2002). But, as some observers anticipated, the UK programme—due to its voluntary nature—suffers from adverse selection: net sellers likely to generate excess permits were predominant among those that signed up, while potential buyers have largely refrained. After rising steadily to $20, prices dropped in late 2002 to below $7 due to oversupply of credits. The mandatory EU system, approved in December 2002, may begin to lessen the fragmentation and improve policy certainty for companies when it begins in 2005 (see Rosenzweig et al. 2002). The European Commission has acknowledged that its differences in sectors and gases covered (only CO2) could create market distortions, and that the UK system would have to be modified to transfer smoothly to the EU programme. Analysts fear incompatibilities from differences in design may inhibit firms from taking part in economically beneficial cross-border trading. Others are optimistic, expecting prices of $7 per tonne by 2010 (Fialka and Hofheinz 2002).

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• Asda Stores Ltd. • Barclays Bank plc • Battle McCarthy Carbon Club • Blue Circle Industries plc • British Airways plc • British Sugar plc • BP plc • Budweiser Stag Brewing Company • Dalkia plc • Dana UK Holdings Ltd • DuPont (UK) Ltd • EGNI (Wales) Ltd • First Hydro • Ford Motor Company Ltd • General Domestic Appliances Ltd • GKN (UK) plc • Imerys Minerals Ltd

• Ineos Fluor Ltd • Kirklees Metropolitan Council • Land Securities plc • Lend Lease Real Estate Investment Services Ltd • Marks & Spencer plc • Mitsubishi Corporation UK plc • Motorola GTSS • The Natural History Museum • Quantum Gas Management • Rhodia Organique Fine Ltd • Rolls Royce plc • Royal Ordnance plc • Shell UK Ltd • Somerfield Stores Ltd • Tesco Stores Ltd • UK Coal Mining Ltd • Wates Group

box 2.1 Initial entrants to the UK emissions trading scheme, April 2002 Source: DEFRA 2002a

Some firms have partnered with non-governmental organisations to build GHG markets. The World Resources Institute and WBCSD are working to establish a GHG accounting and reporting standard. The Partnership for Climate Action, teaming Environmental Defense with Alcan, BP, DuPont, Entergy, Ontario Power Generation, Pechiney, Shell and Suncor, aims to reduce emissions by 80 million tonnes of CO2e by 2010. The participants plan to create a trading system among them; first trades were expected by the end of 2002. The WWF’s Climate Savers Programme works with multinationals such as Johnson & Johnson and Nike to reduce emissions through efficiency and fuel switching (Dunn and Flavin 2002). Sixteen members of the Pew Center on Global Climate Change’s Business Environment Leadership Council have set corporate greenhouse gas targets, with trading an important motivation (see Margolick and Russell 2001). Corporate-led efforts have also appeared. The Emissions Market Development Group, including Credit Lyonnais, Swiss Re and other firms, is creating a ‘carbon repository’ to which companies deposit achieved reductions, and which increases the liquidity of early trading by assigning exchange rates in proportion to the risks of the reductions and issuing credits redeemable for future compliance. Insurance firm members believe, however, that the creation of insurance products to guarantee reductions will be critical to the entity’s success (Rosenzweig et al. 2002). Another private-led GHG emissions trading initiative is the Chicago Climate Exchange (CCX), which began in early 2003. The exchange’s design phase included 28 North American GHG-emitting companies, as well as municipalities, offset providers and financial service providers (see Sandor 2002a). The CCX’s 14 founding members have committed, as must future members, to reducing GHG emissions by 2% below 1999 levels during 2002 and reducing them by 1% annually thereafter,

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with credits given for domestic and international offsets (see Box 2.2). Corporate involvement is driven in part by expectations of future US government regulations, though the CCX itself has applied for regulatory coverage by the National Association of Securities Dealers. Chairman Richard Sandor intends to expand the CCX internationally (Sandor 2002b). • American Electric Power • Baxter International, Inc. • City of Chicago • DuPont • Equity Office Properties Trust • Ford Motor Company • International Paper

• Manitoba Hydro • MeadWestvaco Corporation • Motorola, Inc. • STMicroelectronics • Stora Enso North America • Temple-Inland Inc. • Waste Management, Inc.

box 2.2 Founding members of Chicago Climate Exchange Source: Chicago Climate Exchange 2002

Growing corporate engagement with project-based mechanisms—AIJ and CDM— is also evident. Programmes are progressing from pilot phases for gaining market experience to potential mechanisms for achieving voluntary commitments, hedging risk and complying with emissions limits. While governed by differing rules, they adhere to a de facto set of criteria. They include the pilot phase of the international AIJ programme, pilot programmes in the US and Canada, the Dutch government’s Emission Reduction Unit Procurement Tender and the World Bank’s Prototype Carbon Fund (PCF). As of 2002, 155 AIJ projects had been undertaken in 41 countries—roughly 80% involving renewable energy and energy efficiency (Rosenzweig et al. 2002). The Dutch programme has bought more than 4 million tonnes of CO2e reductions for roughly $30 million for projects such as co-generation in Romania and a wind park in Poland. The PCF intends to ‘demonstrate convincingly that there is significant private sector interest in the emerging market for emissions reductions under JI and the CDM’ (World Bank 2002a). As of mid-2002, members included five national governments and 17 companies from the electric power, energy, finance and trade sectors, and 31 host-country committee members (see Table 2.1). Twelve projects were under review, including those for renewable energy in Costa Rica and biomass in Bulgaria. Businesses are working to address concerns that carbon finance would bypass smaller projects in the poorest countries. The World Bank and the International Emissions Trading Association—a non-profit group of 50 companies involved in negotiations over flexibility mechanisms—have begun a Community Development Carbon Fund (CDCF), which will finance greenhouse gas emissions reductions from small projects in 64 developing countries. The first initiative to target small-scale projects through the CDM, the CDCF will work through local intermediaries and NGOs to lower transaction costs and risks and has formal support from a dozen governments and firms, including Swiss Re, TransAlta and the Commonwealth Bank of Australia (see World Bank 2002b).

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• Government of Canada • Government of Finland • Government of Norway • Government of Sweden • Government of the Netherlands • Japan Bank for International Cooperation Firm

Sector

Country

BP Chubu Chugoku Electric Power Deutsche Bank Electrabel Fortum Gaz de France Kyushu Electric Power Company Mitsubishi Mitsui Norsk Hydro Rabobank RWE Shikoku Electric Power Co. Statoil Tohoku Electric Power Co. Tokyo Electric Power Co.

Energy Electricity Electricity Financial Energy Energy Energy Electricity Trade Trade Oil Financial Electricity Electricity Energy Electricity Electricity

UK Japan Japan Germany Belgium Finland French Republic Japan Japan Japan Norway Netherlands Germany Japan Norway Japan Japan

table 2.1 Participants in the Prototype Carbon Fund, as of June 2002 Source: World Bank 2002b

As these markets emerge, economic models will give way to real-world corporate experience through actual market performance data. A 2002 Natsource study interviewed representatives of 35 large private companies in Canada, the US, Japan, the European Union and Russia. Of these, 28 reported ‘engagement in the GHG market’ as one of their corporate climate change response strategies. Their price expectations, just over $5 per tonne of CO2e in 2005 and an average of $11 per tonne in 2010, stood in the low to mid range of the economic modelling estimates of Kyoto Protocol implementation. This follows the pattern of sulphur trading, where market experience undercut model predictions. As the authors note, ‘it is hardly surprising that many market participants beat the price predictions of so many early modelers and analysts, as occurred in the performance of the US acid rain program in comparison to early modeling predictions’ (Natsource 2002). The Natsource study assesses the prices of the market transactions to date (see Table 2.2). Reviewing the corporate interviews and price trends, Natsource expects pre-Kyoto prices (2005) to remain below $5 per tonne of CO2e globally, and between

2. down to business on climate change Dunn Commodity type

Vintage year

Price per ton CO2e (US$)

VERs (past deals) Annex B VERs Annex B VERs CDM VERs Dutch ERUs

1991–2007 2008–2012 2000–2008 2008–2012

0.60–2.50 1.65–3.00 1.15–5.00 4.40–7.99

2001 2002 2002

2.86–4.17 2.14–2.85 7.14–8.56

Compliance tools Danish allowances Danish allowances: bid/offer UK allowances: bid/offer VER = verified emissions reduction;

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ERU = emissions reduction unit

table 2.2 Price ranges for publicly announced greenhouse gas transactions, as of 21 March 2002 Source: Natsource 2002

$2.50 and $9 in Europe. For Kyoto-period prices (2010), the firm expects prices between $5 and $11, with $9 as a best estimate. As this study suggests, corporate expectations of the GHG market range somewhat. In considering whether to engage with this market, companies must contend with major policy uncertainties and price volatility, as well as transaction costs and the possibility of anti-competitive behaviour. At the same time, the growing likelihood of a GHG-regulated business environment and the need to manage risk exposure suggest that experimentation with trading will continue. In the short term, however, market fragmentation and the absence of harmonised rules may prevent a more active market. These barriers both explain and are explained by sectoral and regional differences within the private sector.

Sectoral and regional differentiation Differences by sectors and regions are related to the perceived risk that climate policy poses to a firm. Sectors considered to face the highest risk are electricity and energy supply. Companies in these sectors, not coincidentally, have been the most active in influencing negotiations, setting internal targets and experimenting with trading. Energy-intensive firms also perceive serious risks, but some view them as manageable. The financial and services sectors see relatively little risk, and the potential for gain by providing services or products to mitigate climate change. The perception of risk has a geographical component. North American firms anticipate more risk than competitors in Europe and Asia, who see the risk as relatively manageable. In general, most firms believe that they can handle prices at

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$5/tonne CO2e and below, though risks increase more quickly with rising prices for the electricity, energy supply and energy-intensive sectors. Corporate expectations of pricing, which are related to concerns over obstacles to efficient trading, can also be differentiated geographically. Prices in Europe are expected to be the same as or somewhat higher than the global price, due to concerns that restrictions will be placed on trading or companies will not exploit efficient trading opportunities. Japanese prices are also anticipated to be higher than global prices, due to the country’s ambitious target and its industry’s hesitation about trading. Prices in Canada are expected to be close to the global price, as its market is expected to function effectively. Russian prices are expected to be lower than the global average, due to excess permits. And US prices are anticipated to be lower, due to weaker policies—a belief held most strongly by North American companies. Variation within sectors is evident as well. The energy supply sector includes firms actively engaged in, as well as firms notably disengaged from, the Kyoto mechanisms. In terms of involvement in government trading schemes and offset projects, there is a continuum from BP and Shell (most engaged) to Elf and ChevronTexaco (somewhat engaged) to ExxonMobil (least engaged). (ExxonMobil has maintained opposition to the Kyoto pact and pushed for changes in the leadership of the IPCC.) The European-headquartered firms are more involved than their American counterparts with international mechanisms and have more fully established processes for corporate target-setting and internal emissions trading systems. The same pattern holds with long-term energy sources. BP and Shell have both made significant investments in renewable energy—BP Solar has reported profits since 2000—and in hydrogen and fuel-cell technology. ChevronTexaco and ExxonMobil, which abandoned solar research in the 1980s, have made forays into fuel-cell investments. External pressure may spur further convergence. Following a boycott of UK subsidiary Esso and US shareholder pressure, ExxonMobil announced in 2002 a major fund for energy and climate research at Stanford University, acknowledging that, despite the uncertainties of climate science, moves to reduce risk may be justified (see Herrick 2002). Convergence is more evident in the automotive sector, due to the intensity of global competition, local air-quality drivers, and long-term market opportunities of low-GHG vehicles—with the emergent dynamic less a ‘transatlantic divide’ than a ‘Pacific threat’. US-based multinationals were highly resistant to the Kyoto talks, but in the aftermath moved from impeding to influencing the negotiations as they gained momentum. Car-making companies have become involved in trading experiments (Ford, Rolls Royce). Most visibly, firms have made major investments in hybrid-electric and fuel-cell vehicles. Through an ambitious technological strategy, Japanese car-makers have outpaced US firms in hybrid vehicle development and appear to be doing the same with fuel-cell vehicles (see Ball 2002b). Levy and Rothenberg (2002) argue that differing expectations of technological solutions account for these varying (but converging) strategies—an argument also applicable to differences in renewable energy investments among energy companies. The electric power sector, while not as uniformly global, has been closely involved in negotiations and Kyoto mechanisms. Power firms in Asia, North

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America and Europe count among the early emissions traders, and a majority of pilot AIJ/CDM schemes have been electricity-focused. The electricity generation sector has also been well represented in NGO partnerships, the World Bank PCF, and the CCX design. Interestingly, the more regional scope of the sector may match somewhat with the initial fragmentation of the trading and offset markets. Prospects for convergence are enhanced by electricity firms’ experiences with SO2 trading, but hindered by domestic pressures to insulate the coal industry from restrictions on carbon emissions. Other industrial sectors engaged with the Kyoto negotiations and mechanisms include chemicals, electronics, agriculture and forest products. These sectors are less direct contributors to climate change than the previous sectors, and have generally more narrow mitigation opportunities (i.e. agricultural or forestry offsets, HFC [hydrofluorocarbon] or PFC [perfluorocarbon] reductions). Though it is difficult to generalise across such a diverse sector, there appears to be relatively less divergence here, and firms such as DuPont and STMicroelectronics have been among the leading advocates for global rules and mechanisms. The financial services sector exhibits important internal and regional differences. European-based insurers and reinsurers—Munich Re, Swiss Re, Lloyd’s of London, Credit Suisse, Deutsche Bank and ING—have been vocal proponents of emissions controls and are pursuing trading opportunities. Their American counterparts, by contrast, have taken a passive approach, partly from fear of losing clients resistant to climate policies. In a study of American banks and insurers such as Bank of America, Chase Manhattan and AIG, van der Woerd et al. (2000) conclude that these firms ‘seem to have no vision on the role financial institutions could play to combat greenhouse gas emissions’. The internationalisation of financial services may yet encourage convergence, in turn exerting influence on other sectors. Credit-rating agencies have begun to include GHG programmes in analysis of environmental risk factors. In May 2002, the Carbon Disclosure Project, supported by institutional investors representing $4 trillion in assets and including Credit Suisse, Merrill Lynch and UBS, announced it had petitioned 500 large corporations to quantify their greenhouse gas emissions and plans for reducing them. According to a 2002 report commissioned by UNEP on climate change and the financial sector, several factors prevent financial institutions from taking a more proactive stance. Many are unaware of the gravity of the issue or see no financial connection; policy uncertainty has deterred early engagement; lack of information on corporate emissions and strategies hampers integration of the climate issue into financial assessments; and uncertainties about alternative-energy technologies and emissions markets deter investors. The report urges financial institutions to become more familiar with these threats, incorporate climate considerations into their processes, and work closely with policy-makers in developing mitigation strategies (UNEP 2002). Sectoral and regional differences in corporate strategy thus reflect varying interpretations of the technological, economic and policy dimensions of climate change. A strong case can be, and has been, made that economic and competitive considerations will exert pressure toward convergence within sectors and across regions. But it is likely that one will still, for some time, be able to identify groups

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of front-runners, followers, and laggards. Furthermore, additional corporate activities, and lessons from these experiments, are critical inputs for shaping implementation policy. Any overview of corporate responses to climate change is therefore incomplete without discussion of leadership as a strategic—and currently underutilised—option.

The leadership lacuna Defining and assessing corporate ‘leadership’ on climate change is a relative and somewhat subjective undertaking. Nonetheless, a brief overview of three companies—DuPont, BP and Shell—may provide some explanation of the motivations for a firm to assume a leadership position on the issue. It may also permit early analysis as to whether the benefits of leadership in an uncertain policy environment merit the risks. DuPont has exhibited leadership on the climate issue in several ways. The firm set a target of a 65% reduction in greenhouse gas emissions between 1990 and 2010, and has reportedly achieved a 50% cut, mainly through improved nylon manufacturing methods. It also aims to hold total energy use flat at 1990 levels and derive 10% of global energy use from renewable resources by 2010. And DuPont is a prominent member of the WBCSD and Pew Center, advocating sensible climate policies (Dunn and Flavin 2002). The early trading efforts of BP and Shell also represent leadership forays. Since 1998, both firms have established targets for reducing greenhouse gases from operations by 10% below 1990 levels (with respective target dates of 2010 and 2002), established internal cap-and-trade programmes, and assumed leading roles in shaping and executing national and international trading. Both have joined the UK trading scheme, and Shell’s new trading business is also exploring CDM opportunities through the Dutch and other programmes (see Shell International 2002). The BP target reportedly unleashed efforts to learn about trading: one manager commented: ‘Do not underestimate the power of pre-emptive, aspirational targetsetting. The role of leadership is to invent actions that naturally have the consequence of transforming people’s thinking’ (Harvard Business School 2001). In 2001, the firm traded over 4.55 million tonnes of CO2e at an average price of $7.60 per tonne (BP 2002). In March 2002, BP announced it had reached its emissions reduction target eight years ahead of schedule at no net cost, primarily through energyefficiency measures such as reduced flaring and venting (BP 2002). Speaking at Stanford Business School, Chief Executive John Browne (2002) observed that the cost of precautionary action had been ‘clearly lower than many feared’, that additional incentives were needed, and that BP sought to maintain ‘our leadership position’ in climate action. Browne has committed BP to containing its net emissions at 2001 levels through 2012, by means of further energy-efficiency improvements, the use of cleaner fuels and the application of flexible mechanisms. While such a leadership position entails real risks and unclear benefits, the early experiments of BP and others are likely to yield important lessons for future policy

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design. For example, BP experienced price volatility with its internal trading system—a problem related to restrictions on the banking of permits, which led to extreme supply highs and lows. Subsequent policy changes to improve banking flexibility evened out this volatility (Natsource 2002). As the BP experience suggests, real-world corporate experience will be an invaluable input to the debate over the actual costs and benefits of reducing emissions. It is not unreasonable to expect that, over time, managers will prove the pessimistic economists to be mostly wrong. One can also anticipate that a handful of early movers will seek competitive advantage by shaping the rules of the game. But whether the broader corporate world will become more proactively engaged in shaping future climate policies is an open question. Until this occurs, potential leaders may be deterred from stepping into the turbulent waters of the early greenhouse gas market. At the 2000 World Economic Forum in Davos, corporate leaders voted climate change the most pressing issue confronting the global business community. Yet, as Packard and Reinhardt (2000) argue in the Harvard Business Review, in reality many executives, finding the climate issue so complex, have found it easier to adopt a defensive or wait-and-see stance. The authors urge executives to ‘encourage a regulatory climate that will be stable and predictable—and therefore friendly to investment—over the long term’. That is not the regulatory climate we have today, and any regulatory climate change seen thus far has taken place more in spite of than because of corporate pressure. It took over half a century for business and political leaders to collectively build a workable global trade regime. Corporate leaders face a commensurate challenge in helping to build an effective, sustainable global climate regime—a challenge they have yet to fully embrace.

References Ball, J. (2001) ‘Environmentalists highlight firms’ rifts on international global-warming treaty’, Wall Street Journal, 27 August 2001: A8. —— (2002a) ‘Kyoto discord leads firms to call for unified rules’, Wall Street Journal, 29 August 2002: A10-11. —— (2002b) ‘Honda, Toyota plan to release fuel-cell test vehicles in US’, Wall Street Journal, 2 December 2002: A12. BP (2002) ‘BP beats greenhouse gas target by eight years and aims to stabilise net future emissions’, press release, 11 March 2002. Browne, J. (2002) Beyond Petroleum: Business and Environment in the 21st Century (Stanford, CA: Stanford Graduate School of Business, 11 March 2002). Buchan, D. (2002) ‘Companies agree first pollution permit swap’, Financial Times, 7 May 2002: 9. Chicago Climate Exchange (2002) ‘Chicago Climate Exchange names founding members’, press release, 16 January 2003. Cortese, A. (2002) ‘As the Earth warms, will companies pay?’, New York Times, 18 August 2002: §§ 3, 6. DEFRA (UK Department for Environment, Food and Rural Affairs) (2002a) ‘Auction Success for UK Emissions Trading Scheme’, news release, 13 March 2002. —— (2002b) ‘UK Emissions Trading Scheme: Introduction’, www.defra.gov.uk/environment/ climatechange, April 2002.

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Dunn, S. (2002) Reading the Weathervane: Climate Policy from Rio to Johannesburg (Worldwatch Paper, 160; Washington, DC: Worldwatch Institute). —— and C. Flavin (2002) ‘Moving the Climate Change Agenda Forward’, in C. Flavin, H. French, G. Gardner, S. Dunn, R. Engelman, B. Halweil, L. Mastny, A. McGinn, D. Nierenberg, M. Renner and L. Starke (eds.), State of the World 2002 (New York: W.W. Norton): 24-50. ECCP (European Climate Change Programme) (2001) European Climate Change Programme Report (Brussels: ECCP). Fialka, J.J., and P. Hofheinz (2002) ‘Europe to create a big emissions-trading market’, Wall Street Journal, 11 December 2002: A15. Harvard Business School (2001) Global Climate Change and BP Amoco (Case Study 9–700–106, rev. February 28; Cambridge, MA: Harvard Business School Publishing). Herrick, T. (2002) ‘Exxon contributes $100 million to research on energy, climate’, Wall Street Journal, 21 November 2002: B2. Interlaboratory Working Group (2000) Scenarios for a Clean Energy Future (Oak Ridge, TN/ Berkeley, CA: Oak Ridge National Laboratory/Lawrence Berkeley National Laboratory). Levy, D.L., and P. Newell (2000) ‘Oceans Apart? Business Responses to Global Environmental Issues in Europe and the United States’, Environment 42.9 (November 2000): 8-20. —— and S. Rothenberg (2002) ‘Heterogeneity and Change in Environmental Strategy: Technological and Political Responses to Climate Change in the Global Automobile Industry’, in A.J. Hoffman and M.J. Ventresca (eds.), Organizations, Policy, and the Natural Environment: Institutional and Strategic Pressures (Stanford, CA: Stanford University Press). Margolick, M., and D. Russell (2001) Corporate Greenhouse Gas Reduction Targets (Washington, DC: Pew Center on Global Climate Change). Metz, B., O. Davidson, R. Swart and J. Pan (2001) Climate Change 2001: Mitigation (Contribution of Working Group III to the Third Assessment Report of the Intergovernmental Panel on Climate Change; Cambridge, UK: Cambridge University Press). Murphy, C. (2002) ‘Hog Wild for Pollution Trading’, Fortune, 2 September 2002: 137-40. Natsource with Global Change Strategies Incorporated (2002) Assessment of Private Sector Anticipatory Response to Greenhouse Gas Market Development (New York: Natsource). Packard, K.O., and F. Reinhardt (2000) ‘What Every Executive Needs to Know About Global Warming’, Harvard Business Review 78.4 (July/August 2000): 129-35. Rosenzweig, R., M. Varilek and J. Janssen (2002) The Emerging International Greenhouse Gas Market (Washington, DC: Pew Center on Global Climate Change). Sandor, R. (2002a) ‘CCX Progress Report’, Environmental Finance: 43. —— (2002b) ‘The Chicago Climate Exchange: Creating a Market for GHG Emissions’, presentation at Yale School of Management, 3 December 2002. Shell International (2002) ‘Our Approach to Climate Change’, www.shell.com. UNEP (United Nations Environment Programme) (2002) Climate Change and the Financial Services Industry (Paris: UNEP, October 2002). Van der Woerd, K.F., C.M. de Wit, A. Kolk, D.L. Levy, P. Vellinga and E. Behlyarova (2000) Diverging Business Strategies toward Climate Change: A USA–Europe Comparison for Four Sectors of Industry (Amsterdam: Vrije Universiteit Institute for Environmental Studies). WBCSD (World Business Council for Sustainable Development) (2002) A Business Perspective on Upcoming Climate Negotiations (Geneva: WBCSD). Weyant, J.P. (2000) An Introduction to the Economics of Climate Change Policy (prepared for the Pew Center on Global Climate Change; Arlington, VA, July 2000). World Bank (2002a) ‘New fund to help poor countries under Kyoto Protocol’, press release, 2 September 2002. —— (2002b) ‘Welcome to the Prototype Carbon Fund’, www.prototypecarbonfund.org, June 2002.

3 Organising business industry ngos in the climate debates Simone Pulver University of California, Berkeley, USA

The spectres of climate change and the international regulation of greenhouse gas emissions have motivated both the business and environmental communities to organise their climate advocacy efforts. A comparison of the organising success of the two communities over the past ten years reveals a startling difference. On the environmental side, the Climate Action Network (CAN) has been the dominant association representing environmental NGOs in the multilateral climate negotiations. With over 280 members, CAN represents the majority of environmental groups advocating on climate change and has consistently embodied the voice of the environmental community in the climate debates since it was founded in 1989. In contrast, the business view in the climate negotiations has been voiced by a changing and competing array of business and industry associations. The Global Climate Coalition (GCC), also founded in 1989, was the primary business association in the early years of the multilateral climate negotiations, along with the International Chamber of Commerce and the International Petroleum Environmental Conservation Association. However, in 1996 the GCC started losing members and in 2002 withdrew from the international arena. In its wake, a range of business groups emerged, including, the World Business Council for Sustainable Development, the Pew Center on Global Climate Change and the International Emissions Trading Association. Given the diversity of business interests, the range of representative associations is not too surprising. However, even single sectors, such as the oil industry, have participated in the climate negotiations through multiple, competing business associations whose individual prominence has fluctuated over time. What explains this difference? Why has the private sector in general and the oil industry in particular been less successful than the environmental community in organising internal consensus and projecting a united front on the climate issue? I offer a two-part answer. First, much of the challenge of organising the business voice in the climate negotiations is due to a fundamental conflict between companies that approach climate change as a business opportunity and others that approach it as a liability. The former include the wind, solar and energy efficiency industries, as well a natural gas companies who anticipate a climate-driven shift

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away from coal and oil towards natural gas. Until the late 1990s, the latter included the oil, coal and automobile industries, energy-intensive industries such as aluminium and cement, and electric utilities. However, in 1997, the conflict in the wider business community was reproduced within the oil industry. British Petroleum (BP) and Royal Dutch/Shell announced that they were willing to take precautionary action on climate change and withdrew from the Global Climate Coalition. They broke ranks by embracing climate change as a business opportunity. At that time the rest of the oil industry, dominated by Exxon and Mobil and working through the Global Climate Coalition, was highlighting the uncertainty of climate science and emphasising the economic cost of mandated greenhouse gas emission reductions.1 Tension within the business community in general and the oil industry in particular, however, is not a sufficient explanation for business’s failure to present a united front on the climate issue. I argue that tension within the business community exposed a fundamental weakness in the function of business and industry associations in the international climate negotiations. Member companies expect business associations to act as ‘anti-politics machines’.2 The role of business groups is to create distance between their member companies and the climate policy process and allow members to participate in climate politics without directly appearing as political agents. The anti-politics function of business associations is at the heart of the private sector’s difficulties in organising internal consensus and projecting a united front in the climate negotiations. It has had two effects. First, the anti-politics function exacerbated tension between European and American business. The European and American oil companies disagreed not only on appropriate action in the face of climate change but also on appropriate behaviour by business associations in international politics. The US-based Global Climate Coalition failed as an international business association because it tried to export an American political model to the international arena and, in the process, alienated its European members. Second, the anti-politics function made it difficult for business associations to accommodate conflict between members companies. The split in the oil industry highlighted that companies compete to control business groups, de facto voicing their own opinions under the name of a business association. The competition for control made it impossible for the Global Climate Coalition to accommodate internal conflict and led to its decline and the creation of new business associations. This chapter is structured around a comparison of the role of business associations and the Climate Action Network in facilitating oil company and environmental NGO participation in the international climate negotiations. Drawing on research conducted over the past three years, I demonstrate that business and industry associations (BINGO is the acronym used by the UN Climate Change Secretariat) serve three main functions for their oil company members in the climate debates. First, BINGO membership is the channel by which oil companies gain physical access to the UN negotiations. Second, consensus within the oil industry on climate policy issues is organised through BINGOs. Finally, BINGOs are the means by which oil com1

2

The split in the oil industry in the context of the climate negotiations has been well documented. See Levy and Newell 2000; Rowlands 2000; Birger Skjaerseth and Skodvin 2000; and van den Hove et al. 2002. I borrow the expression ‘anti-politics machine’ from Ferguson (1994).

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panies participate in the climate negotiations without directly appearing as political agents. In sum, business and industry associations serve access, consensus and anti-politics functions for oil companies in the climate debates. My comparison of the role of BINGOs and the Climate Action Network reveals that they make similar demands and face similar challenges in their access and consensus functions. However, in terms of their political function, BINGOs and the Climate Action Network face very different requirements from their respective memberships. This difference is central to explaining the success of the environmental community and the failure of the business community in projecting a united front on the climate issue.3

NGOs in the multilateral climate negotiations A side-effect of the multilateral climate negotiations has been an increase in the number and size of NGOs voicing the concerns of the environmental and business communities in national and international arenas. Since the beginning of the multilateral climate process, the number of NGOs attending meetings has risen from 96 at the first Intergovernmental Negotiating Committee meeting to a high point of 323 at the Sixth Conference of the Parties (COP 6) in The Hague. This analysis contributes to the literature on NGO participation in international environmental governance by disaggregating the general category of non-state actor and by comparing the different ways in which the private sector and the environmental community engage in climate politics. Recent research recognises the important roles played by non-state constituencies in the origin and negotiation of international environmental agreements (Haas 1992; Finger 1993; Risse-Kappen 1995; Lipschutz and Mayer 1996; Meyer et al. 1997; Raustiala 1997; Fri 1992; Susskind 1992; Sell 1995; Levy 1997; Levy and Egan 1998; Betsill 2000; Newell 2000; Betsill and Corell 2001; Oberthuer 2002). In most of these analyses, the non-state actors involved in environmental governance are homogenised. Many authors focus exclusively on environmental protection NGOs. Those that do acknowledge the participation of corporations and business and industry NGOs in environmental treaty negotiations assume unified corporate interests (Wapner 1995) or don’t elaborate on the critical interaction between industry actors and environmental protection NGOs (Raustiala 1997). Analyses of private-sector involvement in environmental treaty negotiations also fall short in situating corporate actions within a broader frame of environmental politics (Susskind 1992; Levy 1997). My research addresses these lacunae by exploring the multiple roles of business and industry NGOs in the climate debates and by examining the interrelations 3

The empirical basis for this chapter includes: interviews with over 80 participants in the climate negotiations (focusing on representatives from oil companies and business and environmental NGOs); participant observation at COPs 4, 6, 6bis, 7 and 8; analyses of relevant NGO publications and UNFCCC (United Nations Framework Convention on Climate Change) documents; and organisational histories of the Climate Action Network and the range of BINGOs representing oil companies in the climate negotiations.

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within a fragmented private sector, its representative BINGOs and its environmental critics. I provide a new basis from which to understand the functions of and challenges to non-state actors in international environmental governance.

The access function Business and industry associations play a prominent role in the multilateral climate negotiations for several reasons. The first relates to access to the negotiations. BINGO membership is the means by which companies gain access to the climate negotiations. UN regulations governing attendance allow only four categories of attendees: national delegations, press, UN organisations and NGO observers. In order to have a physical presence at the international climate negotiations, a company must be a member of a business or industry NGO, registered with the UN Climate Change Secretariat. The world’s major oil multinationals (Royal Dutch/ Shell, BP, ExxonMobil, ChevronTexaco, TotalFinaElf) have attended and participated in the climate negotiations through a range of business and industry NGOs. They include the International Chamber of Commerce (ICC), the International Petroleum Industry Environmental Conservation Association (IPIECA), the Global Climate Coalition (GCC), the Pew Center on Global Climate Change, the World Business Council for Sustainable Development (WBCSD), as well as the Union of Industrial and Employers’ Confederations of Europe (UNICE), the International Climate Change Partnership (ICCP) and the International Emissions Trading Association (IETA). See Table 3.1 for summary information on the most prominent of these organisations. Oil company representatives tend to participate in the climate negotiations through the BINGO in which they play a dominant role. For example, at COP 7 representatives from Shell attended through two organisations: IPIECA, for a member of the sustainable development team, and IETA, for representatives from Shell’s trading business. In addition to access, BINGOs also provide various logistical services to their member companies during the negotiations. The climate meetings are as much opportunities for information exchange and networking as they are sites for the negotiation of text. The Climate Change Secretariat formalised the information exchange in 1996, granting NGOs the right to set up information booths and host side events during the negotiations. Once again, UN requirements prevent individual companies from sponsoring a booth or side event at the conference centre. When BP and Shell shared their experiences with emissions trading and the Clean Development Mechanism at COP 8 in 2002, speakers from both oil companies were integrated into side events hosted by IETA and the WBCSD. There have been some exceptions to the rule that companies must act through a BINGO at the COPs. For example, at the COP 4 negotiations in 1998, BP set up a table demonstrating a climate change CD-ROM developed by BP Education for use in the classroom. The more formal exception is the Climate Technology Pavilion, launched at COP 6 in 2000. The purpose of the pavilion is to showcase clean technologies, and most of the booths were sponsored by private companies. At COP 6, BP,

3. organising business Pulver 51 International Chamber of Commerce (ICC) www.iccwbo.org International Petroleum Environmental Conservation Association (IPIECA) www.ipieca.org Global Climate Coalition (GCC) www.globalclimate.org

World Business Council for Sustainable Development (WBCSD) www.wbcsd.org

Pew Center on Global Climate Change www.pewclimate.org

Founded in early 1900s; accredited as observer to UN in 1946; members from over 140 countries; broad scope of activities; Joint Working Party on Climate Change with 40 members was organised in the early 1990s; based in Paris. Founded in 1974 following the establishment of the United Nations Environment Programme; members include oil companies from all over world; climate change is one of five policy areas; Global Climate Change Working Group was established in 1988 and has over 30 members; based in London. Founded in 1989 in response to establishment of Intergovernmental Panel on Climate Change; in 1996, membership represented over 40% of US economy; works exclusively on climate change; has nine committees focusing on different aspects of climate change; based in Washington, DC. Founded in 1995 by merging the World Industry Council for the Environment and the Business Council for Sustainable Development, which was established in 1991; currently has 160 global members; works on a broad scope of issues related to business and sustainable development; Energy and Climate Working Group was established as a ‘council project’ and has 117 members; based in Geneva. Founded in 1998 as an alternative to the Global Climate Coalition; works exclusively on climate change; initially had 20 corporate partners who do not contribute financially to the centre; based in Washington, DC.

table 3.1 Business and industry NGOs in the climate negotiations

Shell and Norway’s Statoil each had large displays in the Climate Technology Pavilion.4 Finally, special events can be hosted at private venues independent of the Climate Change Secretariat or conference site. For example, the business community generally hosts a dinner for delegates at each COP. Nevertheless, most of the activity during the climate negotiations centres on the conference site and is therefore co-ordinated by BINGOs on behalf of their member companies. The access function of BINGOs in the multilateral negotiations distinguishes them from the Climate Action Network. Since CAN members are NGOs in their own right, they can register with the Climate Change Secretariat either as members of CAN or under their own name. Likewise, each member of CAN is able to sponsor its own information booth and to host side events. However, both BINGOs and CAN share a general frustration with access, springing from the second-tier status of all NGOs in 4

The importance of this opportunity for display is questionable, since there has not been consistent support for the idea. The site for the pavilion had been part of the problem. At the COP 6 negotiations, the pavilion was separate from the conference hall, and the entrance quite hard to find, especially in the rain.

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the climate negotiations. The primary responsibility of the Climate Change Secretariat is to support national delegations, and NGO observer privileges have been curtailed when they are seen to interfere with the inter-state negotiations. In the 1997 COP 3 negotiations, the COP chairman ordered NGOs off the negotiating floor into the observer balcony because of a particularly egregious intervention by an oil lobbyist. With the increasing use of cellphones in the conference centre, this physical separation has become a moot point. However, it reinforces the fact that NGOs attend COPs through the good graces of the UN organisers. The BINGO name is a case in point. Most company representatives are not enthusiastic about the BINGO acronym. Nevertheless, they accept it since the terminology was introduced by the Climate Change Secretariat.

The consensus function A second, more important function of BINGOs and CAN in the climate negotiations is to provide a forum to aggregate policy stances and negotiate consensus among member organisations. Agreement within the business and environmental community is attractive to each because an organised umbrella organisation with a large membership is more likely to wield political influence. Both the private sector and the environmental community have faced internal conflicts over climate policy and strategy in the negotiations. The consensus efforts of the Climate Action Network are a success story. The business community has been less effective in organising a consensus voice and projecting a united front in the climate debates. CAN has successfully organised consensus in the environmental climate advocacy community both at the organisational and issue levels. Two of CAN’s distinguishing features are its longevity and its broad membership. CAN was founded in 1989 and has since been the dominant environmental voice in the multilateral climate negotiations and a constant presence at all climate meetings. It is the official liaison between the Climate Change Secretariat and the environmental community. The network has 287 members, co-ordinated through regional nodes in Africa, Central and Eastern Europe, Europe, Latin America, North America, South Asia and Southeast Asia. This broad membership is one of CAN’s strengths, because individual members of CAN are able to claim the support of the majority of environmental NGOs in their lobbying efforts. CAN has also been very effective at organising consensus on specific policy issues. Each day of the negotiations, CAN publishes ECO, a daily newsletter and commentary on the progress of the different negotiating groups. In order to write ECO, CAN organises daily sessions to discuss and agree on lobbying tactics. To the network’s advantage, the lead climate campaigners from each of its member NGOs generally attend the COPs and all strategy sessions. CAN is thus able to make on-the-spot decisions for the network at each COP. The climate experts of three environmental NGOs (Friends of the Earth, Greenpeace and WWF) generally direct CAN strategy at the negotiations; however, all members actively participate in CAN discussions and are mobilised in its lobbying efforts.

3. organising business Pulver 53 CAN’s success in organising consensus is not due to the absence of internal conflict. The primary axis of conflict within CAN is between Northern and Southern NGOs and their respective emphasis on environmental versus equity implications of the climate negotiations (Duwe 2000). CAN’s membership reflects this conflict in an unusual way. Most climate advocacy NGOs based in Southern countries are members of CAN. However, some US-based social justice NGOs have opted not to participate in CAN because they reject the UN negotiations process as elitist and co-opted. In The Hague in 2000 and in New Delhi in 2002, these NGOs hosted a Climate Justice Summit parallel to the COP 6 and COP 8 meetings. Other equity-focused environmental NGOs are both CAN members and participate in the climate justice discussions. The second source of conflict within CAN has been disagreements over appropriate mechanisms to achieve the goals of the climate change convention. The issue of emissions trading was particularly divisive in the lead-up to COP 3 in Kyoto. Most of CAN’s members rejected emissions trading as a loophole for countries to escape the responsibility of reducing carbon emissions within their national borders. Environmental Defense, the American environmental NGO instrumental in designing the successful sulphur dioxide emissions trading programme in the United States, was a strong emissions trading advocate. Later in the process, similar tensions emerged over the issue of avoided deforestation. The conflict came to a head during the tense COP 6 negotiations in The Hague and became publicly manifested in the final analysis of The Hague negotiations. Several of the US NGOs blamed the European Union for the collapse of the negotiations, while the European NGOs were supportive of the European Union for trying to maintain the environmental integrity of the Kyoto Protocol. This conflict caused Environmental Defense to withdraw from CAN and no longer participate in its daily strategy meetings, but the break was never formal. Environmental Defense continues to be listed in CAN’s membership directory. Moreover, neither the North–South nor the US–Europe conflict undermined CAN’s position as the voice of the environmental community in the climate negotiations. The private sector has not been able to organise a BINGO equivalent to the Climate Action Network. Over the course of the climate negotiations, the Global Climate Coalition, the International Chamber of Commerce, the World Business Council for Sustainable Development, and the International Emissions Trading Association have appeared as primary representatives of the business community. In the early years of the negotiations, from 1990 to 1996, the US-based Global Climate Coalition stood as the dominant BINGO in opposition to CAN. Representing 40% of the US economy and a range of multinationals, the GCC was seen to speak for the business community and the oil industry. However, the GCC never played a role fully equivalent to CAN. First, it never attained the geographic diversity of the membership of the Climate Action Network: the bulk of the GCC members were US companies. From the oil industry, only the American oil companies (Exxon, Mobil, Chevron and Texaco) were among the more active ‘board members’. BP and Shell were ‘general members’ and only through their American subsidiaries. Second, the GCC never represented the oil multinationals exclusively. The major oil companies were always also members of the ICC and IPIECA, although only a few company representatives consistently attend the negotiations as part of the ICC and IPIECA

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contingents. Third, the GCC did not rival CAN in its longevity. The GCC began losing members from 1996 onwards as several major oil and car companies shifted their climate policies from a position of doubting climate science to support for precautionary action. By 2002, the GCC had withdrawn from the international arena. Finally, unlike CAN, the GCC had a rival BINGO in the International Chamber of Commerce. The ICC has a long history of engagement with UN processes and is the industry liaison to the Climate Change Secretariat, arranging for the BINGO room at the conference centre and co-ordinating the daily BINGO meetings. The ICC is granted one of the slots to address the plenary of delegates at the initiation of the high-level segment of each COP. The WBCSD received a second slot when it became clear that there were two divergent business perspectives on climate change. The BINGO community has also not organised anything equivalent to CAN’s ECO newsletter. The on-the-spot consensus mechanisms necessary to publish ECO are virtually impossible for a BINGO. Any specific policy position must first be vetted through the internal approval process of individual member companies. The daily BINGO meetings during the COPs are used to discuss logistical issues, rather than strategy and tactics. As explained in the Introduction, part of the challenge in organising the business voice in the climate negotiations springs from the conflict between those companies that see climate change as a business opportunity and those that regard it as a liability. The oil industry exemplifies this conflict. Its engagement with climate change can be divided into three phases. From 1991 to 1996, the climate change advocacy efforts of the oil industry were led by the four American oil companies, Exxon, Mobil, Chevron and Texaco. These companies were in leadership positions in the GCC, ICC and IPIECA and used the BINGOs to lobby against international climate regulation. A split between the American and European branches of the oil industry initiated the second phase. In October of 1996, BP quietly withdrew from the Global Climate Coalition because the BINGO no longer reflected BP’s position on climate change. In May 1997, Sir John Browne, CEO of BP, publicly split from the rest of the oil industry by announcing that his company was willing to take precautionary action in the face of potential global climate change. Shell followed suit in 1998, expressing support for international climate regulation. In the current, third phase, the BP and Shell approach to the climate issue is gaining broader acceptance. Texaco (before its merger with Chevron) and Mexico’s national oil company are supportive of international climate regulation and are experimenting with emissions trading. Even ExxonMobil has softened its sceptical approach to climate science. While the conflict between the European and American branches of the oil industry was more divisive than that between European and American environmental NGOs, the split in the oil industry is not a sufficient explanation for the decline of the Global Climate Coalition and for the failure of business to present a united front on the climate issue. Even prior to the split, the GCC did not achieve a status equivalent to CAN and always existed within a community of competing BINGOs. Moreover, the split in the oil industry is primarily a policy split. Although the climate policies of the different oil companies combine market and non-market strategies (Levy and Kolk 2002), the divergent climate strategies have had a minor effect on oil company operations and investments. BP and Shell are operationally

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very similar to ExxonMobil (Rowlands 2000) and will continue to be so for the next decades. Therefore, one might expect even a split oil industry to find common ground in the climate negotiations and to work to project a united front through a representative business association.

The anti-politics function This chapter began with the question of why the private sector has been less successful in organising consensus in the climate debates than the environmental community. I argue that the answer to this question lies in the different ways in which private companies and environmental groups participate in climate politics. The third role of BINGOs and CAN in the multilateral climate negotiations is to channel the input of their members into the political process. The flow of information into the climate negotiations is elaborate. There exists a detailed literature on the various mechanisms of information transfer from observer organisations into the negotiations process. Focusing on the activities of environmental NGOs, Betsill and Corell (2001) identify lobbying, proposing negotiating text, preparing reports and position papers, and co-operating with like-minded delegations as some of the activities by which environmental NGOs insert information into the international climate negotiations. Newell (2000), Levy and Egan (1998) and Raustiala (1997) catalogue a similar range of activities as channels of private-sector influence. However, there is a fundamental difference between the participation of the environmental community and that of the private sector in the multilateral climate negotiations. Environmental NGOs come to the COPs with the openly political purpose of influencing the direction of the negotiations, and they do so both as CAN members and in their own names. In contrast, most oil multinationals are unwilling to appear as political agents in the climate debates. They characterise their activities as providing advice rather than exerting influence. In interviews, oil industry and other executives emphasised that they attend COPs as observers and not as participants, the distinction being that observers watch and participants try to influence the process. They made the same distinction between their roles as advisors rather than as political decision-makers in climate politics at the national level. BINGOs play a crucial role in creating this ‘anti-politics’ fiction, establishing distance between their member companies and the political process. By co-ordinating their advocacy through memberships in BINGOs, companies remove themselves from direct intervention in the political process. BINGOs play an anti-politics role in both American and European politics. In the US, the role of industry associations is to create some organisational distance between a specific corporate brand name and lobbying efforts in Congress. In the European model, acting through an industry association is congruent with and reinforces companies’ roles as advisors not decision-makers.5 5

Explaining the origins of the different styles of political engagement of the oil multinationals

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The fiction of distance between oil companies and politics is limited to direct influence on the political process. In the more diffuse realm of influencing public opinion, the corporate name and logo are used as resources. ExxonMobil ran a series of climate change advertisements, questioning the efficacy of international climate regulation, in the New York Times and Washington Post editorial pages under the ExxonMobil brand. Likewise, BP and Shell, after the split in the oil industry, prominently featured their corporate logos in their climate-friendly, clean-technology advertisements. However, none of the three corporations has created its own ExxonMobil, BP or Shell climate advocacy NGO. Rather, they continue to participate in the climate negotiations process through BINGOs with broader memberships. Adopting a non-political identity is standard behaviour for oil companies; however, in the context of the international climate negotiations, the anti-politics function imposed on BINGOs became an obstacle to organising consensus within the oil industry. The anti-politics function is implicated in the decline of the Global Climate Coalition and the general turbulence of the BINGO community in two ways, both brought to the forefront by the split in the oil industry. First, differences between European and American definitions of the anti-politics function created problems for international business associations. In particular, US-style lobbying undermined the advisor role that European companies espouse. This clash of political styles was central to the downfall of the GCC. Beyond policy disagreements, BP and Shell rejected the GCC’s aggressive lobbying tactics and the negative press it generated. Representatives from both companies credit the failure of the GCC to its export of an American model of politics to the international arena. By Americanstyle politics they mean adversarial politics where regulation is the product of ongoing conflict between interest groups, and business wields influence through the action of lobbying groups in Washington, DC. They contrast American politics to the European model which relies on a more consultative process based on a clear division of responsibilities. Government sets the regulatory agenda and turns to relevant interest groups for advice.6 BP, Shell and others rejected the Global Climate Coalition because membership in the BINGO became a political liability. The GCC’s lobbying violated the projected self-image of European oil companies as mere advisors to government law-makers. Once the European oil companies had withdrawn from the GCC, the BINGO also became a liability for its remaining members. From the perspective of American oil companies, the GCC name became too closely linked with the particular brand names of the American oil and car companies. The GCC no longer appeared as a

6

and environmental NGOs is beyond the scope of this chapter. There seems to be an inverse relationship between access to government and open admission of political influence. With some national variation, the economic and strategic importance of oil resources guarantees oil corporations political access, and they tend to wield influence out of the public eye. Environmental NGOs, on the other hand, tend to be on the political periphery and exert influence through public campaigns (Kingdon 1995). These are general categorisations of European and American politics and have been explored with much greater nuance (see Vogel 1986; Djelic 1998; Engels 2001; Hampden-Turner and Trompenaars 1993). Nevertheless, they reflect the thinking of many participants and observers in the climate negotiations.

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general industry lobbying association but rather as the lobbying arm of ExxonMobil and a few others. After the fall of the GCC, other BINGOs representing the oil industry self-consciously constituted themselves as non-political. The Pew Center on Global Climate Change, launched in 1998 with 20 corporate partners (including BP and Shell), was established to provide an alternative to the GCC. Its advocacy style focuses on providing information to negotiators and not on lobbying. Since its inception, the Pew Center has emphasised that none of the corporate partners contributes money to the organisation. The WBCSD sees itself playing a similar informational role. The first major initiative of its climate group was to develop an accounting protocol for greenhouse gas emissions. Such a protocol is relevant to WBCSD member companies but has no immediate political relevance to the negotiations. It is worth noting that the clash of national political models has not created a problem within the Climate Action Network. Its openly political advocacy approach makes irrelevant differences in national political styles. Each member of CAN is encouraged to pursue all possible avenues of influence. If anything, the frustration within CAN is that attendees at the COPs are not sufficiently active in their lobbying efforts. The direct political engagement of CAN members gives the network a second advantage in organising consensus among members in the climate debates. CAN members have a dual channel of access to the negotiations. They attend the climate meetings as representatives of their own NGOs and as members of CAN. As direct participants in climate negotiations, CAN members can speak through CAN or independently of the network. This dual identity has two advantages. First, individual NGO members are not forced to rely on CAN to communicate their advocacy positions in the climate negotiations, which limits the incentive for an individual group to try to control the network. Second, it provides CAN with a mechanism to accommodate internal conflict. In a disagreement between the Natural Resource Defense Council and the majority of CAN members over forestry issues, the NRDC published its own policy statement, and CAN, in turn, made clear that its particular policy position was not supported by all its members. In the more fundamental internal conflict between CAN and Environmental Defense over emissions trading, Environmental Defense withdrew from CAN and directly represented itself in the climate negotiations. The NGO had no incentive to establish an environmental network to compete with CAN. Oil companies find themselves in a different position. As a result of not engaging directly in the multilateral climate negotiations (in line with the UN regulations on attendance), oil companies attempt to control specific BINGOs, de facto voicing their individual opinions through the representative BINGO. Most BINGOs differentiate between members that are actively involved in policy formation and those that act as passive observers. From this perspective it is possible to align different BINGOs with representative oil companies. In the GCC, only the American oil companies (Exxon, Mobil, Chevron and Texaco) were among the board members. BP and Shell were general members and only through their American subsidiaries. The chairmanship of the ICC working group on climate change was held by a representative from Texaco until 1998. The first head of the WBCSD programme on energy and climate was seconded from BP. The current chairman of IPIECA’s climate programme is from ChevronTexaco.

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The need for oil companies to act through BINGOs in the climate debates makes it difficult for individual BINGOs to accommodate internal conflict. Rather, internal dissension is expressed in shifts of allegiance between BINGOs and in the creation of new BINGOs. After changing their climate policy position, BP and Shell had no official mechanism for participating in the climate negotiations. At the time of the split, both companies were frustrated with their memberships in the GCC, ICC and IPIECA because the three BINGOs were under the leadership of the American oil companies. UN guidelines also prevented BP and Shell from directly expressing their new policy positions in the climate negotiations. As a result the companies’ only recourse was to create a new BINGO through which to voice their concerns or to shift the policy stance of a more centrist BINGO. The companies pursued both strategies. An oil executive seconded from BP initiated the WBCSD’s climate programme in 1996. The Pew Center on Global Climate Change was launched in 1998 as an alternative to the Global Climate Coalition. BP and Shell were among the Pew Center’s initial partners. Finally, both BP and Shell, in conjunction with ICC staff, undertook efforts to redirect the ICC’s policy positions. Control of the ICC was especially important because of its favoured position with the Climate Change Secretariat. In 1998, the leadership of the ICC working group on climate change, which had been dominated by American oil companies, shifted to the more neutrally positioned TotalFinaElf. The anti-politics function of BINGOs is the key factor distinguishing them from the Climate Action Network. CAN’s open political advocacy style is central to its success in organising consensus and projecting a united front in the climate debates. In contrast, the anti-politics function imposed on BINGOs in the climate negotiations is a major obstacle to organising consensus in the BINGO community. The anti-politics function hampered business associations in bridging differences in national political styles and made them inflexible in the face of internal conflict.

Implications for managers and policy-makers In the multilateral climate negotiations, business and industry NGOs provide access, consensus and anti-politics functions for their member companies. They are the means through which representatives from the private sector attend the climate negotiations and organise consensus opinion, and they create distance between their member companies and the political process. I argue that the history of the BINGO community in the climate negotiations has been turbulent because of the policy shifts of major oil multinationals, but also because of the self-consciously non-political identity these corporations are trying to project. The decline of the Global Climate Coalition is due in part to differences between the American and European perceptions of the ways by which BINGOs should participate in the climate negotiations. In addition, the anti-politics function has made it difficult for BINGOs to accommodate conflict within the oil industry. A comparison of the advocacy styles of the community of BINGOs and the Climate Action Network underscores the flexibility of the CAN in dealing with internal conflicts.

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My analysis suggests that the private sector would benefit from a direct mechanism through which to participate in the climate negotiations. There was an attempt to establish such a mechanism early in the negotiations. In 1994, the New Zealand delegation proposed the Business Consultative Mechanism (SBSTA 1996a, 1996b). The business community argued that the mechanism would provide a ‘convenient, direct and effective additional channel of communication’ allowing business to provide information, advice, and practical expertise on a range of technological and socioeconomic issues (SBSTA 1996a: 2). In addition it was seen as an opportunity for business to contribute directly the UNFCCC process, ‘convey[ing] the full range of business positions on an unfiltered basis’ (SBSTA 1996a: 3). The environmental NGOs, not surprisingly, rejected the proposal even though its scope was widened to include all NGOs, not just business groups. As one of its specific recommendations, CAN stated that ‘environmental NGOs do not believe there is currently a need for additional input of consultative mechanisms’ but rather a strengthening of current mechanisms (SBSTA 1996b: 31). From the environmental NGO perspective, there was little value in providing business with an officially legitimate channel of communication into the political process. I argue that a more viable proposal than the Business Consultative Mechanism would be to allow private companies to register directly as observers to the multilateral climate negotiations. This is not unprecedented within the UN system. The private sector participates directly in the deliberations of the Convention on Biodiversity. Direct participation by the private sector would carry with it several advantages. First, it would improve the flow of information into the negotiations process, by broadening the range of business perspectives voiced in the negotiations. Second, the private sector would benefit from directly participating in the climate negotiations, via increased flexibility for individual companies in formulating and voicing their positions on policy issues. Finally, the environmental community also stands to gain from the direct participation of individual companies in the climate negotiations because it would help to clarify which companies support which specific policy positions.

References Betsill, M. (2000) ‘Greens in the Greenhouse: Environmental NGOs, Norms, and the Politics of Global Climate Change’, PhD dissertation, University of Colorado, Boulder, CO. —— and E. Corell (2001) ‘NGO Influence in International Environmental Negotiations: A Framework for Analysis’, Global Environmental Politics 4.1: 65-85. Birger Skjaerseth, J., and T. Skodvin (2000) ‘Climate Change and the Oil Industry: Common Problem, Different Strategies’, paper presented at the Sixth Session of the Conference of the Parties to the Climate Convention, The Hague, 23 November 2000. Corell, E., and M. Betsill (2001) ‘A Comparative Look at NGO Influence in International Environmental Negotiations: Desertification and Climate Change’, Global Environmental Politics 4.1: 86-107. Djelic, M. (1998) Exporting the American Model: The Postwar Transformation of European Business (Oxford, UK: Oxford University Press).

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Duwe, M. (2000) ‘International NGOs and Climate Politics: Disputes and Bridges between North and South’, master’s thesis, School of Oriental and African Studies, University of London. Engels, A. (2001) ‘Company Behavior and Market Creation for CO2 Emission Rights in the US, the UK, the Netherlands, and Germany: Early Evidence and Future Research Perspectives’, paper presented at the Scandinavian Consortium for Organizational Research (Scancor), 12 March 2001. Ferguson, J. (1994) The Anti-Politics Machine: Development, Depoliticization, and Bureaucratic Power in Lesotho (Minneapolis, MN: University of Minnesota Press). Finger, M. (1993) ‘Politics of the UNCED Process’, in W. Sachs (ed.), Global Ecology: A New Arena of Political Conflict (London: Zed Books): 36-48. Fri, R. (1992) ‘The Corporation as Non-governmental Organization’, Columbia Journal of World Business, Fall/Winter 1992: 90-95. Haas, P. (1992) ‘Introduction: Epistemic Communities and International Policy Co-ordination’, International Organization 46.1: 1-35. Hampden-Turner, C., and A. Trompenaars (1993) The Seven Cultures of Capitalism: Value Systems for Creating Wealth in the United States, Japan, Germany, France, Britain, Sweden, and the Netherlands (New York: Currency Doubleday). Kingdon, J. (1995) Agendas, Alternatives, and Public Policies (New York: HarperCollins College Publishers). Levy, D. (1997) ‘Business and International Environmental Treaties: Ozone Depletion and Climate Change’, California Management Review 102 (Spring 1997): 126-47. —— and D. Egan (1998) ‘Capital Contests: National and Transnational Channels of Corporate Influence on the Climate Change Negotiations’, Politics and Society 26.3: 337-61. —— and A. Kolk (2002) ‘Strategic Responses to Global Climate Change: Conflicting Pressures on Multinationals in the Oil Industry’, Business and Politics 4.3: 275-300. —— and P. Newell (2000) ‘Oceans Apart? Business Responses to Global Environmental Issues in Europe and the United States’, Environment 42.9: 8-20. Lipschutz, R., and J. Mayer (1996) Global Civil Society and Global Environmental Governance (Albany, NY: State University of New York Press). Meyer, J., D.J. Frank, A. Hironaka, E. Schofer and N.B. Turna (1997) ‘The Structuring of a World Environmental Regime, 1870–1990’, International Organization 51.4: 623-51. Newell, P. (2000) Climate for Change: Non-state Actors and the Global Politics of the Greenhouse (Cambridge, UK: Cambridge University Press). Oberthuer, S. (2002) Participation of Non-governmental Organizations in International Environmental Governance (Berlin: Ecologic). Raustiala, K. (1997) ‘The “Participatory Revolution” in International Environmental Law’, Harvard Environmental Law Review 21.2: 537-86. Risse-Kappen, T. (1995) ‘Introduction’, in T. Risse-Kappen (ed.), Bringing Transnational Relations Back In: Non-state Actors, Domestic Structures and International Institutions (Cambridge, UK: Cambridge University Press). Rowlands, I.H. (2000) ‘Beauty and the Beast? BP’s and Exxon’s Positions on Global Climate Change’, Environment and Planning 18: 339-54. SBSTA (Subsidiary Body for Scientific and Technological Advice) (1996a) ‘Workshop on Consultative Mechanisms for Non-Governmental Organization Inputs to the United Nations Framework Convention on Climate Change’, FCCC/SBSTA/1996/MISC.2, 6 June 1996. —— (1996b) ‘Mechanisms for Non-governmental Organization Consultations’, FCCC/SBSTA/1996/ 11, 20 June 1996. Sell, S.K. (1995) ‘The Origins of a Trade-Based Approach to Intellectual Property Protection: The Role of Industry Associations’, Science Communication 17.2: 163-85. Susskind, L. (1992) ‘New Corporate Roles in Global Environmental Treaty-Making’, Columbia Journal of World Business, Fall/Winter 1992: 63-73. Van den Hove, S., M. Le Menestrel and H.C. de Bettignies (2002) ‘The Oil Industry and Climate Change: Strategies and Ethical Dilemmas’, Climate Policy 2.1: 3-18. Vogel, D. (1986) National Styles of Regulation (Ithaca, NY: Cornell University Press). Wapner, P. (1995) ‘Politics beyond the State: Environmental Activism and World Civil Politics’, World Politics 47.3: 311-40.

4 Best corporate responses to climate change opportunities for converging climate and biodiversity protecting solutions Michael Totten and Sonal I. Pandya Center for Environmental Leadership in Business, USA

In this new century, corporations need to redefine themselves as never before. Facing increasing pressures from governments to clean up their financial practices, from civil society groups to support the local communities in which they operate, and from consumers demanding environmentally superior products, companies are being asked to look well beyond their traditional business boundaries and respond creatively to a new set of challenges. Nowhere are businesses facing these new realities more intensely than with the issue of climate change. Even as Russia deliberates on whether or not to ratify the Kyoto Protocol, following the lead of 120 ratifying nations and triggering the Kyoto Protocol’s entry into force,1 many national and multinational corporations are already determining how to significantly decrease their climate change emissions, while continuing to grow and profit. While the full scope and shape of climate policies are still emerging, companies are gathering and evaluating the list of options available for pursuing these reductions. Clearly the most attractive opportunities will be those that result in cost savings as well as outright emissions reductions, such as energy efficiency and fuel switching. Nevertheless, to fulfil their obligations (and hopefully go beyond that), many companies will also look to invest in projects that will offset a portion of their remaining emissions. Unfortunately, many of the options initially put forward, such as afforestation and the use of hydropower or biomass-generated electricity, can, if poorly designed, have a significantly negative impact on biodiversity, and can even result in a net increase in carbon emissions. As written now, several of the technical provisions in the Kyoto Protocol do nothing to prevent such perverse effects. 1

The rules for entry into force of the Kyoto Protocol require 55 Parties to the Convention to ratify (or approve, accept, or accede to) the Protocol, including Annex I Parties accounting for 55% of that group’s carbon dioxide emissions in 1990.

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Biodiversity protection opportunities Some of the most attractive opportunities for corporations investing in offsets can be found in the land-use change and forestry (LULUCF) arena, particularly in the area of biodiversity protection. Biodiversity protection is defined here as the prevention of deforestation (i.e. conservation); the ecological restoration of fragmented landscapes into effective biodiversity corridors; the sustainable improvement of agro-ecological systems; and the expansion of new growth on degraded lands. Protecting endangered biodiversity habitat can provide multiple benefits, including the following: • Preventing the extinction of irreplaceable, globally important plant and animal species, which may occur in the wake of the projected degradation or destruction of perhaps 100 million hectares (1 million square kilometres) this coming decade (2003–2013), and several times this amount over the next several decades (Myers et al. 2000; Myers and Knoll 2001; Wilson 2002; see Figure 4.1) • Protecting the immensely valuable ecosystem services produced by these habitats (e.g. soil conservation, water retention and purification, conservation of genetic resources, pollination services) (Daily 1997; Balmford et al. 2002)

1,000 900 800 700 600 500 400 300 200 100 0 Natural background rate Human-induced rate

Estimates by a number of eminent biodiversity scientists indicate that extinction rates may be up to 1,000 times the natural background rate (Myers and Knoll 2001; Wilson 2002; Chapin et al. 2002). Climate change is expected to worsen threats to biodiversity, especially for specialised and endemic species, and especially if the global rate of habitat fragmentation and conversion does not slow down (IPCC 2001b).

figure 4.1 21st-century species extinction rates

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• Capturing some of the lowest-cost climate protection opportunities currently available • Spurring sustainable economic activity in the under-developed regions where these biodiversity habitats exist, by generating project employment opportunities and a revenue stream from trading the ‘carbon services’ delivered by these protected habitats (Tietenberg et al. 1999; Totten 1999; Petsonk 1999; Sandor 2001a; Bonnie et al. 2002) • Maintaining resilient ecosystems (Folke et al. 2002; Walker et al. 2002) that can adapt to the effects of climate change and provide society with higher-quality and flexible response options (Brauner 1998; Fearnside 2000; Sarewitz and Pielke 2001; Pielke 2001, 2002; Fisher 2002; Hannah et al. 2002; O’Neill and Oppenheimer 2002) Table 4.1 illustrates the large potential to simultaneously advance biodiversity and climate protection, and foster sustainable economic development in 20 tropical countries comprising a disproportionate share of globally important biodiversity. Human-induced LULUCF activities worldwide comprise 20% of annual global greenhouse gas (GHG) emissions, or roughly 1–1.5 billion tons of carbon (t C) (or 3.67 to 5.5 billion t CO2).2 This encompasses forest removal, soil degradation and loss from agriculture, ranching and logging activities, hydro damming, road expansion and urban sprawl. It also includes the annual destruction of an estimated 12 million hectares of tropical rainforest harbouring some of the planet’s most biologically diverse and abundant flora and fauna.3 The Intergovernmental Panel on Climate Change (IPCC), comprising several thousand climate-related scientists and experts commissioned to provide scientific assessments to the governmental policy-makers engaged in developing the UN Framework Convention on Climate Change (UNFCCC), has indicated that improving LULUCF activities could help to prevent, reduce or offset upwards of 100 billion t C this century (Watson et al. 2000; IPCC 2001c). This represents 10% of the roughly 1 trillion t C reductions needed to stabilise atmospheric GHG concentrations at 450 parts per million (ppm), 80% above the pre-industrial level.4 As can be seen, LULUCF opportunities are significant in volume, even if relatively modest compared with the total amount of reductions required this century. Furthermore, many LULUCF activity improvements represent some of the least-cost options among all carbon mitigation methods. And the most cost-effective of all LULUCF options, prevention of deforestation, offers the additional benefits of greatly slowing biodiversity loss and species extinction. 2

3 4

One billion metric tons carbon = one gigaton carbon = 1015 grams carbon = one petagram carbon. One unit of carbon = 3.67 units of carbon dioxide (CO2). One metric ton = 2,240 pounds compared with one imperial or short ton = 2,000 pounds. One hectare = 2.5 acres. The atmospheric concentration of greenhouse gases has increased by 31% since 1850. Preindustrial GHG atmospheric concentrations, expressed in carbon dioxide (CO2) equivalent units, were roughly 250 parts per million (ppm). Current levels are ~365 ppm and growing by 1.5 ppm per year as a result of the release of 25+ billion tons per year of GHG (CO2 equivalent) emissions. According to the IPCC, the present CO2 concentration has not been exceeded during the past 420,000 years and probably not during the past 20 million years (IPCC 2001).

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▼

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6–9 6–9ofofthe theworld’s world’stop top1010most biodiverse countries most biodiverse countries

Through the prevention of deforestation, ecological restoration and reforestation on degraded lands, carbon mitigation projects in the top 20 tropical countries have the potential to store between 20 and 50 billion tons of carbon while also protecting some of the world’s most important biodiversity.

table 4.1 Twenty most significant tropical countries for carbon retention/sequestration Sources: Carbon figures: Trexler and Haugen 1995; biodiversity indicators (birds, mammals and plants): Groombridge and Jenkins 2002; (reptiles and amphibians) Groombridge 1994; (additional information) Myers et al. 2000

There is a potential win–win–win outcome here. First, investing companies minimise their greenhouse gas mitigation costs by capturing the low-cost carbon opportunities. Second, tens to hundreds of billions of dollars in revenues could accrue to local communities and regional economies for these ‘carbon services’ through a global carbon trading market. Third, the intact and restored biodiversity habitats protect both globally important species and the ecosystem services provided by these habitats (Totten 1999; Niles 2000; Niles et al. 2001; Swingland et al. 2002).

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Benefits of early action Many firms look at the current uncertainty around the eventual shape of climate change policies and decide to do nothing, at least for the near term. Yet this decision is not as safe as it may seem. One thing is certain; policy changes are coming, and by acting early firms can gain a competitive advantage over slower-moving competition. One way to gain an advantage as an early mover is to lock up emissions or offset rights today while prices are artificially low. According to several analyses, the price of emissions reductions through an international carbon trading market could average US$9–15 per t C (~US$2.50–4 per t CO2), or US$3.5 billion per year total cost for the treaty signatory countries (den Elzen and de Moor 2002). But if the USA had participated instead of withdrawing from the treaty process the emissions reductions would have been several times higher, increasing the demand for carbon credits and trebling or quadrupling the price per ton of carbon.5 Eventually, the USA will become a more active participant in the global climate protection process, and the corresponding increased demand will drive up prices. In another example, the cost of carbon offset or sequestration investments (such as rainforest protection projects) can vary widely according to region, ecosystem, project structure and a host of other variables. Early-mover companies are already locking up some of the most attractive and cost-effective opportunities available around the world. Laggard companies who wait for policies to solidify will not only have fallen behind on the learning curve when the time comes to develop such investments; they will also be forced to choose from a pool of less attractive and higher-cost investments. Early movers also gain competitive advantage by building internal knowledge and developing capacity to participate in the rapidly developing carbon trading markets (like those already in place in the UK, Australia and Japan). Investments in real tangible projects also allow leadership companies to communicate a positive message to concerned consumers, shareholders and employees using clear examples. Finally, since many projects bring jobs and investments to a region, companies are often finding that they can build better relationships with local communities.

A case of two leaders Exemplifying the kind of corporate leadership that is so essential in this early phase of the battle against climate change is STMicroelectronics. The company has pledged to achieve zero net greenhouse gas emissions by 2010 while implementing a fourfold production increase. STMicroelectronics is the third largest semiconduc5

President Bush withdrew the US from the Kyoto process, saying it was ‘fatally flawed’ and would be damaging to the US economy. Contrary to the President’s conclusion, scientists calculate the total costs to be modest. It remains to be seen whether the US re-enters the Kyoto process. Recent polls show very high public concern over climate change and support for taking action (Azar and Schneider 2002). A National Science Foundation sponsored survey of US citizens in 2003 found ‘a strong majority (88%) support the Kyoto Protocol and (76%) want the United States to reduce greenhouse gas emissions regardless of what other countries do’ (Leiserowitz 2003).

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tor company in the world, headquartered in France, with annual revenues in excess of US$6 billion. The company employs 40,000 people in 27 countries. STMicroelectronics’s climate commitment builds on the environmental leadership it has demonstrated for more than a decade. Much of the credit goes to Pasquale Pistorio, the company’s CEO, who first outlined the fundamentals of the company’s environmental vision in 1993. The company then focused on continuous improvement, and by 2001 ST had reduced electricity consumption and GHG emissions by nearly one-third, and paper and water usage by nearly half, over their 1994 baseline. As Georges Auguste, Vice President of Total Quality and Environmental Management, notes, ‘We believe firmly that it is mandatory for a total quality management (TQM) driven corporation to be at the forefront of ecological commitment, not only for ethical and social reasons, but also for financial return.’ And the company has proved that environmental stewardship can go hand in hand with profitable growth, having grown from the 12th to the third largest semiconductor company in the world over the past decade. STMicroelectronics is not the only company demonstrating such leadership. In 1998, BP, the fourth largest corporation in the world with annual revenues of US$174 billion, initiated a bold commitment to achieve deeper emissions reductions than the Kyoto Protocol’s target of 5% below 1990 levels. In March 2002, BP’s CEO, Lord John Browne, announced that the company’s 2010 goal of reducing emissions to 10% below the 1990 level had already been reached. BP’s GHG emissions have fallen to less than 80 million tons, 10 million tons below the level for 1990 and 14 million tons below the level they had reached in 1998. Most impressively, the net cost to the company was negative, since the emissions reductions resulted in sufficient waste reduction improvements so that monetary savings surpassed total costs (Browne 2002). ‘Counterintuitively,’ Lord Browne said in 2004, ‘BP found that it was able to reach its initial target of reducing emissions by 10% below its 1990 levels without cost. Indeed, the company added around $650 million of shareholder value, because the bulk of the reductions came from the elimination of leaks and waste’ (Browne 2004). BP is fully internalising its climate commitment by including it as an outcome in performance reviews. BP also takes a portfolio approach to carbon mitigation that emphasises trading internally and externally. It is now examining the role of forest protection and restoration as a means of achieving further GHG reductions, while also capturing impressive biodiversity protection benefits and spurring sustainable economic growth in developing countries. The company recently committed US$20 million to gain experience in protecting and restoring biodiversity habitats in temperate and tropical countries, independent of any carbon credit.

Portfolio approach for carbon investments Corporate actions to reduce or offset atmospheric carbon emissions are just like any other investment, in that there are risks associated with the expected returns. Even

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investments made in the pursuit of basic waste reduction, for example, can yield greater or lower cost savings than anticipated. Smart companies understand that by taking multiple and varied carbon mitigation approaches they can build a portfolio of investments that minimises overall risk. Waste reduction, purchases of low-emissions energy and biodiversity protection could all be a part of a successful bundle of investments. Companies pursuing such a diversified portfolio reduce their exposure to any one risk while capturing the distinct benefits associated with each project type. In addition, such an approach provides the business with hands-on experience within multiple arenas, which can be developed into internal expertise and leveraged for competitive advantage. With the Kyoto Protocol’s rules and provisions still in development, taking a portfolio approach is especially important for companies looking to take advantage of the clear benefits from early action. To protect against risk from environmental regulations and the company’s own image with consumers, the sound approach is to avoid investments that, while meeting current provisions in the Protocol, actually lead to perverse climate change results. Afforestation is one example of a climate protection investment that companies should carefully evaluate before pursuing. Problems with such projects can arise because of the Protocol’s definitions (as well as lack of definitions) of what constitutes forests, deforestation and degradation. Deforestation, for example, may be preceded by degradation of the forest until just 10% of the original cover and equivalent amount of carbon remains. If this remnant were then deforested only the final 10% of the original carbon pool would be counted as emissions (Schulze et al. 2002). If afforestation follows such unaccounted ‘deforestation’, and is carried out under inadequate or ill-conceived rules, guidelines and standards, there is a serious risk of actually incurring a net emissions increase while also causing negative ecological and socioeconomic outcomes. In addition to the threat of potentially promoting the clearing of intact forests to grow monoculture tree plantations, there are the risks of: planting inappropriate flora for a particular biome, which worsens soil erosion, water loss, or pest and pathogen attacks; introducing invasive or exotic species; and siting nitrogen-fertilised afforestation plantations on phosphorus-limited tropical soils, which accelerates the release of non-CO2 GHG emissions. Wetlands, natural grasslands, heathlands and other ecological habitats that were never forested are also threatened by afforestation, even though research indicates that more carbon may be released than absorbed when some of these habitats are replaced with trees (Watson et al. 2000; Jackson et al. 2002). The introduction of exotic, fast-growing, single-species plantations, managed for rapid productivity through the infusion of fertilisers, biocides, irrigation and genetic modification, also adversely modify the native floral and faunal composition leading to many undesirable consequences. In addition, purchases of ‘green energy’ (most notably hydropower and bioenergy expansion) should be carefully evaluated, since the treaty’s current crediting of these energy options poses another potential threat to biodiversity. Take hydropower, which experienced explosive growth in the 20th century and is routinely promoted as a ‘clean’ energy option: it is often not nearly as climate-

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friendly as normally assumed. Recent research indicates that hydrodams account for roughly 7% of total global GHG emissions, and could increase to 15% given projected growth; yet this is not fully accounted for in the global GHG inventories relied on for the Kyoto Protocol (St Louis et al. 2000). In the case of hydro facilities with large, shallow dams, the climate benefits can actually be negative relative to the fossil-fuelled generation they displace (Totten et al. 2003).6 Purchases of biomass energy could pose similar problems if they lead to deforestation or other ecosystem loss in order to grow sufficient biomass to meet market demands (Totten et al. 2003). This is not to suggest that companies should not look into potential win–win investments provided by certain afforestation or green power purchases. There are clearly worthwhile investments to be made in both categories. However, there are several key lessons for companies pursuing climate protection investments: • A portfolio approach can help to reduce a company’s overall risk exposure given the unclear and evolving nature of the current climate policy environment. • Companies should take care to choose carbon mitigation investments that do not lead to perverse climate effects or other ecological damage, even if those investments are allowed (or encouraged) under current climate protocols (Kyoto or otherwise). • Investments in biodiversity protection efforts appear to be among the least expensive, lowest-risk and most attractive climate protection options available to companies today.

Going beyond Kyoto Unfortunately, the Kyoto Protocol’s provisions, as currently written, exclude crediting up to 2012 for the most valuable and cost-effective carbon offset option, prevention of deforestation. The only creditable LULUCF activities in this first period include afforestation (i.e. planting trees on land not forested for at least 50 years), reforestation and improved agricultural methods such as conservation tillage. As described above, the specifics of the Kyoto Protocol continue to be developed even as corporate leaders are moving forwards with their own climate protection efforts. Given the impressive business and ancillary benefits that can be delivered by well-designed projects that conserve threatened biodiversity habitat, leadership companies are beginning to advocate the inclusion of such carbon offsets as a creditable activity in the Protocol’s next commitment period. By 2012 the 55 signatories to the Kyoto climate treaty are only expected to achieve, at best, a mere one-thousandth of the total amount of carbon reduction necessary 6

Large, shallow reservoirs, especially in the tropics, can generate large amounts of GHG from the decay of biomass. As Robert Goodland with the World Bank noted, ‘The worst hydropower projects may produce more [GHG] than a coal-fired equivalent’ (Fearnside 2002).

4. best corporate responses to climate change Totten and Pandya 69

this century (i.e. roughly 1 billion out of 1 trillion tons of necessary carbon reductions) in order to stabilise the Earth’s climate. This suggests that the reductions mandated by the Kyoto Protocol will only be a start. While early-mover advantages are still available, it can be in a company’s best interest to go beyond eco-efficiency investments. As the IPCC demonstrates in its Third Assessment Report, nearly 7 billion tons of CO2 reductions can be achieved at negative cost in buildings and industrial operations through a myriad of energy efficiency improvements (IPCC 2001c; see also Swisher 2002). These savings can then be committed to achieving further carbon reductions through ecological restoration of endangered biodiversity habitat. STMicroelectronics’s commitment to zero net carbon emissions provides one example of a company that is moving beyond the requirements implied by the Kyoto Protocol. The company believes that its zero net carbon goal can be met through a diversified portfolio of actions, including financing biodiversity protection investments through savings from eco-efficiency efforts. These include decreasing the company’s total energy consumption by a factor of ten; defined as a target reduction of at least 5% per year for each US$1 million of added value (where added value represents sales revenue minus purchasing costs). ST intends to rely on radical energy efficiency gains and cogeneration of heat and power to achieve roughly twothirds of the goal, plus about 5% from green power sources such as wind and solar. ST estimates savings of US$900 million could be made during the 1994 to 2010 period. These actions will result in the company’s CO2 emissions dropping from nearly 500 tons per million dollars of production value in 1999 to only 80 tons per million dollars in 2010. The remaining carbon reductions will be achieved by investing more than US$100 million of the efficiency savings in forest restoration carbon offset projects. One project is taking place in Bukit Timah Nature Reserve in Singapore. An area of about 350 km2, equivalent to half the size of Singapore, will be restored to capture 1 million tons of CO2. What is remarkable about the STMicroelectronics programme is that it serves as an ‘existence proof’ of a powerfully positive climate strategy for corporations that: • Far surpasses the Kyoto Protocol goal of 5% GHG emission reductions below 1990 levels with a commitment to zero net GHG emissions • Emphasises radical efficiency gains that generate significant monetary savings (while enhancing total quality management goals) • Commits a percentage of these savings to achieve its climate-neutral goal at no net cost to the company • Restores forests in order to gain both climate and biodiversity benefits At BP, management is also pursuing climate protection efforts, as described previously, to go beyond the requirements of the Kyoto Protocol. Lord Browne has described his rationale for such actions: The thinking behind Kyoto was to take the first step—to reduce emissions below the 1990 level. The IPCC now believes that to achieve stabilisation, emissions must be held below 1990 levels over several decades and

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the business of climate change should then decrease over the rest of this century. If stabilisation is the objective, what is the appropriate contribution of an individual company? Clearly we can’t do everything. We supply just 1.5% of the world’s energy and around 3% of the world’s oil and gas. But we play our part and take a lead. We can use our skills and technology and business process to set our own internal target in the context of the goal of stabilisation, with a clear time scale over the next decade; in short to hold the emissions from our operations at 10% below 1990 levels, through 2012, with approximately half of that coming from improvements in internal energy efficiency, and half from the use of market mechanisms, generating carbon credits.

Business benefits associated with biodiversity protection To maximise returns from climate protection investments, companies should focus on making investments that provide multiple benefits in addition to reducing or offsetting carbon emissions. There is a myriad of direct and indirect benefits and multiple values that accrue to the investing company, the local economy, and the regional and global environment from following a ‘biodiversity prevention’ hierarchy in land-based carbon offsets projects. This hierarchy focuses on achieving carbon gains by preventing and reducing deforestation, restoring fragmented landscapes into biodiversity corridors, re-using degraded lands for growing bioenergy crops and tree plantations, and integrating biodiversity buffers into agro-ecological farms and plantations. From the company perspective these benefits can include: • Expanding the pool of lower-cost carbon credits, thereby lowering the company’s overall compliance costs as well as diversifying its carbonmitigation portfolio risk • Increasing brand capital and reputation through corporate identification with the protection of threatened charismatic flora and fauna, support for local community sustainable development, and helping to sustain or enhance the ecosystem services associated with habitat protection and restoration • Capturing a range of intangible advantages from these positive actions, such as increased public trust, enhanced community relations, better shareholder and stakeholder interactions, more flexibility in licence to operate, faster regulatory approval, greater social tolerance of corporate mistakes, and so on7 7

Ongoing research into intangible assets indicates that they can be terrific drivers of corporate value and key sources of value creation. By some estimates, ‘fully 35% of portfolio managers’ decisions about where to allocate their investment dollars is based on intangibles’ (Low and Kalafut 2002).

4. best corporate responses to climate change Totten and Pandya 71

Indeed, biodiversity protection investments are among the most effective options for enhancing or preserving corporate reputation. Good reputations have been shown to bring a number of specific advantages to a company, such as: generating customer willingness to pay more and recommend the company to others; increasing employees’ loyalty and commitment; attracting top recruits; receiving favourable treatment from business partners; reducing perceived company risk by investors and capital markets; receiving fair treatment from the media; and earning greater latitude from stakeholders to make decisions and take actions in both good times and bad (Arnold and Day 1998).

Conclusions Climate change is one of the most significant global challenges currently facing business. Although there are many potential carbon mitigation opportunities available, smart companies are realising that by taking a portfolio approach and pursuing multiple and diverse climate protection investments, they can minimise corporate risk while maximising the benefits captured. Land use and forestry changes account for roughly 20% of global greenhouse gas emissions, but also offer a commensurate opportunity in terms of emissions reductions and can provide a valuable contribution to a company’s portfolio of carbon mitigation investments. Biodiversity protection projects represent some of the most attractive of these options since they are among the least expensive climate protection opportunities available anywhere and can deliver a host of impressive benefits. Such benefits include: protecting endangered species threatened with extinction, protecting habitats that deliver critical ecosystem services, and providing sustainable development opportunities to local communities. Moreover, companies that invest in such biodiversity protection projects can capture a range of valuable business benefits including: reducing carbon compliance costs; diversifying portfolio risk; increasing brand capital; and enhancing reputation among key stakeholder groups. There also exists an incentive for companies to make early investments in this arena in order to lock up some of the most attractive and cost-effective opportunities, in addition to providing the chance to gain competitive advantage by building internal knowledge and developing capacity to participate in the rapidly developing carbon-trading markets. Climate change and biodiversity loss are two of the greatest challenges currently facing humanity. Furthermore, biodiversity loss is fuelling climate change and, in turn, climate change is anticipated to accelerate biodiversity loss and species extinctions throughout this century. Recognising the intimate interconnection between these two global problems and designing resilient actions that address both simultaneously is now an imperative. Corporate leadership is already rising to this challenge by pursuing convergent solutions for biodiversity and climate protection, and demonstrating the tremendous values that can be captured by following such a strategy.

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References Arnold, M.B., and R.M. Day (1998) The Next Bottom Line, Making Sustainable Development Tangible (Washington, DC: World Resources Institute). Azar, C., and S. Schneider (2002) ‘Are the Economic Costs of Stabilising the Atmosphere Prohibitive?’, Ecological Economics 42: 73-80. Balmford, A., et al. (2002) ‘Economic Reasons for Conserving Wild Nature’, Science 297 (August 2002): 950-53. Bonnie, R., M. Carey and A. Petsonk (2002) ‘Protecting Terrestrial Ecosystems and the Climate through a Global Carbon Market’, in I.R. Swingland, E.C. Bettelheim, J. Grace, G. Prance and L. Saunders (eds.), Carbon, Biodiversity, Conservation and Income: An Analysis of a Free-Market Approach to Land-Use Change and Forestry in Developing and Developed Countries (Philosophical Transactions: Mathematical, Physical and Engineering Sciences; London: The Royal Society, www.royalsoc.ac.uk). Brauner, C. (1998) Climate Research Does Not Remove the Uncertainty: Coping with the Risks of Climate Change (Geneva: Swiss Reinsurance Company, www.swissre.com). Browne, J. (2002) ‘Beyond Petroleum: Business and the Environment in the 21st Century’, speech at Stanford University, 11 March 2002; London: BP, www.ieta.org/ieta/www/pages/getfile. php?docID=168. —— (2004) ‘Beyond Kyoto’, Foreign Affairs, July/August 2004. Chapin, F.S., O.E. Sala, and E. Huber-Sannwald (eds.) (2002) ‘Global Biodiversity in a Changing Environment: Scenarios for the 21st Century’, Ecological Studies (Springer) 152. Daily, G.C. (ed.) (1997) Nature’s Services: Societal Dependence on Natural Ecosystems (Washington, DC: Island Press). Den Elzen, M.G.J., and A.P.G. de Moor (2002) ‘Evaluating the Bonn-Marrakesh Agreement’, Climate Policy 2.1: 111-17. Fearnside, P.M. (2000) ‘Global Warming and Tropical Land-Use Change: Greenhouse Gas Emissions from Biomass Burning, Decomposition and Soils in Forest Conversion, Shifting Cultivation and Secondary Vegetation’, Climatic Change 46: 115-58. —— (2002) ‘Greenhouse Gas Emissions from a Hydroelectric Reservoir (Brazil’s Tucuruí Dam) and the Energy Policy Implication’, Water, Air and Soil Pollution 133.1–4: 69-96. Fisher, A.C. (2002) Uncertainty, Irreversibility, and the Timing of Climate Policy (Arlington, VA: Pew Center on Global Climate Change, www.pewclimate.org). Folke, C., et al. (2002) Resilience and Sustainable Development: Building Adaptive Capacity in a World of Transformations (scientific background paper on resilience for the process of the World Summit on Sustainable Development on behalf of the Environmental Advisory Council to the Swedish Government; Resilience Alliance, www.resalliance.org). Frumhoff, P.C., and E.C. Losos (1998) Setting Priorities for Conserving Biological Diversity in Tropical Timber Production Forests (Cambridge, MA: Union of Concerned Scientists, www.ucsusa.org). ——, D.C. Goetze and J.H. Hardner (1998) Linking Solutions to Climate Change and Biodiversity Loss through the Kyoto Protocol’s Clean Development Mechanism (Cambridge, MA: Union of Concerned Scientists, www.ucsusa.org). Gillison, A.O. (2001) Review of the Impact of Climate Change on Forest Biological Diversity (prepared for the Secretariat of the Convention on Biological Diversity, Ad Hoc Technical Expert Group on Biological Diversity and Climate Change; Montreal: Secretariat, Convention on Biological Diversity, www.conbio.org). Groombridge, B. (ed.) (1994) Biodiversity Data Sourcebook (Cambridge, UK: World Conservation Press). —— and M.D. Jenkins (2002) World Atlas of Biodiversity: Earth’s Living Resources in the 21st Century (Berkeley, CA: University of California Press). Hannah, L., G.F. Midgley, T.E. Lovejoy, W.J. Ward, M. Bush, J.C. Lovett, D. Scott and F.I. Woodward (2002) ‘Conservation of Biodiversity in a Changing Climate’, Conservation Biology 16.1 (February 2002): 264-68.

4. best corporate responses to climate change Totten and Pandya 73 Hughes, J.B., G.C. Daily and P.R. Ehrlich (1997) ‘Population Diversity: Its Extent and Extinction’, Science 278 (October 1997): 689-91. IPCC (Intergovernmental Panel on Climate Change) (2001a) Third Assessment Report, Working Group I, Climate Change 2001: The Scientific Basis (Cambridge, UK: Cambridge University Press, www.ipcc.ch). —— (2001b) Third Assessment Report, Working Group II, Climate Change 2001: Impacts, Adaptation, and Vulnerability (Cambridge, UK: Cambridge University Press, www.ipcc.ch). —— (2001c) Third Assessment Report, Working Group III, Climate Change 2001: Mitigation (Cambridge, UK: Cambridge University Press, www.ipcc.ch). IUCN (World Conservation Union) (1999) Report of the 11th Global Biodiversity Forum: Exploring Synergy Between the UN Framework Convention on Climate Change and the Convention on Biological Diversity (Gland, Switzerland: IUCN–WCU, www.bgh.ch). —— (2000) Carbon Sequestration, Biodiversity and Sustainable Livelihoods: The Role of an Ecosystem Approach in Balancing Climate Change, Biodiversity, and Social Objectives (Gland, Switzerland: IUCN–WCU, www.iucn.org/themes/climate/carbonseq1-01.html). Jackson, R.B., J.L. Banner, E.G. Jobbagy, W.T. Pockman and D.H. Wall (2002) ‘Ecosystem Carbon Loss with Woody Plant Invasion of Grasslands’, Nature 418 (8 August 2002): 623-26. Leiserowitz, A. (2003) ‘American Opinions on Global Warming’, University of Oregon Survey Research Laboratory, osrl.uoregon.edu/projects/globalwarm, accessed 5 October 2004. Low, J., and P.C. Kalafut (2002) Invisible Advantage: How Intangibles are Driving Business Performance (Oxford, UK: Perseus Publishing). Myers, N., and A. Knoll (2001) ‘The Biotic Crisis and the Future of Evolution’, Proceedings of the National Academy of Sciences 98.10 (May 2001): 5,389-92, www.pnas.org. ——, R.A. Mittermeier, C.G. Mittermeier, G.A.B. da Fonseca and J. Kent (2000) ‘Biodiversity Hotspots for Conservation Priorities’, Nature 403: 853-58. Niles, J.O. (2000) The Additional Benefits of Reducing Carbon Emissions from Tropical Deforestation (Working Paper Series No. 0084; Stanford, CA: Morrison Institute for Population and Resource Studies, Stanford University). ——, S. Brown, J. Pretty, A. Ball and J. Fay (2001) Potential Carbon Mitigation and Income in Developing Countries from Changes in Use and Management of Agricultural and Forest Lands (Occasional Paper 2001-04; Essex, UK: Centre for Environment and Society, University of Essex). Noss, R. (2001) ‘Kyoto: Forest Management in a Time of Rapid Climate Change’, Conservation Biology 15.3 (June 2001): 578-90. O’Neill, B.C., and M. Oppenheimer (2002) ‘Dangerous Climate Impacts and the Kyoto Protocol’, Science 296 (June 2002): 1,971-72. Petsonk, A. (1999) ‘The Kyoto Protocol and the WTO: Integrating Greenhouse Gas Emissions Allowance Trading into the Global Marketplace’, Duke Environmental Law and Policy Forum 10: 185219. Pielke, R.A. (2001) ‘Climate and Social Vulnerability’, Climate Change Science: A Forum of the National Academies and the US Senate, Washington, DC, 8 June 2001, sciencepolicy.colorado. edu/homepages/roger_pielke. —— (2002) Testimony on Economic and Environmental Risks of Greenhouse Gases, hearing, Committee on Environment and Public Works, US Senate, 13 March 2002, and follow-up questions and answers, 29 May 2002 (Washington, DC: US Senate, www.senate.gov). Sandor, R. (2001a) ‘The Convergence of Environmental and Capital Markets: Another Step’, Environmental Finance, November 2001: 13. Sarewitz, D., and R. Pielke, Jr (2001) ‘Vulnerability and Risk: Some Thoughts from a Political and Policy Perspective’, Columbia–Wharton/Penn Roundtable on Risk Management Strategies in an Uncertain World, New York, 4 April 2002. Schulze, E.D., D. Mollicone, F. Achard, G. Matteucci, S. Federici, H.D. Eva and R. Valentini (2002) ‘Making Deforestation Pay under the Kyoto Protocol?’, Science 299 (14 March 2002): 1,669. St Louis, V.L., C.A. Kelly, E. Duchemin, J.W.M. Rudd and D.M. Rosenberg (2000) ‘Reservoir Surfaces as Sources of Greenhouse Gases to the Atmosphere: A Global Estimate’, Bioscience 50.9 (September 2000): 766-75.

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Swingland, I.R., E.C. Bettelheim, J. Grace, G. Prance and L. Saunders (eds.) (2002) ‘Carbon, Biodiversity, Conservation and Income: An Analysis of a Free-Market Approach to Land-Use Change and Forestry in Developing and Developed Countries’, in Philosophical Transactions: Mathematical, Physical and Engineering Sciences (London: The Royal Society). Swisher, J. (2002) The New Business Climate: A Guide to Lower Carbon Emissions and Better Business Performance (Snowmass, CO: Rocky Mountain Institute, www.rmi.org). Tietenberg, T., M. Grubb, A. Michaelowa, B. Swift and Z. Zhang (1999) International Rules for Greenhouse Gas Emissions Trading, Defining the Principles, Modalities, Rules and Guidelines for Verification, Reporting and Accountability (Geneva: United Nations Conference on Trade and Development, r0.unctad.org/ghg/publications/intl_rules.pdf, accessed 5 October 2004). Totten, M.P. (1999) Getting it Right: Emerging Markets for Storing Carbon in Forests (Washington, DC: World Resources Institute, www.wri.org). ——, S.I. Pandya and T. Janson-Smith (2003) ‘Biodiversity, Climate and the Kyoto Protocol: Risks and Opportunities’, Frontiers in Ecology and the Environment (Washington, DC: Ecological Society of America, June 2003). Trexler, M., and C. Haugen (1995) Keeping it Green: Tropical Forestry Opportunities for Mitigating Climate Change (Washington, DC: World Resources Institute). Walker, B.S., S. Carpenter, J. Anderies, N. Abel, G. Cumming, M. Janssen, L. Lebel, J. Norberg, G. Peterson and R. Pritchard (2002) ‘Resilience Management in Social-Ecological Systems: A Working Hypothesis for a Participatory Approach’, Conservation Ecology 6.1: 14, www.consecol. org/vol6/iss1/art14. Watson, R.T., I.R. Noble, B. Bolin, N. Ravindranath, D. Verarado and D. Dokken (eds.) (2000) Intergovernmental Panel on Climate Change (IPCC) Special Report on Land Use, Land Use Change and Forestry (Cambridge, UK: Cambridge University Press). Wilson, E.O. (2002) The Future of Life (New York: Knopf).

Part 2 Policy instruments

5 Early experiences with emissions trading in the UK Frauke Roeser WSP Environmental, UK

Tim Jackson University of Surrey, UK

The climate in which companies operate is changing. In the wake of full ratification of the Kyoto Protocol new climate change policies are emerging which put companies under increasing pressure to control and reduce greenhouse gas emissions. The landmark Kyoto agreement has moved business into the centre of the climate change debate as it introduces flexible, market-based policy tools which use the principles of competitive advantage and free trade to increase efficiency in climate change mitigation. The Kyoto Protocol marks the birth of a carbon market which, eventually, will allow carbon emissions to be traded on a global scale (Skea 1998). First steps towards implementing this new market have already been taken and include the launch of pilot greenhouse gas emissions trading regimes at the national and subnational level. In April 2002 the UK became the first country to introduce a fully fledged industry-wide emissions trading scheme (ETS) as one of a number of tools to achieve its Kyoto Protocol targets. Under Kyoto the UK has agreed to reduce greenhouse gas emissions by 12.5% over 1990 levels between 2008 and 2012. In addition, the government has set a much more ambitious internal target of a 20% reduction in carbon dioxide emissions by 2010 (DETR 2000). In stating that ‘Emissions Trading will . . . set a framework for the UK to move efficiently to a low carbon economy’ (DETR 2001: 48), the government ascribes a critical role to this new policy tool to achieve a directional turn away from the currently fossil-fuel-based economy. As national schemes are being developed ahead of international trading systems, early experiences with emissions trading in the UK are of special interest. Early schemes will provide essential practical insights into how, and if, trading might work on a global scale. Also, very importantly, the first national greenhouse gas emissions trading scheme will give an indication of the position of industry and the preparedness of companies to participate in such a market. Are companies ready to

5. early experiences with emissions trading in the uk Roeser and Jackson 77

compete in a carbon market? Have they got appropriate management and monitoring systems in place? And is the scheme stringent enough to ensure environmental credibility and efficiency? These questions are the focus of this chapter, which aims to provide an insight into the effectiveness of the UK ETS as a policy tool, with a particular focus on the position of UK business. The chapter will begin with a brief description of the UK ETS and its principal elements, followed by an assessment of early developments in the new UK carbon market. The core of the chapter will be an analysis of the emissions profiles of FTSE 100 companies. This analysis will look, first, at reporting standards and availability of data and, second, at the financial exposure of companies to carbon trading and the effect this may have had on the scheme’s design. The assessment will be based on market and company data which was collected during March to June 2002. Given that the UK ETS has only been operational for a few months, data on trading activity and the fledgling market is still limited. However, existing data will certainly give an indication of how the market may develop and how efficient one can expect it to be.

The UK ETS The UK ETS is a peculiar scheme in that it combines different types of trading schemes in a unique way. At the very basic level, one distinguishes between socalled ‘cap-and-trade’ systems and ‘credit-based’ trading regimes. In the former, companies operate under an absolute emissions limit and may sell excess reductions to the market, whereas the latter is based on relative reduction targets and measures emissions credits from a given baseline against business-as-usual scenarios or a set standard. The latter type has the advantage of allowing companies to account for business growth. However, it is environmentally less robust as it does not limit emissions in absolute terms and poses serious monitoring and verification problems. The UK scheme offers a hybrid of these two types. There are currently two kinds of participant. The so-called direct participants effectively operate under a cap-andtrade system with absolute reduction targets, whereas agreement participants with output-related or relative reduction targets follow the baseline and credit approach. A third entry route into the scheme, which is also credit-based as it will grant companies credits for specific abatement projects, is in the process of being defined. The scheme covers carbon dioxide and the basket of greenhouse gases as listed in the Kyoto Protocol. It is a voluntary downstream trading system targeted at energy end-users rather than energy producers. The direct entry route is open to all companies operating in the UK. Certain emissions sources, such as most transport activities, methane emissions from landfill and emissions from power generation, are excluded. Direct participants take on a voluntary five-year emissions reduction target, which is divided into five equal annual reduction targets. These reduction targets were determined via an auction which took place in February 2002. The UK government set aside incentive payments of £215 million in total for the five-year

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period. Upon achievement of the annual reduction target, which is calculated from a baseline made up of average annual emissions over three years until 2000, the participant will receive the auctioned (taxable) incentive payment of £53.37 per tonne CO2e reduced. Any excess in emissions reductions may be traded on the market. Equally, shortfalls to meet the annual target may be purchased from the market. The agreement route is open to companies from industry sectors that are covered by Part A of the Integrated Pollution Prevention and Control (IPPC) Regulations which have negotiated an 80% reduction in the Climate Change Levy upon achievement of certain energy-efficiency targets. Reductions or improvements in excess of the agreed target are converted into credits which may be traded on the market. Trading for agreement participants is regulated by a gateway, which ensures that ‘weaker’ credits from relative targets will not dilute the absolute emissions reductions achieved by direct participants (DETR 2001). Figure 5.1 shows participants and trading routes in the UK ETS. Market Others: • Brokers • NGOs

Gateway Permit

Emission-saving projects

Direct participants

CCLA participants

Cap and trade

Baseline and credit

• Voluntary participation • Through financial incentives

Reporting Approval Verification

Trading authority CCLA = Climate Change Levy Agreement; NGO = non-governmental organisation

figure 5.1 UK emissions trading scheme The government has made it clear that the scheme is evolutionary with the first trading period running for five years until 2007. In 2005 a comprehensive review of the scheme’s current structure and procedures will be undertaken, particularly in view of the proposed EU-wide trading scheme. If the EU scheme (European Commission 2000) goes ahead as planned, it will pose a serious challenge to the UK as indeed the EU scheme is in many ways fundamentally in conflict with existing UK ETS rules (Sorrell 2003). This particularly relates to the EU scheme’s mandatory nature, its focus on carbon dioxide emissions only and the inclusion of electricity generation via an upstream element. In addition, the UK’s incentive payment and

5. early experiences with emissions trading in the uk Roeser and Jackson 79

the weaker, controversial stance on how trading interfaces with IPPC are a cause of concern.

Market developments The success of an emissions trading scheme depends on its ability to create an efficient market that will enable companies to realise emissions reductions costeffectively (Woerdman 2000). Crucial for the environmental effectiveness of an ETS is how far it is able to internalise the cost of emitting carbon, thus providing an incentive to reduce emissions beyond legally required limits and to develop alternative abatement technologies and strategies. In short, an effective, environmentally credible carbon market requires sufficient players with diverse abatement potentials, stringent targets, transparency and strict monitoring and control systems (Tolley 1997; Bartlam 2001; Tietenberg 1985). Although DEFRA celebrated the success of the incentive auction held in February 2002 (DEFRA 2002) and stated that the agreed reductions of over 4 million tonnes CO2e represent 5% of the UK’s planned annual emissions reductions, it is doubtful whether the UK ETS will help the UK achieve its short- and long-term climate change policy objectives, for a number of reasons. With 34 direct participants the UK market is relatively small. As participation is voluntary, only companies with decreasing emissions have taken on absolute targets which, in turn, are relatively low compared to overall emissions. Eight companies account for 85% of the total reductions. In the majority these are based on gases other than carbon dioxide. Furthermore, most energy-intensive sectors have entered the scheme via the agreement route, which is environmentally much weaker as it is based on relative reduction targets and allows the increase of emissions overall. If one looks at the largest industrial carbon dioxide emitters, which are cement, iron or steel manufacturing, brick and lime manufacturing, chemicals and the fuel industry (See 2001), very few are actually represented in the direct part of the scheme. With nearly 6,000 participants, the agreement sector now makes up the core of the scheme, quite contrary to policy-makers’ original intentions. In addition, there have been serious allegations of ‘hot air’ trading, particularly in the case of the participating chemicals companies, and of non-additional emissions reductions, which merely represent business-as-usual scenarios. In fact at least 50% of claimed reductions are alleged to fall into this category (ENDS 2002). Given these parameters alone, it becomes clear that the UK market does not fulfil the criteria of an efficient and environmentally effective carbon market. Supply and demand imbalances, underpinned by relatively low reduction targets and a small number of players, are expected to create little trading activity. Unexpectedly, market data released in September 2002 showed that prices have been pushed up to above £12 per t CO2e, driven by agreement participants’ fear of not meeting their targets and thus losing the significant Climate Change Levy rebate. It illustrates the insecurity of participants and their inability to determine their emissions position. In addition, hot-air allegations have seriously undermined the credibility of the

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scheme which is further exacerbated by the provision of the incentive bonuses. As the Sustainable Development Commission (SDC 2001) suggests, the use of financial incentives in the UK ETS has inverted ‘the polluter pays’ into a ‘pay the polluter’ principle. Together with the free allocation of emissions allowances, this clearly sends the wrong message to industry. The emphasis on gases other than CO2—in fact, around 75% of emissions reductions in the absolute sector come from non-CO2 sources—is a further issue of concern, particularly in view of the long-term environmental viability of the scheme. This is the more relevant as CO2 is estimated to increase significantly in proportion to other greenhouse gases over the next 20 years in the UK (SDC 2001). Overall it becomes clear that, contrary to the overarching intention of carbon reduction policies, the UK ETS fails to internalise the social and environmental cost of emitting carbon. Participating companies do not have to pay for emissions allowances; the reduction targets offered by companies in the scheme are both voluntary and relatively low; and there is a high risk that many such targets are essentially ‘free-riders’ on the incentive scheme. In fact, the incentive bonus actually reverses the concept of cost internalisation and thus fails to provide a signal to industry that a fundamental change in the economy—away from fossil fuels and towards low-carbon energy sources—must occur. In addition, the scheme fails to include the majority of emissions sources in the UK, such as the transport sector, the domestic sector and, most importantly, electricity generation—sectors that hold the key to a low-carbon economy. Apart from these policy design issues, another area is of crucial importance: the position of UK industry to participate in the new carbon market. Crucial to this issue, as mentioned before, is the problem of monitoring systems and reporting on the one hand, and the potential effect of carbon policies on corporate performance on the other. The industry analysis reported in this study, and in particular the modelling of financial exposure, illustrate how the position and lobbying power of industry has informed the design of the UK ETS.

Industry position In order to gain an understanding of the position and ability of UK business to participate and compete in the new carbon market, a quantitative analysis of reporting practices and emissions profiles was undertaken. The analysis is based on greenhouse gas emissions data and key operational and financial information collected on all FTSE 100 companies from publicly available sources during March and June 2002. In a first step the scope and quality of the available data was analysed, including the effects of reporting practices and data availability on emissions trading. The second step encompassed the development of a number of indicators to get a quantitative view of companies’ emissions relative to each other. Indicators included emissions per employee, exposure of market value to carbon and exposure of profits based on a number of carbon cost scenarios.

5. early experiences with emissions trading in the uk Roeser and Jackson 81

Unfortunately, data on costs of emissions abatement of individual companies and marginal abatement cost curves could not be obtained as this is considered commercially sensitive. Therefore an assessment of how companies would fare in a carbon market and how they would behave in emissions trading could not be undertaken with any confidence. The section will begin with the conclusions on data availability and reporting practices of the FTSE 100 group of companies, followed by the analysis of emissions profiles.

Reporting standards The study concluded that, overall, availability of and access to reliable emissions data is limited. Over one-third of FTSE 100 companies still do not disclose any quantitative information on their climate change impact and the data that is disclosed by companies is generally inconsistent, of poor quality and limited scope. Accuracy and depth of monitoring vary widely, from broad estimates to source-bysource monitoring. In many cases the basis of the reported data is not disclosed and often very little or no information is given about the data collection process. Uncertainties in monitoring of methane and SF6 (sulphur hexafluoride) emissions are particularly high, but even CO2 emissions data—where not derived from electricity purchased—includes many estimates. While all reporting companies disclose UK emissions data in some form, emissions from non-UK activities are not commonly monitored or, if included, data is usually of much lower quality. Although a number of reporting guidelines, such as those by DEFRA or the Global Reporting Initiative, exist, they are not widely and comprehensively used. If used, guidelines are often applied selectively and do not cover all recommended emission sources and areas. Companies use different reporting periods—calendar, fiscal or financial year—which sometimes differ even from their own financial reporting periods. Efficiency ratios and benchmarks are therefore difficult to establish. Very little historical data is available that would allow an assessment of improvements in energy efficiency and overall trends in absolute greenhouse gas emissions. In addition, historical data is often not adjusted to allow like-for-like comparisons. The reported data is seldom broken down by source, activity, business unit and geographical region, and companies often fail to include all their activities in the data collection process. A number of companies even exclude some of their highestimpact activities: for example, an electricity generator that excludes emissions from power stations, beverage producers that do not cover emissions from the fermenting process, or a mining company that excludes emissions from electricity purchased. For a more detailed analysis of reporting standards, companies were grouped into ten broad industry sectors based on their climate change impacts and their general activities. Many companies provide a range of different services and products which will result in some sector overlap and potentially multiple grouping. In those cases, companies were categorised according to their core activity. The results of this detailed sector analysis are summarised in Table 5.1. Overall, the lack of consistent and high-quality data means that a quantitative assessment of companies’ climate change impacts is in most cases not possible. Low

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Sector

Building Finance FMCG Industrial Media Resources Retail Services Transport Utilities Total

Comprehensive reporting— may include some estimates

Limited reporting— company-wide emissions estimated

5 7 2 1 5 3 2 2 6 33

1 8 2 3 1 2 2

3 22

Reported data of dubious quality

1 2

Some data reported— insufficient

No data but reporting planned

1 3 1

1 4

No data reported

3 4 2 3 5

1 1

2 3

3 8 1

6

6

29

FMCG = fast-moving consumer goods

table 5.1 Greenhouse gas emissions reporting: FTSE 100 companies data comparability hampers any cross-industry comparisons and the absence of common indicators or reporting standards makes benchmarking very difficult. In view of the emerging carbon market, this is an issue of serious concern. For emissions trading, the monitoring and provision of accurate data are extremely important as environmental data will be translated into monetary values. High-quality data is also important for the participants themselves to be able to take informed decisions on whether to trade or to abate, and for outsiders to assess and verify the efficiency and credibility of the market. While transparency may not be necessary for the market to operate efficiently, it is certainly vital to establish confidence in the new market, both among potential market players and the general public.

Emissions profiles Despite these data quality and reporting issues, analysis of the available data provides some insights into company performance and gives an indication of how different companies and sectors are positioned in relation to each other. It has to be noted that, in the absence of detailed information on abatement options and costs, a full risk analysis and assessment of the relative position of companies in a future carbon market is not possible. By comparing emissions profiles of 100 of the UK’s largest companies, however, some valuable insights into the effectiveness of the UK ETS may be drawn. Table 5.2 shows emissions profiles of three industry sectors: industrial manufacturing, resources and utilities. These sectors are the most energy-intensive overall and display the highest emissions on average. The table shows absolute greenhouse gas emissions for one year, average profitability data over five years and the various financial indicators discussed earlier. Here the fifth column translates emissions

24,530,000 47,676,000

Corus Group

Hanson

ICI

Rolls Royce

Anglo American

BG

BHP Billiton plc

BP

Enterprise Oil

Rio Tinto

Shell

Centrica

Innogy

International Power

Lattice Group

National Grid UK

Powergen

Scottish & Southern Energy

Scottish Power

Severn Trent

United Utilities

Industrial

Industrial

Industrial

Industrial

Resources

Resources

Resources

Resources

Resources

Resources

Resources

Utilities

Utilities

Utilities

Utilities

Utilities

Utilities

Utilities

Utilities

table 5.2 Emissions profiles and profit exposure of selected sectors

Utilities

Utilities

841,000,000

634,000,000

1,199,000,000

523,000,000

753,000,000

1,313,000,000

1,554,000,000

881,000,000

567,000,000

453,000,000

5,428,000,000

1,676,000,000

787,000,000

9,760,000,000

1,240,000,000

2,481,000,000

1,781,000,000

397,000,000

668,000,000

688,000,000

488,000,000

799,000,000

EBITDA 5-year average (£)

EBITDA = earnings before interest, taxes, depreciation and amortisation

442,276

1,676,261

76,102,815

29,180

54,300,000

2,392,000

7,601,503

1,404,634

100,358,000

23,000,000

559,321

83,700,000

17,000,000

7,400,000

25,500,000

888,000

5,667,608

2,531,100

32,500,000

4,766,089

BAE Systems

Industrial

Emissions 2000/01

Company

Sector

2,211,380

8,381,305

380,514,075

145,900

271,500,000

11,960,000

38,007,515

238,380,000

122,650,000

7,023,170

501,790,000

115,000,000

2,796,605

418,500,000

85,000,000

37,000,000

127,500,000

4,440,000

28,338,040

12,655,500

162,500,000

23,830,445

Cost of carbon (1 t CO2e = £5)

0.263

1.322

31.736

0.028

36.056

0.911

2.446

27.058

21.631

1.550

9.244

6.862

0.355

4.288

6.855

1.491

7.159

1.118

4.242

1.839

33.299

2.983

CO2 as % EBITDA (1 t CO2e = £5)

2.104

10.576

253.888

0.223

288.446

7.287

19.566

216.463

173.051

12.403

73.956

54.893

2.843

34.303

54.839

11.931

57.271

8.947

33.938

14.716

266.393

23.860

CO2 as % EBITDA (1 t CO2e = £40)

5. early experiences with emissions trading in the uk Roeser and Jackson 83

84

the business of climate change

into monetary values, assuming a cost of £5 per tonne of CO2e. The following two columns show how the profitability of a company would be affected if carbon emissions had to be accounted for, by representing the cost of carbon as percentage of EBITDA (earnings before interest, taxes, depreciation and amortisation) at assumed costs of £5 and £40 per tonne of CO2e. These two price scenarios represent the bottom and top ends of carbon price estimations. The data shows that if the cost of carbon emissions had to be fully internalised the effect on the financial performance of companies in certain carbon-intensive industry sectors would be significant. The data leads to the following suggestions: • The industrial sector’s profitability would be affected by 1.1–4.2%, excluding the steel sector. Perhaps not surprisingly, given the high energy intensity of iron and steel production, exposure of the Corus Group is much greater at 33.3%, assuming a cost of CO2 of £5 per tonne. • The resources sector is even more at risk with profit exposure generally1 ranging between 4.3% and 7.2% (at £5 per tonne). The mining industry would be hit particularly hard if emissions had to be fully internalised. • The highest exposure rates are found in the utilities sector. Not surprisingly, electricity generation emerges as the most exposed sector with companies’ profits exposed between 21.6% and 36.1% at a cost of carbon of £5. The figures for Scottish & Southern Energy should be discarded as, presumably, they exclude emissions from power stations. The reported figures for United Utilities also look unrealistically low. Comparing the above emissions profiles with a selected number of companies from less carbon-intensive sectors, the wide range of industry risk and differences in exposure becomes evident. Table 5.3 represents a selection of companies from the financial services, fast-moving consumer goods (FMCG), manufacturing, pharmaceuticals and retail sectors. Table 5.3 shows that all of the represented sectors have a very low carbon exposure with profits potentially affected by less than 1% at a cost of carbon of £5. The financial services sector, not surprisingly, bears the lowest risk, followed by retail and then FMCG and pharmaceuticals. While the low exposure of the financial and retail sectors is generally in line with the carbon intensity of the businesses, a number of companies from the FMCG and pharmaceutical sectors have carbon intensity similar to the industrial sector. Their comparatively low profit exposure is a manifestation of the relatively high profit margins in these sectors and suggests that these may need to be factored into policy decisions. It should be emphasised again that the data and the derived indicators should be treated with caution. Data may not be fully comparable, and a full internalisation of the cost of carbon emissions at this stage is unlikely. Also, many other factors, such as abatement cost, abatement potentials and the ability of companies to pass 1

Excluding Enterprise Oil, BG and Shell, for whom the reported figures are not directly comparable, either as a result of apparent reporting inaccuracies or organisational factors. Shell emissions data, for example, represents the entire Shell group, whereas profitability figures refer to the UK-listed arm of the company only.

Abbey National

Barclays

CGNU

Prudential

Royal Bank of Scotland

AstraZeneca

GlaxoSmithKline

Reckitt Benckiser

South African Brewery

Unilever

Boots

GUS

M&S

Safeway

Sainsbury

Financial services

Financial services

Financial services

Financial services

Financial services

FMCG/Pharma

FMCG/Pharma

FMCG/Pharma

FMCG/Pharma

FMCG/Pharma

Retail

Retail

Retail

Retail

Retail

869,047

780,461

424,798

226,800

232,016

4,600,000

1,131,149

414,000

1,700,000

640,000

288,000

139,551

117,615

269,880

650,000

Emissions 2000/01

4,345,235

3,902,305

2,123,990

1,134,000

1,160,080

23,000,000

5,655,745

2,070,000

8,500,000

3,200,000

1,440,000

697,755

588,075

1,349,400

3,250,000

Cost of carbon (1 t CO2e = £5)

0.393

0.692

0.218

0.154

0.183

0.545

0.870

0.470

0.150

0.148

0.032

0.051

0.104

0.016

0.170

CO2 as % EBITDA (1 t CO2e = £5)

FMCG = fast-moving consumer goods

1,107,000,000

564,000,000

975,000,000

736,000,000

633,000,000

4,219,000,000

650,000,000

440,000,000

5,653,000,000

2,160,000,000

4,437,000,000

1,367,000,000

563,000,000

8,556,000,000

1,910,000,000

EBITDA 5-year average (£)

EBITDA = earnings before interest, taxes, depreciation and amortisation

Company

Sector

3.140

5.535

1.743

1.233

1.466

4.361

6.961

3.764

1.203

1.185

0.260

0.408

0.836

0.126

1.361

CO2 as % EBITDA (1 t CO2e = £40)

5. early experiences with emissions trading in the uk Roeser and Jackson 85

table 5.3 Emissions profiles and profit exposure: selected companies

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the business of climate change

costs up and down the supply chain (particularly in the case of the energy supply sector), need to be considered for a full financial risk evaluation. However, the data shows compelling consistencies in the profiles and profit exposure of certain industry sectors. It may therefore legitimately be used to give an indication of industry risk in the face of the emerging carbon market, which increasingly requires companies to internalise the cost of carbon emissions and penalises energy- and carbonintensive businesses. The data, of course, shows only one facet of a much more complex picture. The observations from the emissions data are particularly interesting in the UK ETS context as they provide an insight into the negotiating position of different industry sectors and show how the current scheme design has, in part, been informed by industry pressure and the desire to protect business from financial risk. The following specific observations can be made: • Only eight of the FTSE 100 companies have joined the UK ETS as direct participants, which underlines the limited scope of the UK ETS. The eight companies represent a small fraction of UK business, and their five-year reduction targets in turn are relatively insignificant in terms of total emissions impact, as Table 5.4 demonstrates. Company

Barclays

Total emissions 2001

Target reduction by 2006

Target reduction in % of total emissions

269,880

10,000

3.71

BP

83,700,000

353,500

0.42

British Airways

17,396,000

125,000

0.72

Land Securities

46,380

1,381

2.98

Marks & Spencer

424,798

2,060

0.48

Rolls Royce

888,000

27,000

3.04

Shell

100,358,000

438,750

0.44

Tesco

no data disclosed

74,000

table 5.4 Direct participants: FTSE 100

• The sector with the highest carbon exposure, electricity generation, has been excluded from the scheme altogether. The downstream trading approach protects the electricity generation industry from being targeted directly. The data in Table 5.2 has shown how significantly electricity generating companies’ profits would be affected if they had to internalise the cost of carbon. It has to be noted here again that in an upstream model most of these costs are likely to be borne by energy users. • Those sectors with relatively low carbon exposure have responded much more positively to emissions trading. This is particularly evident in the position of the retail sector which is proportionately over-represented in the direct section of the ETS. Four of the 34 participating companies are

5. early experiences with emissions trading in the uk Roeser and Jackson 87

retailers. This underlines how the scheme favours sectors with low carbon exposure while at the same time ‘under-representing’ those sectors that have the highest climate change impacts. Last, the industry data shows the limited success of the ETS in addressing greenhouse gas emissions from a holistic perspective. For example, indirect emissions, such as transport emissions or those arising from the product or service provided, are not represented. This, of course, distorts the true picture of industry impacts, which is particularly evident in the case of the finance and building sectors but is also true for sectors such as retail, where embodied product emissions may constitute a company’s biggest impact. Another limitation is the failure to account for company-wide emissions. Considering the emissions profiles of some of the largest UK-listed companies reveals that a large proportion of emissions are not incurred in the UK. This is certainly the case for the resource sector but is also true for a number of manufacturing businesses. In this context it will be interesting to see how emissions from future energy imports are going to be reflected in any trading system. Although currently the UK is self-sufficient in energy terms, this situation is expected to change in the near future. This problem of accounting for emissions along the energy supply chain exemplifies the complexity of the global system and the challenges it poses to domestic accounting procedures and trading schemes. It should be said, of course, that designing a domestic scheme that would take account of indirect as well as company-wide emissions is administratively difficult, if not impossible. By their very nature, domestic schemes cannot account for emissions outside national boundaries. However, these observations on indirect and non-UK emissions serve to illustrate and reinforce the idea that the environmental reach of the UK ETS—and perhaps of any regional or sub-regional trading scheme—is rather limited. The complexity of impacts and the interrelatedness of the supply chains of large companies simply leave too much scope for carbon leakage, where emissions are displaced from a regulated to a non-regulated source or area. This problem underlines the fact that international harmonisation and stringent monitoring must be a prime objective for the development of any robust emissions trading system. In the light of this need, the effectiveness of building an international trading regime ‘bottom-up’, based on a multiplicity of domestic schemes, must appear questionable. Rather, it would seem that efforts need to be focused specifically on finding an integrated global solution. Emissions trading was brought into the climate policy debate precisely because of the need to find a flexible response to a global phenomenon, where abatement is independent of geographic location. This global rationale seems to have been sadly neglected in the development of the UK scheme.

Conclusions Both the discussion of early market developments in the first part of this chapter and the analysis of corporate exposure in the second part have exposed serious

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weaknesses in the early stages of the UK ETS. The development of the scheme appears to have been rushed, driven by political interests to be a ‘first mover’ and constrained by the complicated institutional architecture of the existing energy policy mix. The voluntary approach, exclusion of key industry sectors and the incentive payment significantly reduce the scheme’s environmental credibility. Combined with allegations of hot-air trading and non-additionality, it would seem that short-term targets for greenhouse gas emissions reduction are unlikely to be achieved. More importantly, the current scheme fails to constitute a significant step towards the UK’s long-term climate change policy aim of taking the economy into a low-carbon future. This possibility has been hampered by the failure of the scheme either to internalise the cost of greenhouse gas emissions, particularly CO2, or to put in place strong incentives for the long-term reduction of emissions. Due to significant concessions to industry, the UK carbon market is unlikely to yield the static and dynamic efficiency gains associated with emissions trading. This is particularly evident when considering the position of UK industry, which in this analysis is represented by the FTSE 100 group of companies. Reporting standards and emissions profiles show that most of the largest UK companies are not ready to participate in a carbon market. The lack of robust emissions data is a particular cause for concern as it lends itself to double counting, crediting of non-additional reductions and outright fraud. Needless to say, the implications for global carbon trading are very serious, not least because supra-national enforcement bodies are not yet in place. All in all, the UK scheme represents a missed opportunity for the UK to build a robust and forward-looking framework for domestic emissions trading, and to take a real lead in combating the urgent problem of climate change. The establishment of this new policy mechanism should have been an opportunity to review the current climate change policy and to develop a much more integrated, single-policy approach. This would have meant a review of existing tools, such as the Climate Change Levy. But it would also have needed a more sophisticated, forward-thinking appreciation of wider European developments. Irrespective of whether or not the proposed EU-wide trading scheme offers a more theoretically sound approach, it will inevitably create a much larger, more influential, more effective and potentially more efficient market. A domestic trading scheme that finds itself at odds with the wider scheme, far from offering first-mover advantage, may well leave the incumbent nation at a disadvantage in negotiating the larger market. On the other hand, an effective first national trading scheme, in harmony with a wider European approach, would have sent a clear signal to the international community; it would have placed the UK in a leading position; it would have fortified the international climate policy regime; and it would have placed the market-based mechanisms, in general, in a much stronger position to play a useful role in meeting both the Kyoto Protocol commitments and those that must inevitably follow.

5. early experiences with emissions trading in the uk Roeser and Jackson 89

References Bartlam, M. (2001) ‘Liquidity Matters’ (paper for the Finance Liaison Group of the UK Emissions Trading Group, www.uketg.com). DEFRA (UK Department for Environment, Food and Rural Affairs) (2002) ‘Auction Success for the UK Emissions Trading Scheme’, news release, 13 March 2002. DETR (UK Department of the Environment, Transport and the Regions) (2000) Climate Change: The UK Programme (London: DETR). —— (2001) Framework Document for the UK Emissions Trading Scheme (UK ETS [01] 01; London: DETR). ENDS (Environmental Data Services) (2002) ‘Hot Air Blows Gaping Hole in Emissions Trading Scheme’, ENDS Report 329 (March 2002). European Commission (2000) Green Paper on Greenhouse Gas Emissions Trading within the European Union (Brussels: European Commission). Fankhauser, S. (1995) Valuing Climate Change: The Economics of the Greenhouse Effect (Centre for Social and Economic Research on the Global Environment, Economic and Social Research Council; London: Earthscan Publications). See, M. (2001) Greenhouse Gas Emissions: Global Business Aspects (Berlin/London: Springer). Skea, J. (1998) ‘Role of Emissions Trading in Implementing the UN Climate Change Convention’, Environment and Pollution 10.3–4: 454-61. Sorrell, S. (2003) Back to the Drawing Board: Implications of the EU Emissions Trading Directive for UK Climate Policy (Science Policy Research Unit, University of Sussex, Brighton, UK). Sustainable Development Commission (2001) Forging an Energy Policy for Sustainable Development: A Paper for the Energy Policy Review of the UK Government (London: Sustainable Development Commission, October 2001). Tietenberg, T. (1985) Emissions Trading: An Exercise in Reforming Pollution Policy (Washington, DC: Resources for the Future). Tolley, G.S., and B.K. Edwards (1997) ‘Slippage Factors in Emissions Trading’, in R.F. Kosoboud and J.M. Zimmerman (eds.), Market-Based Approaches to Environmental Policy: Regulatory Innovations to the Fore (New York: Van Nostrand Reinhold): 187-97. Woerdman, E. (2000) ‘Implementing the Kyoto Protocol: Why JI and CDM Show More Promise than International Emissions Trading’, Energy Policy 28.1: 29-38.

6 Building a greenhouse gas management programme a framework based on real-world corporate responses The Partnership for Climate Action* with Environmental Defense

The members of the Partnership for Climate Action (PCA) have a common philosophy of addressing climate change. They represent different industrial sectors, geographic domains and sizes, thus the details of their programmes differ. Individually, each member company is implementing an independently established programme to limit emissions of greenhouse gases (GHGs). All these programmes are distinguished by their comprehensive nature: a complete and interconnected set of practices that allow for an accurate and credible analysis of past, present and future emissions performance, including publicly stated, quantified reduction targets.

A framework for programme review Each corporate partner of the PCA has independently and voluntarily designed its own GHG management programme. These programmes have been influenced by factors such as industrial sector, types of emission, business growth, geographic distribution of operations and corporate culture. The programmes have also been launched at different times and are therefore at different stages of implementation. A review of the programmes reveals their principal elements, which in combination compose a universal framework for programme design. These elements are (1) *

Members of the Partnership are Alcan, BP, DuPont, Entergy, Environmental Defense, Ontario Power Generation, Pechiney, Shell International and Suncor Energy. Launched in October 2000, the PCA provides a forum for world-class companies to gain further experience with greenhouse gas (GHG) management so that they can help to ensure that the emerging policies are both economically and environmentally sound.

6. building a greenhouse gas management programme Partnership for Climate Action 91

target setting, (2) emissions measurement, (3) actions to reduce emissions, and (4) accountability. All the elements of a GHG programme are connected, so that the design of one will affect the others. A comprehensive programme, strong in all four elements, is most likely to deliver both economic and environmental performance. The programmes are still evolving, and typically each year the companies assess their progress and decide on the changes, if any, for the coming year.

Target setting A distinguishing feature of all the PCA members’ programmes is that they have established a mass-based GHG emissions limitation, or target. These targets are expressed in accordance with four parameters: start date, target achievement date, base year (or reference year) and a specific quantity of targeted emissions based on a percentage of the reference year’s emissions. This does not mean that all companies set the same target. Rather, each sets a target that limits its emissions at some predetermined and measurable amount, representing a downward trend and delivering some guaranteed environmental performance. In choosing its targets, each company decides on its feasibility based on the company’s operations, the particular factors influencing its industrial sector and the commitments made by other companies or the sector itself. In addition, the targets are designed to show that each company takes the issue of climate change seriously and that each is committed to reducing emissions over time. The PCA partners established their targets at a time when few, if any, formal regulatory programmes were in place. All the PCA members intend to comply with regulatory programmes as they are developed and implemented. One benefit of voluntarily choosing a target is that it allows companies to gain experience managing GHG emissions, to make early reductions, to prepare for possible regulation and to help inform the regulatory process. Such an initiative is not without risks, however, particularly if future regulation fails to recognise early actions and essentially punishes companies that choose a proactive stance. Figure 6.1 shows some of the topics considered when setting targets.

Coverage, or defining boundaries Coverage refers to which greenhouse gases a programme will include and the company’s boundary lines for setting and reporting targets. The PCA member companies permit all the ‘Kyoto gases’, carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulphur hexafluoride (SF6), to be included in their programmes and focus on those that are the most relevant to their operations. This approach recognises the importance of having both internal and external flexibility to find cost-effective reductions and to engage employees or sectors of businesses that otherwise would not be engaged in this work. The consideration of all gases recognises that each is part of the climate change problem and presents opportunities for GHG management. In some cases, however, it is difficult to measure certain gases accurately. For technical or cost-related reasons, companies have sometimes delayed measuring some non-CO2 gases to a later phase in their programmes. When

92

the business of climate change Gases

Coverage

Source type (e.g. physical plant, transportation, offsets, materiality, data quality) Emissions type (direct/indirect, internal/external)

Base year

Target setting

Baseline

Level of confidence in data Rules for adjustments (increase or decrease) Target articulation (limitation relative to base year, timing and/or interim steps)

Emissions measurement

Allocation method (address equity and timing)

Target Actions to reduce emissions

Accountability

Eligible reductions (e.g. can offsets be used?) Rationale for target (additionality, company exposure, economic opportunity)

figure 6.1 Topics in target setting

evaluating their emissions, PCA companies are thus judging the significance, or materiality, of small sources, though there is no standard for a materiality threshold. Companies may categorise GHGs in two different but related ways. The first is by source type, or the physical apparatus or operation that generates the emissions, such as machinery or automobiles. A review of source types usually leads to further consideration of issues such as data quality and materiality, which in turn may affect decisions about including sources in a company’s target. The second category is emissions type, which is divided between direct emissions emanating from a company’s physical plants and facilities and indirect emissions caused by the production and delivery of energy, fuel, raw materials, services and the like, or by the delivery and use or recycling of the company’s products. Among many important coverage issues, one that is particularly interesting is the relationship between direct and indirect emissions and the corresponding concerns that arise, including the ‘ownership’ of any reduction of emissions and ‘leakage’, meaning that actions taken to reduce emissions in one place may result in increased emissions in another. Regulatory programmes to control GHG emissions will probably address some of these issues. Voluntary programmes offer a tougher challenge and no single

6. building a greenhouse gas management programme Partnership for Climate Action 93

solution. Generally, the PCA member companies are trying to avoid perverse outcomes such as ‘outsourcing emissions’ or discouraging the introduction of newer, cleaner energy sources such as combined heat and power, or cogeneration. Five out of eight PCA companies include only direct emissions in their targets, and most track indirect emissions from electricity purchases.

Baseline The baseline, or the level of emissions in a given year, is one of the building blocks for setting a target. Because the Kyoto Protocol uses 1990 as the base year and sets targets as percentages of 1990 emissions, several PCA companies use 1990 as their base year. The results have been mixed. An important concern is data quality, and in many cases the data simply does not exist or is based on estimates, thereby introducing uncertainty that could be as large as the target itself and undermining the credibility of the company’s performance. Consequently, a company might choose a more recent baseline to increase the accuracy and reliability of the information used to establish its target. Another issue is that some companies have changed so much since 1990 that the 1990 emissions have no relevance to their targets today. This may be true in cases of an unusual growth of emissions, an unusual decline in emissions, or changes in emissions among business units. Even if a company can obtain a good 1990 estimate, it may find that historic emissions are not appropriate to assigning internal present-day emissions responsibility. Six out of eight PCA companies are using 1990 as their target’s baseline year; the rest are using more recent data. None of the PCA companies has used 1990 data to assign internal responsibility for reducing emissions. A business’s growth and contraction are other important considerations for the emissions baseline. Companies grow by acquiring existing assets (acquisition), building new ones (greenfield growth) or expanding existing facilities (organic growth). Similarly, they contract by shutting down assets, selling them (divestiture) or simply decreasing throughput or capacity (organic decline). All these situations need to be addressed in the baseline. Some PCA companies are raising or lowering their baseline for acquisitions of existing assets or divestiture, respectively, but are not making adjustments for shutdowns, greenfield growth or organic changes in emissions. Some companies note at the outset of their programmes the exceptions to these adjustment procedures. Accurate accounting and disclosure are used to track such adjustments so that PCA companies can fully substantiate their performance claims.

Targets, or emissions limitations The emissions limitation is generally set as some percentage of the baseline emissions achieved by a target date, as shown in Table 6.1. One primary goal for the PCA companies is setting a target that helps them to prepare for future carbon constraints. That is, they want to make internal changes now in order to establish their GHG emissions profile and to determine their opportunities and costs for making reductions. This goal should also be balanced against the practical realities

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the business of climate change Company

Target

Alcan

Achieve annual reductions of 500,000 tonnes by 2004, with future targets set on a yearly basisa

BP

10% below 1990 by 2010

DuPont

65% below 1990 by 2010

Entergy

Stabilise at 2000 levels for 2001–2005 (interim target)

Ontario Power Gen.

Stabilise net GHG emissions at 1990 levels starting in 2000

Pechiney

15% below 1990 by 2012

Shell International

10% below 1990 by 2002

Suncor Energy

6% below 1990 level s by 2010, consistent with Canadian federal commitments

a This recent initiative is in addition to a reduction in annual GHG emissions by 2 million tonnes compared with 1990, which has been achieved despite increases in overall production capacities during the same period

table 6.1 PCA targets

of competitive markets. The PCA member companies cover different sectors, operate globally and produce a range of products, of which some are subject to regional or global commodity market price fluctuations. Targets act as inducements for emissions reductions. When setting a target, companies usually try to create a ‘stretch’, perhaps defined as a quantity of emissions reductions that the company currently does not know how to achieve. When establishing such a target, the company creates a driver to discover opportunities for reduction and internal change. Another factor in setting the emissions limitation is present and future competitive positioning. PCA companies have set their targets in part because they have a business case for reducing emissions, such as sound long-term planning and investors’ demands. A voluntary commitment should not hurt the company’s competitiveness. Nonetheless, over time, the potential financial benefits of environmental management are likely to give proactive companies an advantage over those that wait. Because emissions limitation commitments are generally set for 5–10 years, each company should periodically track its progress in meeting its target. And although the PCA companies’ targets do vary, as shown in Table 6.1, they all illustrate the seriousness of the company’s commitment and the potentially beneficial impact on the environment.

Emissions measurement Measurement is a key factor in GHG management systems because it is linked to setting baselines, determining the extent to which targets are met, supporting credible emissions trades and ultimately demonstrating accountability. As a result, accuracy and uncertainty are paramount. Figure 6.2 illustrates the topics considered when measuring emissions.

6. building a greenhouse gas management programme Partnership for Climate Action 95

Target setting

Internal, direct emissions

Measurement protocols: direct measurement versus estimation or calculation; factors and other standards

Emissions measurement

External, indirect emissions

Measurement protocols; criteria (e.g. project baseline criteria)

Accounting standards, data quality Actions to reduce emissions

Verification

Internal audits

Accountability Third-party verification

figure 6.2 Topics in emissions measurement

Internal, direct emissions All PCA companies use methods for direct measurement (e.g. continuous emissions monitoring) or estimation (e.g. emission factors and fuel usage data) that are recognised as best practices by the industrial associations and/or countries in which they operate. Furthermore, they have established systems to ensure the accuracy, completeness and consistency of this data and the integrity of the data based on collection and handling methods. Six PCA companies have tested the ‘GHG Protocol’ developed by the World Resources Institute and the World Business Council for Sustainable Development (WRI and WBCSD 2001) and are consistent with that guidance to varying degrees. Conformity with the GHG Protocol or other practices, however, does not mean that all the PCA companies take the same approach to measurement. For example, the GHG Protocol allows companies to make decisions that significantly affect the data’s comparability. This flexibility may be relevant to the extent that PCA companies trade emissions; thus it is another issue that the PCA will explore. For certain GHG emissions that are emitted in relatively small quantities, the cost of voluntary measurement can be prohibitively expensive. Although there is no set threshold for measurement cut-off, the gases not fully measured seem to share certain characteristics. They are: .

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• Emitted in very small amounts (i.e. kilograms) • Emitted from fugitive sources or sources that are difficult to reach • Non-CO2 gases • Estimated using uncertain methods In cases in which a company is omitting a GHG from its measurement protocol, it frequently tries to include it in future inventories and/or to track emissions indicators at least in order to review emissions trends. Even with the best practices, measuring emissions is uncertain, and guidance on addressing this uncertainty is just beginning to emerge. Lessons can be drawn from financial accounting and environmental regulatory practices. To date, a common practice is simply to disclose the uncertainty and, if possible, to quantify it. Another option is to track separately highly uncertain emissions sources so that the uncertainty of one group of sources does not diminish the reliability of other measurements. Most companies that have identified areas of uncertainty are also trying to reduce that uncertainty over time.

External, indirect emissions Indirect emissions offer an additional opportunity to reduce emissions further ‘up the value chain’, thereby extending the reach and potential impact of any single organisation and engaging other entities in the process. Indirect emissions also pose interesting challenges, centred primarily on the issues of the ‘ownership’ of emissions reductions (as one company’s indirect emission is another company’s direct emission) and the ‘quantification’ of reduction in emissions. One option is to track improvements in indirect emissions separately from improvements in direct emissions. All the PCA companies have created measurement systems that allow data to be separated. Or, in an overall programme, separate targets can be created for direct and indirect emissions, as DuPont has done. This allows the company to track its performance separately and transparently on more than one dimension and provides the raw data to support its position on various regulatory approaches.

Verification Quality control of emissions data begins on the shop floor and is further supported by an internal audit, a process that is centrally managed by all the PCA companies. This process can be similar to, and in fact part of, a financial audit. A second quality check is made during a third-party review, or verification, which is common and increasingly used by the PCA companies. Although all PCA companies use or intend to use third-party verification, there is no standard guidance for conducting such reviews. One examination of various public and private verification procedures suggests, however, that they typically include an evaluation of the data management systems for developing the GHG inventory; a confirmation that the inventory reflects actual operations and covers the material sources of GHG emissions; and a confirmation of the estimates and reductions of emissions,

6. building a greenhouse gas management programme Partnership for Climate Action 97

including the consistency with which a company or organisation has applied its protocol (Loreti et al. 2001). Although third-party verification is recognised by all PCA companies as important in managing their programmes and building credibility, there are some trade-offs. Third-party verification of emissions as a prerequisite to trading poses a procedural condition that could impede market activity. In addition, employing third-party auditors adds a transaction cost to emissions trading, and there are currently standards regulating the accreditation of auditors. Table 6.2 summarises the PCA companies’ emissions measurement practices.

CH4 = methane; CO2 = carbon dioxide; HFC = hydrofluorocarbon; IPCC = Intergovernmental Panel on Climate Change; N2O = nitrous oxide; PFC = perfluorocarbon; SF6 = sulphur hexafluoride a D = direct measurement, E = estimation b Not a significant source but may be examined in the future c IPCC factors are the default choice, but more accurate factors are used where available d Emissions are directly measured in the Natural Gas & Renewable Energy unit but, when estimation is used, emissions are estimated based on total CO2 emissions e Emissions from business units do not exist or occur at trace levels f Methods and specific emissions factors are not standardised across (and sometimes within) the business units. The Natural Gas & Renewable Energy unit uses some factors provided by the Canadian Association of Petroleum Producers. Global warming factors for CH4 and N2O are consistent across business units.

table 6.2 PCA targets

Actions to reduce emissions PCA companies have designed and implemented programmes that are meant to be flexible and innovative, programmes that maximise their options for reducing GHGs and encourage new ideas and new thinking. As a result, many competing projects and activities should be evaluated and, as illustrated in Figure 6.3, a key step for organising a company’s effort is developing various types of guidance. The guidance a company develops depends on the level of centralisation in the programme design and the extent to which the company will accept reductions from outside its operations. There is no fixed approach, and in fact several different options have emerged:

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the business of climate change

Target setting

Guidance for internal actions

Project approval: capital allocation, clearinghouse functions

Emissions measurement

Actions to reduce emissions

Guidance for emissions trading

Definition of credible reductions; rules for trading and banking

Internal administration, information systems

Accountability

Guidance for external actions

Use, selection and evaluation of emissions offset projects

Product life-cycle assessment; customer and supplier outreach

figure 6.3 Topics in actions to reduce emissions

1. Explicit internal targets or technology requirements are assigned to each business unit (BU). A company begins to make capital investments to improve efficiency and possibly to make significant innovations that reduce GHG emissions. Typically the target is set in a bottom-up fashion and represents the best that the company can do given its current understanding of costs and technology options. 2. Explicit internal targets with internal emissions trading at the BU level. A company uses an internal emissions trading programme to encourage innovation and to create competition for ‘making’ reductions. Typically the target represents a stretch and leaves open the possibility that employees will be able to meet the targets in ways not previously envisioned. The programmes provide incentives for encouraging business unit leaders to find low-cost reductions. 3. Explicit internal targets with internal and external emissions trading at the BU level. A company delegates responsibility for meeting targets down to the BU level and gives the units flexibility for meeting those targets. To date, none of the PCA companies has moved to this level of implementation or decentralisation. In this approach, a company might have optimal flexibility in meeting BU targets and might also find itself in the

6. building a greenhouse gas management programme Partnership for Climate Action 99

awkward position of having one BU selling tonnes of carbon externally when another is having difficulty meeting its target. 4. Explicit internal targets and centralised acquisition of offsets or sale of internal reductions. BUs are given guidance to improve their GHG intensity. Targets can be set through a bottom-up or top-down approach and therefore may represent more or less of a ‘stretch’ for the company. At the same time, a centralised group reviews external offset projects to get a sense of the ‘market price’ of carbon. The centralised group could also buy offsets and might negotiate the sales of reductions that exceed the selfimposed emission target. 5. Internal performance goals and centralised acquisition of offsets. In this approach, targets at the BU level are not prescribed, but incentives are provided to improve emissions performance. This approach might be used by a company that has already tried to optimise its operations from a carbon perspective, so that new targets will create additional burdens on the BU staff. Rewards might be offered for reductions, such as more investment capital. At the same time, the company may acquire external emission reductions if necessary.

Guidance for internal actions Besides communicating the structure of the programme, a company’s guidance can help to identify, screen and select internal emissions reduction opportunities. These guidelines are shaped according to the company’s overall business strategy and may be integrated with other objectives, such as sustainable development. Typically a company is interested in developing a carbon abatement cost curve to better understand its own operations and to reduce emissions and the associated costs. Such a curve may require that business units determine the cost of reducing carbon in both existing sources and planned investments even if the investments are not ultimately made. Based on a review of these data, a company can encourage investments that best fit the company’s long-term planning. Another option is to require a company’s business units to include some centrally determined cost of carbon in their project evaluation. The cost of carbon then contributes to the rate of return expected from an investment and thus can become a deciding factor in whether to go forward with a project. All PCA companies have substantial emissions inventories, and as a group they possess a wide range of emissions types and sources, so the actions they can take are many. In sum, the steps that the PCA companies have already taken include manufacturing process changes, upgrades and improved energy efficiency at power-generating stations, fuel switching, coal blending, methane capture, diversion of wood waste, fuel efficiency measures, cogeneration and project-based offsets.

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Guidance for emissions trading The PCA companies agree that appropriately designed market-based strategies are a cost-effective means to reduce GHG emissions and to protect against climate change, and they are committed to exploring the issues around emissions trading. Two PCA partners’ (BP and Shell) GHG programmes are based on systems for internal trading among BUs, whereas other programmes focus on external, inter-company trades. In each case, trading raises issues of credit creation, fungibility, transfer, use and verification. An accepted criterion for a tradable emissions credit is that the credit must be ‘surplus or additional’, that it represents a reduction in emissions below some targeted level. More broadly, the US EPA’s definition of surplus may be described as a reduction in emissions that is not already required. In a regulatory programme such as the US cap-and-trade programme for sulphur dioxide, all credits (or ‘allowances’, in regulatory parlance) are automatically surplus, in a sense, because they represent allowed emissions below the regulatory cap. Regardless of the amount of trading in a cap-and-trade programme, the target level for total emissions is always preserved. In contrast, in a voluntary programme, the creation of surplus reductions is somewhat arbitrary but can be made contingent on the achievement of voluntary targets. The possibility for near-term trading suggests the existence of near-term targets, which in turn raises the issue of comparability of near-term targets among market participants. These are topics for further discussion by the PCA members, particularly in their examination of tracking and reporting emissions and demonstrating progress.

Guidance for external actions As used here, the term external actions has two meanings. First, external actions are actions taken to reduce emissions in projects external to a company’s operations, or project-based offsets. Despite work being done on external offsets, there is no comparable or consistent approach to evaluating them. At some point, an agreed-on set of criteria for screening, selecting and evaluating offset projects would be useful. Such criteria could be based on those used to choose internal investments for emissions reductions, with a comparable level of rigour. Second, a company’s GHG programme may include external actions to reduce emissions that are not intended to count towards the company’s voluntary target, meaning that they are external to the defined boundary. Hypothetically, a programme could include efforts to reduce and quantify downstream indirect emissions from product use, even though the company’s GHG target and reduction strategy is based on direct emissions only. Though such external actions may begin in a parallel or complementary fashion to a company’s GHG target, this would not preclude subsequent integration into the target articulation.

Accountability The final core element of a GHG programme is accountability. Figure 6.4 shows its two principal components, reporting and reconciliation. Together these activities

6. building a greenhouse gas management programme Partnership for Climate Action 101 Target setting Basics: format, frequency, level of detail, level of aggregation Emissions measurement

Length of time to generate an emissions report, reporting cycle

Reporting

Actions to reduce emissions

Access to data: internal, external

External registration of data

Accountability Process for true-up: timing, role of banking

Reconciliation Liability: mechanism to address deficit

figure 6.4 Topics in accountability

demonstrate a company’s commitment to report its progress publicly and to achieve its environmental goals.

Reporting Each PCA programme includes the preparation of annual, public, emissions performance reports. The audiences for the reports are the general public, employees, shareholders, policy-makers and business analysts. One of the reports’ goals is to show the strengths of a company’s programme to enhance its credibility. Another goal is to support the business case for GHG management, particularly by showing analysts and investors how emissions performance has positioned the company to succeed under future carbon constraints. Although all PCA companies submit reports, formats differ in their treatment of emissions performance, their use of emissions trading and their use of external offsets. Likewise, the frequency of reporting varies, as generating an emissions report can take anywhere from one month to one year, including the internal collection and auditing of data. Despite the differences among PCA companies, some suggested guidelines for minimum reporting include the following: • Global emissions by company

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• Distinction between the different types of GHG • Distinction between direct and indirect emissions • Offsets and transaction activities • Geographic distinctions (particularly between industrialised and developing countries) • Progress relative to base year and recent emissions To register their emissions data and performance with an independent third party, five of the eight PCA companies use or are planning to use some form of external registration, mainly under voluntary agreements with governments.

Reconciliation In a regulated emissions trading programme, reconciliation refers to the comparison of a regulated source’s actual emissions with its allowed emissions. If the emissions exceed the allowed amount, the source must obtain additional credits to offset the difference. If the source fails to obtain these credits, it will not be in compliance and thus will face whatever penalties are prescribed in the regulations, such as a financial fine and a deduction of credits from its upcoming allotment. The notion of reconciliation has a different meaning in a voluntary programme. Typically the PCA companies use a reconciliation period to compare their performance with their stated goals. However, rather than impose regulatory penalties, the PCA companies use other incentives such as salary or management inducements and peer pressure. For example, a business unit that meets its target might find it easier to compete internally for capital to invest in more reductions. Or the leader of a BU that fails to meet its target might have to explain the failure during his or her annual salary review. Because all the PCA companies have agreed to report their progress publicly, a company that fails to meet its target would be committed to reporting that failure. A topic for further discussion is how any deficit relative to specific voluntary commitments will be redressed, including issues such as ‘environmental compensation’ and insurance practices for reconciliation failures. To date, the focus has been internal, getting programmes up and running rather than imposing penalties. The PCA companies have found that this is important in terms of engaging employees at broad levels.

Conclusion The above discussion was completed by mapping each of the PCA members’ greenhouse gas management programmes to a framework for programme review. The programmes are evolving as each company learns by doing, but will continue to be distinguished by their comprehensive nature: a complete and interconnected set of

6. building a greenhouse gas management programme Partnership for Climate Action 103

practices that allow for an accurate and credible analysis of past, present and future emissions performance, including publicly stated, quantified reduction targets.

References Loreti, C.P., S.A. Foster and J.E. Obbagy (2001) An Overview of Greenhouse Gas Emissions Verification Issues (report prepared for the Pew Center on Global Climate Change; Cambridge, MA: Arthur D. Little). WRI and WBCSD (World Resources Institute and World Business Council for Sustainable Development) (2001) The Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard (Washington, DC: WRI; Geneva: WBCSD).

7 Governmental and industrial responses to climate change the case of germany Axel Michaelowa, Sonja Butzengeiger and Sven Bode Hamburg Institute of International Economics, Germany

Germany has declared itself to be a pioneer in climate policy and has some arguments to bolster this claim. Emissions of the Kyoto basket of greenhouse gases have been reduced by 19.4% between 1990 and 2000. The German government lists more than 100 measures for greenhouse gas reduction in its national climate policy programme. Market instruments still do not figure prominently among these. This can be understood by looking at the strongly regulation-oriented culture of German bureaucracy and the ideological stance of the Green Party, which has had a strong influence on the Ministry of Environment since 1998. However, it is surprising that German industry is trying to scupper the EU draft directive on emissions trading when it should be happy that a market-based instrument could lead to lower costs of climate policy. What are the reasons for this resistance?

Background of Germany’s emissions path Germany is often held to be the paragon of successful climate policy. Total emission figures in the last decade confirm this evaluation. However, these reductions are due not only to policy efforts; rather, drivers are numerous.

Industrial structure In the 1980s, industrial installations in eastern parts of Germany were characterised by their inefficiency. Reunification offered enormous opportunities to reduce emissions by either shutting down those installations or increasing their efficiency. For example, BASF managed to reduce emissions at its Schwarzheide plant by 76%. Today, Germany’s industry is one of the most energy-efficient in Europe.

7. governmental and industrial responses to climate change Michaelowa et al.

105

In addition, the proportion of heavy and energy-intensive industry has been slowly declining over the past decade, although it is still significant; while the proportion in value-added of energy-intensive industry was 9.13% in 1992, it steadily decreased to 8.05% in 1998 (Federal Statistical Office 2002). Thermal electricity generation is highly carbon-intensive with an important role for lignite and hard coal, while natural gas is rarely used (see Table 7.1). Fuel

Share 1991 (%)

Share 2000(%)

Carbon-intensive fuels Lignite

29.4

26.0

Hard coal

27.8

25.5

Gas

6.7

8.5

Oil

2.5

1.0

66.4

61.0

27.3

30.2

Hydro

3.4

4.4

Wind

0.0

1.6

Other

2.9

2.8

Total

33.6

39.0

Total Carbon-free Nuclear

table 7.1 Proportions of power sources in German electricity production, 1991 and 2000 Source: BMWi 2000, 2001

German climate policy in the past and the role of industry German climate policy started in the late 1980s with a declaration of an ambitious emissions reduction target (−30% CO2 by 2005 compared with 1987 for West Germany) based on a thousand-page report, ‘Protection of the Earth’s Atmosphere’, by a parliamentary commission (Deutscher Bundestag 1990). This target was agreed based on optimistic expectations about continuing autonomous energy efficiency improvement such as that witnessed in the aftermath of the second oil price shock. In the medium scenario, this was to lead to a 30% and 10% reduction of household and transport energy use, respectively. In contrast, industrial energy use was projected to grow by 8% (Deutscher Bundestag 1990: 45). Industry thus thought it had nothing to fear from climate policy and remained on the sidelines. It soon became clear that the trend would look quite different from the forecasts of the commission. Policy-makers took the opportunity to get themselves out of the trap by discreetly changing the target base to encompass the whole of reunited

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Germany. As mentioned above, German reunification provided Germany with an opportunity for deep and politically palatable reductions in East Germany, most of which took place in industry. Meanwhile, household and transport emissions in West Germany continued to rise. Policy-makers were thus faced with a dilemma during post-unification economic recession: imposing burdens on German industry was out of the question but somehow industry would have to publicly show action on greenhouse gas reduction. In the first half of the 1990s, the Ministry of Environment strove for an energy tax and expressed high hopes at the EU level of implementing such a tax (see e.g. Bundesregierung 1994). When it became clear that the unanimity requirement would block implementation of the EU CO2/energy tax proposal, efforts were directed towards a national energy tax. A study commissioned by Greenpeace in 1994 (Deutsches Institut für Wirtschaftsforschung 1994) catalysed the debate and rallied industry to increase lobbying against the tax. At the time, emissions trading was not discussed at all as a policy alternative, not even by the Federation of German Industry (BDI) in its counterlobbying paper (BDI 1995a). The only alternative suggested was a voluntary agreement. When it became clear that Chancellor Kohl was not supporting the tax, the Ministry of Environment was very eager to conclude a voluntary agreement with major industrial sectors. In these negotiations, BDI temporarily voiced support for trading (Chasek et al. 1998: 33). However, a voluntary approach was agreed that was acceptable for industry based on weak targets and lacking sanctions in cases of non-compliance. At the same time it allowed government to publicly state that climate change was taken seriously. The first voluntary agreement was signed in 1995 and updated in 1996, 2000 and 2001 (see Table 7.2). The agreement includes an umbrella signed by the BDI and detailed agreements for each sector. The first revision of the agreement was necessary because of its severe shortcomings which resulted in strong protest from NGOs. For example, major sectors such as the automobile producers did not participate, the targets were specific and there was no independent monitoring. More than two-thirds of the umbrella target had already been reached because of the crash of East German industry before the agreement had been made. In October 2000, the agreement was updated again in the context of the development of the national programme for climate protection: specific CO2 emissions are to be reduced by 28% by 2005 and by 35% for all Kyoto gases by 2012. As a result of this sector-level agreement an absolute reduction of 45 Mt CO2 is expected. However, the underlying agreements of the sub-sectors (for example, iron and steel, pulp and paper) have not been published so far. This is why the voluntary agreement is still a very convenient instrument from an industry point of view—especially since no emissions targets at the company level exist. Until 1999 the discussion on climate policy concentrated on the two instruments of tax and voluntary agreement. Industry representatives stressed the success of the agreements but could not prevent the introduction of the ‘ecotax’ by the coalition of Social Democrats and Greens that won the federal elections in 1998. However, industry managed to get a far-reaching exemption and thus reached its primary target.

a A = absolute, S = specific

b

West Germany only

table 7.2 Development of voluntary agreements over time Sources: BDI 1995b; Buttermann and Hillebrand 2000: 20

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Today’s situation Energy efficiency Looking at average energy efficiency of industrial production, Germany is in the leading group of European countries, often only being preceded by the Netherlands (see Table 7.3).

a Due to the low efficiency of the Netherlands in pulp and paper

table 7.3 Difference between Germany and the most efficient EU country

Marginal abatement costs for emission reductions Economic modelling generally leads to estimates of German marginal emission reduction costs to reach the Kyoto targets as being below the European average, as Germany starts from a high base of emissions (1990) and still has options available for emissions reduction that have been used up by other EU countries. Using a general equilibrium model, Böhringer et al. (1999) found German marginal costs to be lower than those of Italy, Denmark and the UK but higher than those of France and Spain. Capros (1999) analysed eight EU countries with the energy systems model PRIMES and the Computable General Equilibrium model GEM-E3 (see Table 7.4). Given the energy efficiency achievements in heavy industry, the main potential for cheap emissions reductions in Germany lies in fuel switch in the electricity utility sector.

Emissions trends By 2000 it became clear that emission trends were changing: electricity supply and industry emissions were beginning to rise while household and transport emissions were beginning to fall (see Table 7.5).

7. governmental and industrial responses to climate change Michaelowa et al.

Country

GEM-E3

PRIMES

Böhringer et al.

0

N/A

N/A

Belgium

+25

+75

N/A

Denmark

+250

N/A

+15

Finland

+175

N/A

N/A

France

−100

0

−45

Greece

−75

N/A

N/A

Ireland

−100

N/A

N/A

Italy

+150

+250

+25

Netherlands

+300

+300

N/A

+50

N/A

N/A

0

+100

−50

+150

+275

N/A

−25

+125

+10

Austria

Portugal Spain Sweden UK

109

Note: + = higher than in Germany, − = lower than in Germany; rounded to nearest 425

table 7.4 Differences in marginal abatement costs between Germany and EU countries under burden sharing Sources: Capros 1999; Böhringer et al. 1999

Sector

1990

1992

1994

1996

1998

1999

2000

Energy supply

450.7

−8.8

−13.0

−14.4

−18.2

−25.8

−25.0

Industry

262.8

−13.7

−18.6

−20.6

−26.8

−30.6

−29.3

Households/services

208.0

−7.6

−7.4

+5.3

−6.8

−14.9

−18.7

41.0

−22.5

−40.0

−46.4

−56.3

N/A

N/A

166.7

+6.1

+7.1

+9.8

+12.1

+15.2

+13.0

69.0

−15.7

−15.5

−16.5

−16.8

−18.3

N/A

Waste Transport Agriculture

1990 values in million tonnes CO2e; subsequent figures represent changes in % The estimates for agriculture do not include energy use, which is covered under the households/services category because of insufficient differentiation.

table 7.5 Sectoral emission trends, 1990–2000 Sources: Estimates up to 1999 from inventory submitted for 3rd EU national communication (2001). 2000 figures are from Ziesing 2001, 2002; they cover CO2 from fossil fuels and industrial processes only.

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Introduction of emissions trading as a new climate policy instrument The EU Commission’s proposal on an emissions trading scheme In the international climate negotiations, the EU had long been very sceptical about flexibility instruments. It had always criticised the stance of the US and its allies in the so-called Umbrella Group in relying primarily on international flexibility, and argued for a quantitative cap for the use of the Kyoto mechanisms CDM (Clean Development Mechanism), JI (Joint Implementation) and international emissions trading. Thus it came as a surprise to most observers when in 1999 the EU Commission suddenly became interested in emissions trading and subsequently published a green paper on elements of an EU emissions trading system in March 2000 (EU Commission 2000). The Ministry of Environment set up a Working Group on Emissions Trading with industry and NGO representatives, which first met in October 2000 and today includes over 120 members whose positions on trading often differ strongly. The formal publication of a draft directive on emissions trading occurred in October 2001 (EU Commission 2001); with the EU becoming favourable to emissions trading, the instrument started to become relevant in German discussions on climate policy. While the Ministry of Environment was one of the first supporters within the government, emissions trading was strongly rejected by the Ministry of Economic Affairs, which was being lobbied by parts of German industry. After a long period of silence, Chancellor Schröder finally opposed trading, thus determining the German position. However, with the majority of Member States of the EU favouring the proposal for the directive, the German government gave way, as the directive had to be endorsed by majority.

Responses of German industry What has been industry’s reaction to the plan to introduce a totally new, more flexible climate policy instrument?

Theoretical interests of industry concerning the design of emissions trading One might assume that industry would welcome such an approach, especially when considering the above-mentioned prognosis on abatement costs. More specifically, one can expect the following viewpoints on emissions trading (see Table 7.6): • Growing emitters will favour a relative target that does not constrain their growth and will argue for weak sanctions to limit the risk of penalties. However, they should accept absolute targets as a second-best solution under the threat of fiscal instruments. The first movers in the corporate world (BP, Shell) belong to this group and have argued for absolute targets. In general, growing emitters will try to maximise the degree of options (i.e. Kyoto mechanisms, coverage of gases and sectors) in order to reduce compliance costs.

7. governmental and industrial responses to climate change Michaelowa et al. Group

Target

Allocation

Sector Gas coverage coverage

Sanctions

111

Link to Kyoto mechanisms

Growing emitters

Relative

Voluntary agreement

Broad

All

Lax

Yes

Shrinking emitters

Absolute

Grandfathering

Broad

All

Stringent

No

Climate protection industries

Absolute

Auction

Broad

CO 2

Stringent

Yes, but no sinks

table 7.6 Views of interest groups on emissions trading • Shrinking emitters will try to profit from absolute targets based on historical emissions (‘grandfathering’) that allow them to sell permits. This can be shown in the German voluntary agreements where the textiles and steel sectors were among the few sectors to adopt absolute targets. Broad coverage and stringent sanctions without access to cheap permits from the Kyoto mechanisms will maximise their profit because of the higher permit price. • Climate protection industries—that is, renewable energy industry and industries selling equipment that reduces energy intensity—look for a system that is as stringent as possible in order to maximise demand for low-carbon technologies.

Recent positioning of industry However, the political debate of the period between 2001 and 2003 has shown that the overall (theoretical) assumption that industry favours emissions trading does not prove to be true. Instead, two groups of players have developed: The die-hard opponents. While publicly supporting the Kyoto Protocol (Reuters 2001), German industry associations have fought strongly against any attempt to change the voluntary commitment into a binding absolute emission target. This led to a strong aversion to emissions trading (BDI 2001). Knoedel (2002) neatly states that the opponents of trading are ‘bashing the sack but mean the donkey’. After the publication of the EU Commission’s proposal on an emissions trading directive, an intense lobbying campaign was started. BDI et al. (2002) demand that trading should be purely voluntary and that allocation of permits should be for free. They claim to represent the opinion of ‘German business’, which seems not to be the case as an independent study shows that many companies would favour a mandatory system (Santarius and Ott 2002). Moreover, the emitters found an unlikely ally, the renewable energy industry, which fears replacement of the current massive subsidies by much lower revenues from permit sales (BWE 2000; Köpke 2000). In November 2001, nine companies from energy-intensive sectors wrote a letter to Chancellor Schröder asking him to reject the Commission draft outright. BDI joined forces with the trade union for mining, chemical industry and energy (IGBCE), which hired researchers to write a study denouncing emissions trading as a complex system which would burden industry to the tune of billions of euros and

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cost 60,000 jobs (Ströbele et al. 2002). The study assumed an autarkic system with a market price of 433/t CO2; realistic expectations see a price much lower as can be seen from the recent prices paid by the Dutch government for ERUs (Emission Reduction Units)/CERs (Certified Emission Reductions) purchased within the ERUPT/CERUPT tender ranging from 43–5/t CO2 (Senter 2002). Some utilities such as EON utilise a two-pronged strategy: publicly railing against emissions trading while actively hedging positions. EON bought Danish permits. The cautious supporters. It is astonishing how little public support emissions trading garnered even from companies likely to profit considerably. Only the subsidiaries of the big European oil companies BP and Shell with internal emissions trading systems and—less enthusiastically—the Hamburg Electricity Utility (HEW) actively promoted trading. HEW was the first European company to sell emission certificates overseas. Simultaneously, the former two companies also diversified by selling their coal assets and setting up their renewable energy divisions. Although the overall participation of German companies in the pilot phase for transboundary greenhouse gas offsets was limited, the electricity sector appeared to be very keen on gaining experience. Four of the five projects have been undertaken by large utilities. The most successful and best-documented project is the Ruhrgas project (Knieschewski et al. 2000), which won a German and an EU award for technology in 1998. Ruhrgas plans to expand the project to the entire Gazprom grid once it can get emission permits under Joint Implementation (Ruhrgas 2002). In contrast, the largest German utility, RWE, does not publicise its involvement in two AIJ projects. As can be seen from the discussion above, the overall attitude of German industry towards emissions trading is split. Besides a simple lack of understanding of the new instrument, the main reasons for opposition are the aversion to absolute emissions targets at entity level as well as the emissions situation of individual companies: that is, those with high absolute or specific emissions. Hamburgische Elektrizitäts-Werke AG (HEW AG), the German utility, can be given as an example of the latter factor. HEW was recently bought by Vattenfall and merged with the East German utilities VEAG, Laubag and Bewag. It apparently did not manage to get its proactive stance endorsed by the newly formed company, Vattenfall Europe.

Positioning of a company: the example of HEW The Hamburg Electricity Utility (HEW), originally a local energy supplier in a wellregulated market, can be considered to be one of the most proactive utilities in Germany in recent years. With regard to technical development, HEW has been working on new energy systems—for example, hydrogen technology—since the late 1980s. Fuel cells have successfully been operated in residential areas and the first hydrogen fuel station with public access was established. Currently, HEW also participates in the EU-

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funded project on Clean Urban Transport for Europe (CUTE 2002), which tests the practical application of fuel cell-driven buses in public transport in major cities all over Europe. Small photovoltaic systems have also been supported (COMET 2000). The responsible department within HEW, Energy Concept Future, also actively engaged in the new climate policy instruments as defined in the Kyoto Protocol. In 2000, HEW participated in the Greenhouse and Electricity Trading Simulation (GETS 2) in order to prepare for international emissions trading. Having learned from that situation, practical experience was gained with the first transatlantic deal of emissions reduction certificates: in June 2000, HEW sold 24,000 tonnes of CO2 reductions to the Canadian company TransAlta. In 2001, HEW found itself in the buyer’s position and acquired 24,000 tonnes of CO2e (carbon dioxide equivalent) from the Australian company EDL (HEW 2002). Also in 2001, HEW initiated a ‘competition for the most cost-efficient emission reductions’ in Hamburg, together with the Hamburg Ministry of Environment and Health, German BP AG, Kreditanstalt für Wiederaufbau (KfW) and the Hamburg Institute of International Economics (HWWA). On the political level, HEW participated in the German Emissions Trading Group and openly discussed issues and design options for an emissions trading scheme. However, HEW’s role as a pioneer seems to be changing. After some utility acquisitions in the past and HEW’s integration in Vattenfall Europe, its portfolio now contains several lignite-fired power plants. The new company will be one of the major CO2 emitters in Germany with total annual emissions exceeding those of national states such as Denmark or New Zealand. Recently, HEW co-financed a study arguing against the introduction of a European emissions trading scheme—in line with Germany’s strongest emissions trading opponents (IGBCE 2002). Is this change due to the current process of restructuring the company? A common, non-contradictory strategy seems to be lacking. The two most important factors that influence the company’s attitude might be political signals from the German government and the EU. At the national level, the 2002 flooding in the southern and eastern parts of Germany significantly raised public awareness of climate change and the need for effective climate policies. Vattenfall Europe has just been voted ‘climate sinner of the month’ by the environmental NGO Germanwatch (Germanwatch 2002).

Conclusions Parts of German industry oppose emissions trading based on a combination of several factors: • The German government’s policy error of embarking on voluntary agreements that reflect business as usual led German companies to oppose any climate policy instrument that goes beyond business as usual—whether an energy tax or mandatory emissions trading. • Industry reduced emissions cheaply in the 1990s owing to the shutdown in East Germany. As industrial energy efficiency in many sectors is now near

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the highest level in Europe, companies fear rapidly rising marginal reduction costs. However, models estimating marginal abatement costs for European countries suggest a quite different picture. • Restructuring of companies might lead to an alteration of positioning if strategic acquisitions impose a change on the company’s emissions structure. Bearing in mind the need for absolute emission targets and increasing political pressure from stakeholders, industry would be advised to favour emissions trading over other policy instruments such as command-and-control regulations.

References BDI (Bundesverband der deutschen Industrie) (1992) ‘Überlegungen zu Kompensationsmodellen, Stellungnahme zur öffentlichen Anhörung der von der SPD in die Enquete-Kommission’, in

Schutz der Erdatmosphäre entsandten Bundestagsmitglieder und wissenschaftlichen Sachverständigen zum Thema Kompensation, Bonn, 10 December 1992 (Cologne: BDI). —— (1995a) Changing Course with Eco-taxes? (Cologne: BDI). —— (1995b) Erklärung der deutschen Wirtschaft zur Klimavorsorge vom 10. März 1995 (Cologne: BDI). —— (1998) A Contribution by German Industry and Trade to Future Climate Policy on the Basis of the Kyoto Protocol (Cologne: BDI). —— (2001) ‘Klimavereinbarung von Wirtschaft und Bundesregierung durch EU-Richtlinie zum Emissionshandel bedroht’, press release; Cologne: BDI, 24 October 2001. ——, DIHT, BGW, VDEW, VIK, VKU (1991) Initiative der deutschen Wirtschaft für eine weltweite Klimavorsorge (Cologne: BDI). ——, VDEW, BGW and VIK (2002) Stellungnahme der deutschen Wirtschaft zum Richtlinien-Vorschlag für einen europaweiten Handel mit Treibhausgas-Emissionsberechtigungen (Berlin). BMWi (2000) Energiedaten 2000 (Bonn: BMWi). —— (2001) Nachhaltige Energiepolitik für eine zukunftsfähige Energieversorgung, Energiebericht (Bonn, Germany: BMWi). Böhringer, C., J. Jensen and T. Rutherford (1999) Energy Market Projections and Differentiated Carbon Abatement in the European Union (ZEW Discussion Paper No. 99-11; Mannheim, Germany: ZEW). Bundesregierung (1994) Beschluß der Bundesregierung vom 29.9. 1994 zur Verminderung der CO2Emissionen und anderer Treibhausgasemissionen in der Bundesrepublik Deutschland auf der Grundlage des Dritten Berichts der Interministeriellen Arbeitsgruppe CO2-Reduktion (Bonn: Ministry of Environment). Buttermann, H.G., and B. Hillebrand (2000) Klimaschutzerklärung der deutschen Industrie unter neuen Rahmenbedingungen, Monitoring-Bericht 1999 (Untersuchungen des RheinischWestfälischen Instituts für Wirtschaftsforschung; Essen, Germany: RWI). BWE (Bundesverband Windenergie) (2000) BWE-Stellungnahme zum Entwurf der Generaldirektion Wettbewerb der Europäischen Kommission vom 27.01.2000 zur Änderung des ‘Community Guidelines on State Aid for Environmental Protection’ (Osnabrück, Germany: BVWE). Capros, P. (1999) ‘Economic and Energy System Implications of European CO2 Mitigation Strategy: Synthesis of Results from Model Based Analysis’, paper presented at OECD Workshop on the Economic Modelling of Climate Change, Paris, 1999.

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Chasek, P., D. Downie, K. Baumert, S. Clark, J. Tosteson, L. Bissell, J. Hjether, B. Jayaraman, E. Karkus, J. Leahy and G. Mulder (1998) ‘European Union Views on International Greenhouse Gas Emissions Trading’, Columbia University School of International and Public Affairs Environmental Policy Studies Working Paper 3. COMET (2000) Wo die Sonne scheint, kann Strom fließen (product brochure by HEW AG, SET and Shell Solar Deutschland Vertrieb GmbH; Hamburg). CUTE (2002) CUTE: Clean Urban Transport for Europe (project description by HEW AG, Deutsche BP AG and Hochbahn AG ; Hamburg, Germany). Deutscher Bundestag (1990) Schutz der Erde: Eine Bestandsaufnahme mit Vorschlägen zu einer neuen Energiepolitik. Vol. 2 (Bonn: Deutscher Bundestag). Deutsches Institut für Wirtschaftsforschung (1994) Ökosteuer: Sackgasse oder Königsweg? (Berlin: DIW). Engels, A. (2001) Company Behaviour and Market Creation for CO2 Emission Rights in the US, the UK, the Netherlands and Germany: Early Evidence and Future Research Perspectives (Scancor; 12 March 2001). Environmental Resources Management (2002) GETS 3: Greenhouse Gas and Energy Trading Simulations (Oxford, UK: Environmental Resources Management). EU Commission (2000) Green Paper on Greenhouse Gas Emissions Trading within the European Union (COM[2000]87; Brussels). —— (2001) Directive of the European Parliament and of the Council Establishing a Scheme for Greenhouse Gas Emissions Allowance Trading within the Community and Amending Council Directive 96/61/EC (COM[2001]581; Brussels). Federal Statistical Office (2002) Statistical Yearbook (Wiesbaden, Germany). Germanwatch (2002) ‘Klimasünder des Monats: Vattenfall Europe’, press release, www. germanwatch.org, 26 August 2002. HEW (2002) Umweltschutz: HEW handelt mit Klima-Aktien (HEW company brochure; Hamburg). IGBCE (2002) ‘EU-Emissionshandel birgt erhebliche Risiken für den Industrie- und Energiestandort Deutschland’, press release, www.igbce.de/IGBCE/CDA/Sonderseite/0,1854,knotenId%3D74 %26siteId%3D1%26jahr%3D2002%26monat%3D2,00.html, 16 August 2002. Knieschewski, W., R. Schöttker, A. Sedykh and I. Shchegolev (2000) ‘Das AIJ-Projekt der Ruhrgas AG und der OAO Gazprom und dessen Evaluierung’, gwf–Gas/Erdgas 141.8: 504-507. Knoedel, P. (2002) Stellungnahme zum EU-Richtlinienentwurf ‘Emissionshandel’ vor dem Umweltausschuss des deutschen Bundestages am 20.3.2002 (Deutsche BP; Hamburg). Köpke, R. (2000) ‘Klimawandel durch Handel? Das sich abzeichnende System der EmissionsZertifikate ist noch unausgereift’, in Neue Energie 10 (Osnabrück, Germany: BVWE). Phylipsen, D. (2000) International Comparisons and National Commitments (Utrecht). PricewaterhouseCoopers (2000) GETS 2 Report (Paris: PricewaterhouseCoopers). Reuters (2001) ‘German chemicals body urges US to back Kyoto deal’, 5 July 2001. Ruhrgas (1999) Ruhrgas-Umweltbericht (Essen, Germany). —— (2002) ‘Ökologische Kooperation Gazprom-Ruhrgas’, www.ruhrgas.de/deutsch/umwelt/ JointImpl/joinImple02, 16 August 2002. Santarius, T., and H. Ott (2002) Meinungen in der deutschen Industrie zur Einführung eines Emissionshandels (Wuppertal Paper 122; Wuppertal, Germany: Wuppertal Institute). Sedych, A., J. Dedikov and R. Schöttker (1999) ‘Pilotprojekt Joint Implementation der Firma Ruhrgas AG und der OAO Gazprom auf dem Gebiet der Verringerung der Umweltbelastung und der Emissionen von Treibhausgasen durch die Gastransportoptimierung und Auswertung des Projektes’, presentation at workshop Beyond the AIJ Pilot Phase, Leipzig, Germany, 3 March 1999. Senter (2002) ‘Carboncredits.nl invites 32 companies to offer Emission Reductions’, www. senter.nl/asp/page.asp?id=i001264&alias=erupt, 9 October 2002. Ströbele, W., B. Hillebrand, A. Smajgl, E.C. Meyer and J.M. Beringer (2002) Emissionshandel auf dem Prüfstand (mimeo; Münster, Germany)

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VCI (Verband der Chemischen Industrie) (1998) Position of the Association of the German Chemical

Industry for Concrete Policies and Measures and the Flexible Instruments under the Kyoto Protocol to the UNFCCC (Frankfurt: VCI). VDEW (Verband der Elektrizitätswirtschaft) (1992) Diskussionsbeitrag zur Gestaltung von Steuerbegünstigungen bei einer EG-weiten Energie-/CO2-Steuer (Frankfurt: VDEW). VIK (Verband der Industriellen Energie- und Kraftwirtschaft) (1998) The Way Forward: Climate Change and Industrial Energy Consumers (Essen, Germany: VIK). Ziesing, H.J. (2001) ‘CO2-Emissionen: Trendwende noch nicht in Sicht’, in DIW-Wochenbericht 45 (Berlin: DIW). —— (2002) ‘CO2-Emissionen im Jahre 2001: Vom Einsparziel 2005 noch weit entfernt’, in DIWWochenbericht 8 (Berlin: DIW).

8 Environmental management systems and their influence on corporate responses to climate change Rory Sullivan Insight Investment, UK

John M. Sullivan Alcan Engineering (Australia)

The Greenhouse Challenge was initiated by the Australian government in 1995 as a voluntary programme for Australian companies to report on their actions to abate greenhouse gas emissions. The following year saw the first Australian certifications to the ISO 14001 Standard for environmental management systems (EMSs). Since that time, as an increasing number of organisations have had their EMSs certified to ISO 14001 and, as membership of the Greenhouse Challenge has grown, there has been increasing discussion of the potential for EMSs to contribute to improved corporate performance on energy and greenhouse gas emission management. The purpose of this chapter is to review the experience with EMSs and the Greenhouse Challenge, to identify the lessons that have been learned and to assess the potential for these lessons to be applied outside the Australian context. Specific attention is focused on (a) the relationship between greenhouse and energy management and broader corporate environmental management systems; (b) the environmental performance of organisations that have implemented EMSs and/or have joined the Greenhouse Challenge; (c) the economic and financial impacts of greenhouse and energy management; and (d) the external barriers to improved greenhouse performance and whether these barriers can be overcome through structured approaches to environmental management.

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The Australian policy context Australia is the 14th largest industrial economy in the world with a GDP (gross domestic product) in 2000/2001 of around A$670 billion (Commonwealth of Australia 2002). Fossil fuels account for 94% of Australia’s energy inputs, with renewable energy (mainly hydro electricity) accounting for the remaining 6% (Parliament of the Commonwealth of Australia 2000). Although Australia contributes only 1.4% of total global greenhouse gas emissions, Australia has the second highest greenhouse gas emissions on a per capita basis (behind the United States). This is a consequence of Australia’s dependence on coal for electricity, high landclearing rates and energy-intensive processing industries. In 2002, Australia’s net annual greenhouse gas emissions totalled 530.9 million tonnes of carbon dioxide equivalent (Mt CO2e), representing an increase of 23.2% over 1990 levels. If the emissions from land clearing are included, Australia’s total greenhouse gas emissions would have been 550.1 Mt CO2e in 2002 and 543.2 Mt CO2e in 1990 (i.e. an increase of 1.3% between 1990 and 2002). Without these windfall gains, Australia’s greenhouse gas emissions are growing significantly ahead of the 8% increase (between 1990 and the period 2008–2012) that Australia has been allowed under the Kyoto Protocol. To date, the emphasis of the Australian government’s policy response has been on ‘no regrets’ measures, where a no regrets measure is defined as ‘a measure that has other net benefits (or, at least, no net costs) besides limiting greenhouse gas emissions or conserving or enhancing greenhouse gas sinks’ (AGO 1998). Despite the focus on no regrets measures, the Australian government has committed almost A$1 billion to greenhouse issues (Commonwealth of Australia 2000). The measures adopted have included consumer and corporate education, voluntary corporate participation in emission reduction activities, seed funding for renewable energy innovations, mandatory standards for power generation, energy-use efficiency and vehicle fuel efficiency, the mandatory uptake of new renewable energy in power supply, research and policy development into sinks and emissions, and fostering growth in plantation forestry and native vegetation (Commonwealth of Australia 2000). The Australian Greenhouse Office (AGO) has been established to act as the central contact and co-ordination point for greenhouse issues.

Links between EMS and the Greenhouse Challenge Environmental management systems The International Organisation for Standardisation’s Specification for Environmental Management Systems (the ISO 14001 standard) has been adopted as an Australian Standard (Standards Australia 1996). ISO 14001 provides a framework for EMSs to enable organisations to meet, and continue to meet, their legal and policy obligations, based on a model of policy development, planning, implementation and operation, checking and corrective action and management review (commonly described as the plan–do–check–review model). ISO 14001 does not specify absolute

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requirements for environmental performance, other than requiring policy commitments to compliance with applicable legislation and regulations, pollution prevention and continual improvement. The planning stage involves identifying those aspects of the organisation’s activities, products or services that give rise to environmental impacts and over which the organisation can be expected to have an influence, identifying and updating relevant legal and other requirements, and (based on the significant aspects, the environmental policy and the identified legal and other requirements) developing objectives and targets and an environmental management plan to ensure these objectives and targets are met. The process of implementing the EMS should involve defining the roles, responsibilities and authorities necessary for effective environmental management and providing the resources necessary for the effective implementation of the system. Organisations should ensure that all employees whose work may create a significant impact on the environment are competent on the basis of appropriate education and/or experience. Other elements of implementation include training, the development and operation of procedures for the management of environmental impacts and the documentation of the system. Checking processes include monitoring and measuring environmental performance, tracking performance against the organisation’s objectives and targets, assessing compliance with relevant environmental legislation and regulations, system auditing and corrective action. Finally, the organisation’s senior management should, at suitable intervals, review the overall management system to ensure its ongoing effectiveness, adequacy and suitability.

Greenhouse Challenge Australian industry approached the Commonwealth government in 1995 with a proposal for a voluntary greenhouse gas abatement programme. The primary motivation was the threat that the government would introduce a carbon tax to enable Australia to meet its commitments under the United Nations Framework Convention on Climate Change (Parker 1999). In response, the Australian government established the Greenhouse Challenge in 1995. The overall aim of the Greenhouse Challenge is to achieve maximum practicable reductions in greenhouse gas emissions while not compromising business objectives. Organisations wishing to participate in the Greenhouse Challenge must (AGO 2000a): 1. Establish an inventory of greenhouse gas emissions. The inventory should have sufficient detail to identify all significant sources of emissions. Thereafter, emissions inventories should be prepared annually, and should include an assessment of the factors that influenced changes in emissions from previous inventories. 2. Develop an action plan to minimise greenhouse gas emissions or enhance greenhouse sinks. 3. Forecast expected reductions in greenhouse gas emissions, including estimates of uncertainties and an assessment of the factors that could influence changes in emissions.

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4. Sign a co-operative agreement with the Australian government. The agreement is signed by the chief executive on behalf of the participating organisation and by ministers or senior government officials on behalf of the government. Co-operative agreements should include an emissions inventory, an assessment of opportunities for abating greenhouse gas emissions, greenhouse action plans, a commitment to regular monitoring and reporting of performance against action plans and provision for performance verification. The Greenhouse Challenge does not involve the imposition of specific abatement targets on organisations. Rather, organisations negotiate their planned actions and expected reductions in greenhouse gas emissions with the Australian Greenhouse Office. 5. Monitor and regularly (annually) report on greenhouse gas emissions against targets, including assessment of the effectiveness of policies and measures to improve energy and process efficiencies, abate emissions and enhance sinks. 6. Be open to independent verification. The verification process focuses on those aspects that can be objectively verified (i.e. emissions inventories, the actions that have been reported as undertaken and the accuracy of the claimed greenhouse gas emission reductions). The verification process does not consider whether all practicable actions have been undertaken or whether the reasons provided for not undertaking actions specified in action plans are robust (AGO 2000b). Because of the threat of a carbon tax, Australian industry has seen the Greenhouse Challenge as an opportunity for industry to demonstrate its concerns regarding climate change while, at the same time, deflecting demands to take stronger actions to cut emissions (Sullivan and Ormerod 2002). While the initial participation in the Greenhouse Challenge was by self-selecting organisations, the focus has subsequently broadened to a more comprehensive approach to recruiting companies. At the time of writing (September 2004), over 700 companies have joined the Greenhouse Challenge and a further 400 small businesses have joined a related programme (Greenhouse Allies).

Understanding the links between EMSs and the Greenhouse Challenge There are clear links between the Greenhouse Challenge and EMSs. In particular, the management systems required to implement the Greenhouse Challenge (i.e. defining roles and responsibilities, providing training, monitoring and measuring performance) are similar to those required by ISO 14001. In practice, many organisations have used the systems and processes established for their EMS to also implement the Greenhouse Challenge (Sullivan and Wyndham 2001: 97-224). That is, from a management systems perspective, the Greenhouse Challenge is another ‘regulatory’ requirement (even though participation is voluntary) that can be managed using an EMS.

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There are three important differences between EMSs and the Greenhouse Challenge. The first is that reporting under the Greenhouse Challenge is commonly treated as separate from other reporting processes (e.g. public environmental reports, internal management reporting). That is, the Greenhouse Challenge adds to organisational reporting requirements and, as a consequence, frequently requires additional resources and systems. The second difference is that it is common to find that, in the register of environmental aspects prepared for EMSs, greenhouse gas emissions are covered under the general topic of ‘energy/greenhouse’. While there may be some further disaggregation (e.g. some specific sources may be identified), the level of analysis tends to be quite general and, from a management perspective, the level of disaggregation is generally insufficient to enable specific management tasks to be defined. That is, a common objective arising out of EMSs is to reduce greenhouse gas emissions by a certain amount; the management plans to achieve this type of objective generally have, as the first step, a requirement to ‘prepare a detailed inventory of greenhouse gas emissions’. In contrast, the inventory process that is required under the Greenhouse Challenge is intended to enable all significant sources to be identified, as the basis for greenhouse action plans. Therefore, there is a significant difference between the issue identification processes in EMSs and the Greenhouse Challenge. Depending on the organisation, the Greenhouse Challenge may be seen as essentially requiring something that would have been done anyway (for those organisations that would have needed to develop a detailed greenhouse inventory as part of setting and meeting organisational objectives and targets) or as an additional administrative burden (for organisations that do not see climate change as a priority environmental issue). It is probably fair to note that most organisations with EMSs will see greenhouse gases as a priority issue at some stage (even if not the first priority) and will need to prepare a greenhouse gas inventory at some point. That is, the effect of the Greenhouse Challenge may simply be to bring forward the process of establishing an inventory. The third difference is that there may not be an exact correspondence between the inventory requirements of the Greenhouse Challenge and requirements for other energy or environmental management initiatives. For example, if a facility obtains all of its energy inputs from electricity, preparing a greenhouse gas emissions inventory for the facility is likely to be relatively straightforward (using standard emission factors), whereas to develop an energy management plan may require a detailed inventory of energy consumption by source or by activity within the facility. Another example could be for other sources of air pollutants, which generally require additional information to that collected for greenhouse purposes (e.g. there may be different sources, additional monitoring may be required). The consequence has been that some organisations have needed to develop separate inventories for the purposes of reporting under the Greenhouse Challenge and for other energy or environmental initiatives. The difference between the requirements of EMSs designed in accordance with ISO 14001 and the requirements of the Greenhouse Challenge should not be construed as a criticism of ISO 14001 per se. ISO 14001 is intended to be sufficiently general to apply to environmental issues, at whatever level of detail or analysis the organisation decides. The issue is that organisations tend to manage issues at a level

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that is best for the organisation as a whole, with the tendency being to manage at a fairly broad (or thematic) level wherever practicable (see, for example, Sullivan and Wyndham 2001: 94-227). The consequence is that regimes such as the Greenhouse Challenge (or, indeed, other situations where the organisation decides to focus on a specific aspect of its operations) tend to involve an additional level of work to obtain information at the appropriate level of detail for analysis and for reporting.

Environmental performance Overall outcomes from the Greenhouse Challenge The actions taken under Greenhouse Challenge action plans achieved 19.2 Mt CO2e abatement by 2000. Without the Greenhouse Challenge, annual emissions from the participating organisations were predicted to have grown between 1995 and 2000 by 25.6 Mt CO2e or 20.8%, whereas greenhouse gas emissions from participating organisations are, in fact, expected to grow by only 6.4 Mt CO2e or 5%. In many sectors (including oil and gas extraction, coal mining, food processing, textiles, petroleum refining, cement manufacturing and iron and steel production), participants achieved absolute net reductions over the 1995–2000 period, although these reductions were offset by increases in emissions from the aluminium and the noncoal mining sectors (AGO 2001a: A15-19). The actions taken by participants in the Greenhouse Challenge to reduce greenhouse gas emissions have included fuel switching, the purchase of new equipment, process changes, changes to lighting, recycling, employee training and improved maintenance (AGO 1999: 30). While over half of the participants surveyed as part of an evaluation of the Greenhouse Challenge in 1999 indicated that the Challenge played an important role in stimulating abatement action, it is clear that many of the actions reported under the Challenge would have occurred in any event (AGO 1999). To date, the Greenhouse Challenge appears to have had two major effects. The first is to encourage some organisations to bring forward planned energy saving or greenhouse gas emission reduction projects. The second is to identify opportunities that provide clear short-term financial benefits. The consequence has been that, as noted above, many participating organisations stabilised their greenhouse gas emissions over the period 1995–2000. This is an important outcome. However, it raises the question of whether, now that the easy measures have been adopted, greenhouse gas emissions from participating organisations will remain at these levels or will rise as production increases over time.

The Greenhouse Challenge as a ‘regulatory’ requirement ISO 14001 requires organisations to explicitly identify their legal requirements and

to ensure that this information is kept up to date. While this is only a first step in ensuring regulatory compliance, the emphasis of ISO 14001 on a structured approach to identifying regulatory requirements has enabled organisations to put

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their regulatory compliance systems on a more formal basis than had been the case in the past and, for those organisations with formal EMSs, regulatory compliance now appears to be taken for granted (Gunningham and Sinclair 1999: 8; Sullivan and Wyndham 2001: 233-34). This represents a major step change in the environmental performance of many Australian companies as, historically, regulatory compliance was frequently not an organisational priority (Sullivan 2001). An important feature of EMSs is that the majority of organisations that have developed and implemented EMSs have taken the scope of compliance as encompassing all of the environmental obligations that the organisation has agreed to meet (i.e. not only regulation but also industry codes and other voluntary initiatives). In this context, the Greenhouse Challenge is seen as another regulatory requirement, and the organisation’s EMS is used to ensure that the various requirements are met. For example, in the Greenhouse Challenge verification programme in 2000, 31 companies were assessed and, in all but four organisations, the inventories and action plans were verified as being materially correct (AGO 2001b). Because the verification programme does not comment on issues such as whether or not organisations have EMSs in place, it is not possible to attribute this high rate of compliance to the presence of EMSs. However, it is an indication that most participants assign a high priority to meeting the requirements of the Greenhouse Challenge. Apart from the process requirements of the Greenhouse Challenge, it is relevant to ask about the outcomes that are being achieved from the Greenhouse Challenge. Before doing so, it is first relevant to look at the manner in which performance is assessed. In broad terms, performance can be characterised against a historical baseline (i.e. by comparing absolute emission levels at different points in time) or against alternative future scenarios (i.e. by comparing expected emissions at a given point in time with what emissions might have been at the same point in time without actions to abate emissions). Alternative future scenarios can be defined in terms of either static efficiency measures or ‘business as usual’. The static efficiency approach assumes that no changes to an organisation’s efficiency would occur and future estimates are based on the organisation’s forecast activity (e.g. production rate, changes in business activities). In contrast, the business-as-usual approach takes into account the efficiency changes that would have occurred in the normal course of business. Large-scale economic models typically assume a rate of improvement of 1.0–1.5% per annum. However, broad assessments of changes in energy efficiency cannot readily be extrapolated from the macro (or economy-wide) level to the micro level (i.e. the individual facility or the specific industry sector). The consequence is that the Greenhouse Challenge relies on the static efficiency approach to predict greenhouse gas emissions. As energy efficiency generally improves over time, the static efficiency approach tends to generate higher baselines than the business-as-usual approach. That is, the emissions reductions that are claimed are likely to overestimate the outcomes that have been achieved. Furthermore, given that the task of describing the baseline path is the responsibility of the participating companies, there is a clear incentive for organisations to overstate their expected emissions growth as this will mean that they will appear to have achieved even greater reductions in emissions (Sullivan and Ormerod 2002). From interviews with participating companies, it appears that organisations participating in the Greenhouse Challenges are not setting strong targets (or targets

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that diverge from business as usual), and companies have indicated that they treat their Greenhouse Challenge obligations as seriously as other regulatory requirements. However, there is evidence emerging that many of the organisations participating in the Greenhouse Challenge will not meet their targets or will not implement all of the measures detailed in their co-operative agreements. It appears that, despite the rhetoric, EMSs do not provide a guarantee of organisational performance in relation to voluntary programmes such as the Greenhouse Challenge.

The concept of continual improvement ISO 14001 emphasises the need for continual improvement as an integral part of an EMS but does not define the meaning of ‘continual improvement’, with the conse-

quent potential for a range of interpretations to be adopted (e.g. improvements in the operation of the management system, improvements in operations or improvements in emissions performance). There is evidence that organisations tend to adopt very limited interpretations of this term (Sullivan 2001). Even if narrow definitions are adopted, continual improvement may provide important cumulative benefits in environmental performance, in particular where the lessons from environmental initiatives are used to develop organisational capacity and where the experiences from different projects are propagated through other projects and developments (see, for example, Sullivan and Wyndham 2001: 94-227). Because of the relative immaturity of many of the EMSs that have been developed and implemented in Australia, these longer-term environmental benefits have not yet appeared in many organisations. However, it is relevant to note that many of the organisations that have implemented EMSs (even those organisations that have focused primarily on regulatory compliance) have achieved benefits such as improved financial performance (through reduced raw materials consumption, reduced losses, reduced licence fees) and broader, if less tangible, benefits relating to the long-term sustainability and viability of the organisation (Sullivan and Wyndham 2001: 231-32). In many cases, these broader benefits were not identified at the start of the process of developing and implementing the EMS. There are some early signs that EMSs may be resulting in innovation or encouraging firms to adopt new technologies and management measures. For example, a recent study of 26 firms in Western Australia (12 of which were certified to ISO 14001) indicated that the certified firms had implemented approximately 1.5 times as many new technologies (e.g. energy conservation, water conservation, waste reduction technology) as non-certified firms (Marinova and Altham 2000). While care is required in drawing firm conclusions (because of the limited number of companies considered, the fact that the specific technologies adopted may differ, and the lack of differentiation in the data), the certified firms surveyed appeared to see environmental improvements in a much more holistic manner than those firms that had not been certified and saw that certification (and the actions resulting from their EMSs) provided broader business and competitive advantages. The data indicates that, through the continual improvement philosophy of ISO 14001 and through the Greenhouse Challenge requirements for explicit management focus on greenhouse issues, the longer-term consequence may be to stimulate innovation in energy and greenhouse gas management.

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Creating a management focus for greenhouse gas issues The lack of management commitment to (or interest in) energy/greenhouse gas management has historically been a barrier to enabling organisations to manage these issues effectively. As energy management is usually not a core business concern, businesses have tended not to allocate sufficient resources to it. The time required to identify opportunities and implement solutions, especially those that take time themselves (developing and agreeing procedures, training, generating ownership and awareness, etc.), can also act as a barrier to implementing such systems (Sullivan and Wyndham 2001). Both the Greenhouse Challenge and EMSs appear to have helped to overcome this barrier by requiring organisations to systemise their greenhouse gas and environmental management practices, prepare inventories and action plans, and monitor performance (thereby enabling knowledge to be captured, opportunities identified and performance assessed). The requirement for CEOs to sign off on co-operative agreements is seen as creating the organisational impetus to ensure that the commitments in such agreements are met. In addition, organisations have reported a range of other changes (either as part of meeting their Greenhouse Challenge commitments or as part of implementing EMSs) such as the appointment of staff with responsibility for environmental or greenhouse gas issues, the provision of environmental and energy management training for staff, and skills development in relation to the development of action plans and emissions inventories. These changes have the effect of ensuring that energy and greenhouse gas issues are explicitly considered in business decisionmaking. However (as discussed further below), there is limited evidence that the Greenhouse Challenge has led organisations to change the manner in which they make decisions on greenhouse gas or energy issues.

Economic efficiency Expected rates of return on energy/environmental investments In Australia, over the past ten years (where inflation has generally been between 2 and 4%), organisations have typically expected environmental or energy investments to repay the capital investment within two years (see, generally, Sullivan et al. 2000; van Berkel 2000; Sullivan and Ormerod 2002). This represents an expected rate of return of 50%. This was illustrated by the National Cleaner Production Demonstration, which ran from 1994 to 1996. The project involved the provision of technical assistance for the completion of cleaner production assessments for ten different industries (Environment Australia 1998): 55% of the projects involved no investment (i.e. immediate payback), 21% of the projects had a payback of less than six months and a further 10% had payback periods of between six months and two years. Projects with a payback period of greater than approximately two years were not implemented. The expected rate of return on energy and environmental investments is significantly greater than the typical investment criteria in industries such as energy, oil,

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gas and mining, which usually expect large capital investments (e.g. new power generating equipment) to provide a rate of return of between 15 and 20%. While such a comparison may not be strictly fair for small and medium-sized companies, where the cost of capital may be a major barrier (although this is not necessarily the case as discussed below), it indicates that there may be significant opportunities for energy or environmental performance improvements that are economically viable (and which are relatively risk-free) but are not being implemented.

Have EMSs or the Greenhouse Challenge altered investment criteria? The available evidence indicates that the Greenhouse Challenge has not altered investment criteria. The emphasis of the Greenhouse Challenge is on ‘no regrets’ measures. The majority of the projects that have been implemented are low- (or no-) cost projects, provide very short payback periods or represent projects that would have been implemented anyway (Commonwealth of Australia 1998; AGO 1999: 30). There is limited evidence that participating organisations have gone beyond a narrowly defined interpretation of the costs and benefits of greenhouse gas emission reduction measures, and the majority appear to have taken only those actions that have provided clear financial benefits. In this context, the Greenhouse Challenge can be said to have been economically efficient in that it has not required organisations to take measures beyond those that can be clearly justified in economic terms. The Greenhouse Challenge appears to have had little impact on investment criteria and planning and, apart from some isolated cases, a broader shift of investment attitude (e.g. relaxation of payback requirements) could not be observed. Indeed, it could even be that the Greenhouse Challenge has perpetuated a 50% rate of return as an ‘acceptable’ target for energy investments. For example, a project conducted by the Plastics and Chemicals Industry Association (PACIA) to identify greenhouse gas emission reduction opportunities in the chemical industry, involved AGO funding for a technical consultant to visit sites, advise on opportunities to save energy and provide assistance in the development of inventories and action plans. The opportunities were those with a payback period of two years or less (Rex 2000). It is pertinent to ask whether EMSs lead to organisations changing the rates of return that are required of energy projects. Very few Australian organisations appear to have conducted a systematic evaluation of the overall costs and benefits of their environmental management initiatives, although there is consensus that well-designed EMSs can provide business benefits through enabling more strategic and structured decisions to be made (Sullivan and Wyndham 2001:234; Gunningham and Sinclair 1999: 8). The reason for the absence of data reflects the history to date of EMSs in Australia. For the majority of Australian organisations, the initial priority for environmental management was regulatory compliance. As the majority of organisations see regulatory compliance as a cost of doing business, such investments have tended not to be subject to cost–benefit assessments (other than lowest-cost assessments). Beyond regulatory compliance, it seems that companies with EMSs use a similar payback period test (i.e. two years) to the companies

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discussed above. That is, there is limited evidence to suggest that EMSs change the investment criteria that environmental projects are required to meet (Sullivan 2001). The experience with EMSs and the Greenhouse Challenge raises the question of whether an expected rate of return of 50% is an ‘immutable requirement’ for all energy or environmental investments. If companies are allowed to define their own requirements, it appears likely that this will continue to be the case. However, there is also evidence that these requirements can be altered. Perhaps the best example is the outcomes that have been achieved by the New South Wales Sustainable Energy Development Authority (SEDA). SEDA manages a range of programmes that focus on improving energy efficiency in all sectors. One of SEDA’s key initiatives is the Energy Smart Business programme (ESB). The participants (‘partners’) in the ESB programme sign a memorandum of understanding (MoU) with SEDA. As part of the MoU, SEDA provides technical and implementation assistance through external contractors called Partner Support Managers (PSMs). In return, the partners agree to implement cost-effective upgrades (where cost-effective is defined as projects that provide an internal rate of return of greater than 20%) across at least 75% of their facilities within five years (Cooper et al. 1999). The ESB programme was officially launched on 4 December 1997. Within the first 13 months of operation, over 160 companies had signed MoUs with SEDA. The partners range from small retail shops to large corporations and include regional, national and international companies. At the end of January 1999, the average identified savings for those partners where initial project identification had occurred was 18.8% of their energy consumption and the expectation is that, as each partner is involved in the programme for five years, the final average savings identified will exceed 20% of each partner’s energy consumption (Cooper et al. 1999). SEDA’s experience has been that many of these ‘economically justified’ projects would not have been implemented without the ESB programme.

The broader role of voluntary approaches in energy policy There are broader economic and public policy issues that influence the effectiveness that voluntary programmes such as EMSs or the Greenhouse Challenge can have. First of all, in primary production and basic industries, measures to close resource cycles and optimise processes and activities play the primary role in reducing energy consumption and greenhouse gas emissions. These measures are mainly triggered by cost reduction pressures or by distinct environmental regulations. The reality is that programmes such as the Greenhouse Challenge, where organisations are free to set their own targets, will only ever play a minor role in these decisions. The evidence that is available shows that prerequisites for significant environmental performance improvements are strong regulatory or other pressures (Sullivan and Wyndham 2001: 230-35) or the specification of strong targets with strong

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penalties as part of a voluntary programme (see, for example, the evaluation of voluntary energy programmes in Europe in Krarup and Ramesohl 2000 or the experience of the 33/50 programme for reducing emissions of specified hazardous air pollutants in the United States [OECD 1998: 22-25]). In most energy-intensive industries, core processes have been continuously optimised and any further significant changes in energy efficiency will depend on technological innovation in process technology and ongoing research and development activities. Energy-intensive companies are frequently part of international groups who often lead in energy technology research and development. Under these conditions, voluntary agreements may foster single projects but are unlikely to change underlying strategies and pressures for energy efficiency (see, for example, Krarup and Ramesohl 2000: 40-41; Sullivan and Ormerod 2002). This is of particular relevance in the Australian context given the major contribution of primary industry and power generation to Australia’s greenhouse gas emissions and given that technological change in such industries is driven both by technological developments and by the rate of retirement of existing plant and equipment (which, for many such industries, can be over a period of 20–30 years). Changes in the energy supply structure represent an important opportunity to reduce total greenhouse gas emissions. In Australia, the effect of the reforms of the energy market to introduce a wholesale electricity market across Australia has been to lead to an excess supply of electricity in the market (Stanford 1997; Commonwealth of Australia 2000: 47). The Australian government has argued that energy market reform has reduced some barriers to the penetration of new energy supply technologies (Commonwealth of Australia 2002: 46-48). However, the data available indicates that the effects of these reforms have been to increase the carbon intensity of electricity generation (by favouring low-cost, brown-coal power producers) and to enable many large customers to negotiate extremely low electricity prices. The relatively low price of electricity in Australia has been a barrier to effective demand-side management (as the economic benefits of energy saving are not sufficiently clear cut to encourage energy saving measures). For example, the Electricity Supply Association of Australia has suggested that, in Australia, the rate of improvement in end-use energy efficiency over the past decade has been about half the OECD average (Parliament of the Commonwealth of Australia 2000: 18384). Energy supply in Australia is not only driven by economic pressures but also by state and territory perspectives on security of energy supply and demands for local employment and local development. For example, three coal-fired power stations, with a total generating capacity of approximately 2000 MW, have recently been approved for Queensland. These power stations will not only increase overall greenhouse gas emissions but also lead to a further fall in the price of electricity, thereby acting as another barrier to the development of renewables and alternative sources of energy. It is interesting to note that the Australian government is moving to address (at least partially) this market failure by requiring electricity suppliers and large purchasers to increase the quantity of renewable energy purchased by 2% by 2010.

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Conclusions To date, EMSs have made a contribution to improved corporate greenhouse gas performance, in particular by providing a systematic framework to enable organisations to meet their Greenhouse Challenge commitments. There is some evidence that experience with EMSs is encouraging innovative approaches to environmental management. Overall, EMSs have enabled companies to move into compliance and the Greenhouse Challenge has enabled many companies to stabilise or even slightly reduce greenhouse gas emissions by bringing forward some planned energy-saving or greenhouse gas emission reduction projects and by enabling cost-effective opportunities to be identified. Furthermore, both EMSs and, in particular, the Greenhouse Challenge have made climate change a management issue and there is evidence that climate change is at least being considered as part of corporate decision-making. Despite these positive outcomes, there are also a number of important limitations in the potential contribution of EMSs to corporate greenhouse gas performance. The first is that organisations set their own targets under the Greenhouse Challenge. The consequence is that EMSs are being used as a tool to meet the organisation’s own, self-specified targets (rather than driving companies to go significantly beyond business as usual). The second is that there is limited evidence that EMSs or the Greenhouse Challenge have altered the payback criteria that have to be met for energy-saving or greenhouse gas emission reduction projects to be implemented. There is evidence that companies are not implementing many economically viable (and virtually risk-free) energy-saving or environmental management projects. The third is that, in the context of overall greenhouse gas and energy policy, the ability of voluntary approaches such as EMSs or the Greenhouse Challenge to significantly alter corporate performance is limited. That is, to make a substantial change in the energy or greenhouse gas performance of companies requires stronger policy measures, such as taxes (or higher energy prices), tax rebates, emission limits or emissions trading.

References AGO (Australian Greenhouse Office) (1998) The National Greenhouse Strategy (Canberra: AGO). —— (1999) Greenhouse Challenge Evaluation Report (Canberra: Commonwealth of Australia). —— (2000a) Guidelines for the Cooperative Agreements Program (Canberra: AGO). —— (2000b) Greenhouse Challenge Independent Verification Program: Verification and Reporting Guidelines. I. Verification Information (Canberra: AGO). —— (2001a) National Greenhouse Gas Inventory 1999 (Canberra: AGO). —— (2001b) Independent Verification under the Greenhouse Challenge: 2000. Findings and Discussion Report: February 2001 (Canberra: AGO). —— (2004) National Greenhouse Gas Inventory 2002 (Canberra: AGO). Commonwealth of Australia (1998) Greenhouse Challenge: Cool Solutions for Australian Business. 1998 Report on Australia’s Greenhouse Challenge Program (Canberra: Commonwealth of Australia).

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—— (2000) National Greenhouse Strategy 2000 Progress Report (Canberra: Commonwealth of Australia). —— (2002) Climate Change: Australia’s Third National Report under the United Nations Framework Convention on Climate Change. Summary (Canberra: Commonwealth of Australia). Cooper, D., R. Duncan, B. Precious, A. Williamson and N. Workum (1999) Creating Demand for Energy Efficiency in Australian Industry (Sydney: Sustainable Energy Development Authority). Environment Australia (1998) Environment and Business: Profiting from Cleaner Production (Canberra: Environment Australia). Gunningham, N., and D. Sinclair (1999) ‘Environmental Management Systems, Regulation and the Pulp and Paper Industry: ISO 14001 in Practice’, Environmental and Planning Law Journal 16.1: 5-24. Krarup, S., and S. Ramesohl (2000) Voluntary Agreements in Energy Policy: Implementation and Efficiency (Copenhagen: AKF Institute of Local Government Studies). Marinova, D., and W. Altham (2000) ‘ISO 14001 and the Adoption of New Technology: Evidence from Western Australian Companies’, in R. Hillary (ed.), ISO 14001: Case Studies and Practical Experiences (Sheffield, UK: Greenleaf Publishing): 182-99. OECD (Organisation for Economic Co-operation and Development) (1998) The Use of Voluntary Agreements in the United States: An Initial Survey (Paris: OECD). Parker, C. (1999) ‘The Greenhouse Challenge: Trivial Pursuit?’, Environmental and Planning Law Journal 16.1: 63-74. Parliament of the Commonwealth of Australia (2000) The Heat Is On: Australia’s Greenhouse Future. Report of the Senate Environment, Communications, Information Technology and the Arts Committee (Canberra: Commonwealth of Australia). Rex, L. (2000) ‘Greenhouse Gas Reduction and Energy Efficiency in the Australian Plastics and Chemicals Industries’, in Proceedings of the 15th International Clean Air and Environment Conference, Sydney, Australia, 27–30 November 2000. Vol. 2 (Mitcham, Victoria, Australia: CASANZ). Standards Australia (1996) Australia/New Zealand Standard: Environmental Management Systems—Specification with Guidance for Use. AS/NZS ISO 14001:1996 (Homebush, NSW: Standards Australia). Stanford, J. (1997) ‘Australian Energy Sector: Structure and Sustainability’, in Environment Australia, Environmental Economics Round Table Proceedings, 10 July 1997 (Canberra: Commonwealth of Australia): 57-75. Sullivan, R. (2001) ‘Environmental Management Systems: Theory, Practice and Implications for Law and Policy’, Environmental and Planning Law Journal 18.6: 594-603. —— and R. Ormerod (2002) ‘The Australian Greenhouse Challenge: Lessons Learned and Future Directions for Climate Policy’, in J. Albrecht (ed.), Instruments for Climate Policy (London: Edward Elgar): 170-91. —— and H. Wyndham (2001) Effective Environmental Management: Principles and Case Studies (Sydney: Allen & Unwin). ——, J. Sullivan, C. Kolominskas and R. Ormerod (2000) ‘Where Are the Engineers?’, The Environmental Engineer 1.2: 23-24. Van Berkel, R. (2000) ‘Cleaner Production in Australia: Revolutionary Strategy or Incremental Tool?’, Australian Journal of Environmental Management 7.3: 132-46.

Part 3 Sector analysis

9 Three big Cs climate, cement and china* Joakim Nordqvist Lund University, Sweden

Christopher Boyd Lafarge, France

Howard Klee World Business Council for Sustainable Development, Switzerland

In 2000, the cement sustainability initiative was launched, involving ten corporations that together produce one-third of all the world’s cement. Under the watchword of ‘Toward a sustainable cement industry’, and co-ordinated by the World Business Council for Sustainable Development (WBCSD), the initiative resulted, in July 2002, in the publication of an Agenda for Action (WBCSD 2002b), signed by the business leaders of all the participating companies. Through this agenda, a first five-year action plan has been drafted to define short-term ambitions, as well as necessary partnerships for joint and individual actions identified in the process. Climate protection constitutes a core component of the agenda. This chapter relays insights and experiences learned so far from these combined efforts. It aims to show and discuss the rationale for, and consequences of, this proactive initiative based on the perspectives of both the programme manager and a participating party, namely the French transnational building materials group Lafarge. Another objective is to elaborate on what possible effects the initiative may or may not have on Chinese cement production, hitherto structurally and technically separated from the otherwise largely internationalised stage of actors, yet supplying more than one-third of global cement. As the Cement Sustainability *

This work was supported by the Swedish International Development Co-operation Agency (Sida) under contract SWE-2001-244. A presentation of this article was given at the INEDIS/ EETA International Workshop on Policy Modelling for Industrial Energy Use, 7–8 November 2002, in Seoul, Republic of Korea. INEDIS: International Network for Energy Demand Analysis in the Industrial Sector. EETA: Professional Network for Engineering Economic Technology Analysis.

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Initiative continues into its subsequent phases, it offers an expanded perspective on the role of corporate environmental responsibility and stewardship, and cement production in China could become an appropriate stage for studies and analyses of theories about industrial sustainability and development in the developing world.

The cement industry Cement is the basic constituent of concrete, used in the construction of buildings, roads and other types of infrastructure all over the world. The principal raw material for the manufacture of cement is limestone, which, crushed and ground, is fed through a kiln to produce an intermediate material called clinker. Clinker production is an energy-intensive process, which requires extremely high temperatures, typically between 1,200 and 1,600°C inside the kiln. After the clinker is cooled, it is mixed with various proportions of additives, such as gypsum, to make cement. The predominant use of fossil fuels in cement-making contributes to emissions of considerable quantities of carbon dioxide. But this is less than half the story. Emissions from fuel combustion typically amount to only 40–50% of total carbon emissions from cement production. In addition, large amounts of carbon dioxide are released from the raw material itself, in a process called calcination, making the sector the largest, non-energy source of anthropogenic greenhouse gas emissions. According to Marland et al. (2001), calcination of limestone in cement kilns produced, in 1998, worldwide emissions exceeding 200 million tonnes of carbon, or, in total, 760 million tonnes of carbon dioxide (cf. Hendriks et al. 1999). This corresponds to over 3% of the emissions from global burning of fossil fuels. Table 9.1 shows, for comparison, the world’s top ten carbon dioxide-emitting countries in 1998. C (million tonnes)

World total United States China Russia Japan India Germany United Kingdom Canada Italy Mexico

6,610 1,490 848 392 309 290 225 148 128 113 102

CO2 (million tonnes) 24,200 5,450 3,110 1,440 1,130 1,060 826 543 468 415 374

table 9.1 The world’s top ten countries by 1998 total CO2 emissions, including fossil fuel burning, cement production and gas flaring Source: Marland et al. 2001

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In relation to the cost of production, transportation of cement is expensive and quickly becomes uneconomical as distance increases. The competitive range for road transport is roughly 200 km, and about double for rail. Therefore, exports and imports of cement or clinker are limited compared with local or domestic production. Freight by ship is the only way to transport cement over large distances profitably. As a consequence, production of cement is spread out across the globe to serve local markets. Even so, there is a clear consolidation trend among actors, and a circle of transnational groups now dominates large parts of the sector. Table 9.2 shows the sales volumes and world market shares of the five largest cement corporations in 2001.

Volume (million tonnes) Share (%)

World total

Lafarge

Holcim

Cemex

Heidelberg

1,700

88

84

61

47

100

5.2

4.9

3.6

2.8

Italcementi

42 2.5

table 9.2 Cement sales volumes and world market shares of the world’s top five cement-producing corporations Source: Lafarge estimates for 2001

Proactive responses to climate change The high carbon intensity of the industry provides international cement producers with a strong rationale for proactive responses to climate change. The implications for industry of the commitments by the governments of countries in Annex B to the Kyoto Protocol remain to be seen, but policies and regulations are to be expected that penalise heavy emitters and that benefit those who perform better. Moreover, and regardless of present controversies and debates about the Protocol itself, the awareness of carbon constraint has entered the worlds of both politics and business (Stigson 2001). New opportunities to increase markets and intangible assets, as well as to avoid costs, emerge for actors who can adapt. Such reasoning supports firstmover strategies and proactivity, especially—in the short term—among actors who have a large stake in markets in Annex B countries that claim to adhere to their Kyoto commitments. In their Agenda for Action, the participants of the Cement Sustainability Initiative state: ‘We have chosen to adopt an agenda for sustainable development for three reasons: to prepare ourselves for a more sustainable future; to meet the expectations of stakeholders; and to individually identify and capitalize on new market opportunities’ (WBCSD 2002b; cf. WBCSD 2002a; Sprigg and Klee 2002).

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The Cement Sustainability Initiative In 1999, three of the largest cement groups—Cimpor, Holcim and Lafarge—approached WBCSD, requesting assistance in organising a structured evaluation of the important issues facing the industry in terms of sustainable development. From this request, the Cement Sustainability Initiative grew and was launched in February 2000, by which time the group of producer participants had come to encompass the following ten corporations, together forming the so-called Working Group Cement: • Cemex, Mexico • Cimpor, Portugal • Heidelberg Cement, Germany • Holcim, Switzerland • Italcementi, Italy • Lafarge, France • RMC, United Kingdom • Siam Cement, Thailand • Taiheiyo Cement, Japan • Votorantim, Brazil Alongside the Working Group, key parties to the Initiative include a sponsoring group to provide intellectual and funding support, a lead consultant to organise research and produce reports, an objectively reviewing assurance group, and, not least, the WBCSD Secretariat serving as programme manager. During the two years following the launch of the Initiative, seven Stakeholder Dialogues were arranged (in Brazil, Thailand, Portugal, Egypt, USA, Belgium and China) and 13 sub-study reports were published, resulting, in March 2002, in a concluding report (Battelle 2002). The Agenda for Action, published a few months later, represents the response of the Working Group members to this report. In the concluding report, eight key issues for the industry are presented against the background of the so-called triple bottom line of sustainable development, which comprises economic prosperity, environmental stewardship and social responsibility. The eight issues identified and selected as a result of the work presented in the sub-studies are resource productivity, climate protection, emissions reduction, ecological stewardship, employee well-being, community wellbeing, regional development and shareholder value. The issue of climate protection is specifically elaborated on in sub-study 8 (Humphreys and Mahasenan 2002). Here, potential actions are suggested for the sector to improve its performance in the short as well as the medium and long term, involving several types of actors including the industry, authorities and non-governmental organisations. Technically, and applying presently conventional carbon dioxide management approaches, specific carbon dioxide reductions (in tonnes CO2 per tonne product) of approximately 30% by 2020 (compared with aggregated levels in 1990) are assumed possible in a global context. Primarily, these approaches consist of improved plant

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efficiency, expanded use of composite cements, and fuel switching including the increased use of alternative fuels and resources. As country-specific conditions vary considerably, opportunities and requirements to reduce emissions will also vary among regions and individual companies. Assuming that plant-level energy efficiencies increase annually by 0.5–2% (depending on region), the contribution of such measures to the worldwide specific carbon dioxide emissions reduction potential is 11%. Achieving this, however, is dependent on dedicated and successful energy-efficiency initiatives being carried out in countries where the sector today is relatively inefficient, such as the United States and China. Reaching the 30% reduction requires a whole portfolio of actions pursued simultaneously and aggressively across the globe (Humphreys and Mahasenan 2002). Based on the above key issues, the concluding report presents benefits of progress, and the current sustainability status of the industry. It also suggests a vision for the future, as well as goals and key performance indicators, and derives a set of ten recommendations for the industry. The second recommendation addresses climate change, calling for the establishment of corporate carbon management programmes, statements of medium-term carbon dioxide reduction targets, both company-specific and industry-wide, and the initiation of long-term processes within areas such as product innovation. In response to all of these proposals, the Agenda for Action highlights six priority areas, within which collaborative and individual actions will be focused during the subsequent and implementing phases of the Initiative: • Climate protection • Fuels and raw materials • Employee health and safety • Emissions reduction • Local impacts • Internal business process Why, then, has the industry undertaken this effort over several years, costing approximately US$4 million so far? To understand this, it is important to see how sustainable development issues match those of the cement industry. Figure 9.1 illustrates how the triple bottom line of sustainable development coincides with current industry concerns. In short, sustainable development provides the industry with a comprehensive framework for tackling some of the biggest issues it faces today, including climate change, and, therefore, the industry’s business leaders believe it is central to their progress towards creating effective and efficient businesses in the 21st century. Applying this view to the specific issue of climate protection highlights the value of a comprehensive standpoint. From a financial perspective, one might currently estimate carbon costs as US$5–25 per tonne of CO2. These values may equal or exceed the average margin of today’s cement producer. Reducing carbon dioxide emissions will require a variety of strategies including energy efficiency improvements and using different fuels and raw materials in the cement manufacturing

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Dimensions of sustainability

Wealth and opportunity creation

• Shareholder returns • Resource efficiency • Innovative products

• Product standards • Emission trading rules • Waste fuel policies • Access to resources

Economy

Public policies and management practices

Resource and ecosystem preservation • Quarry management • Emissions control • CO2 and climate

Governance Quality of life and social equity

Environment

Society

Cement industry issues shown in grey boxes.

• Product use • Employment • Training • Community engagement

figure 9.1 Confluence between sustainable development goals and important priorities for the cement industry Source: World Business Council for Sustainable Development

process. Yet some of these substitutions remain controversial, indicating an urgent need for better understanding and communications with stakeholders (including employees) about the risks, benefits and management of these alternative materials. One early output from the Cement Sustainability Initiative has been a Carbon Dioxide Accounting Protocol to provide a common framework for monitoring and reporting carbon dioxide emissions (Vanderborght and Brodmann 2001). The framework, developed in consultation with the World Resources Institute and the WBCSD, now provides an agreed and well-accepted methodology for dealing with carbon dioxide in this industry—an essential first step before trading and other market mechanisms might be used successfully. It is also an essential first step for any company to understand both the quantities and costs of their carbon dioxide emissions.

Lafarge Corporation Founded in France in 1833, Lafarge is now a world-leading transnational corporation within the construction materials industry, with a presence in 75 countries across the world (Lafarge 2001). Since 1999 its operation is organised into four autonomous divisions, of which cement is the dominant. Through several mergers

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and acquisitions, the latest being the acquisition of the British manufacturer Blue Circle in 2001, Lafarge’s cement division has become the world’s largest cement producer with around 160 production sites, and a total production in 2001 of close to 90 million tonnes. A large share of this production is located in developing countries. Lafarge prides itself in its management strategy—the ‘Lafarge Way’—based on a model of participatory and social, human-oriented management. Not only the group’s own employees but a wide array of external stakeholders are included in the scope of its efforts in this area. As a result, this corporate tradition has evolved and been developed over the decades to include a high level of awareness of, and a proactive approach towards, environmental issues. A measure of the importance attributed to such issues by Lafarge in later years is given by the corporation’s participation as co-founder of several initiatives: the WBCSD (1991), the French association Enterprises pour l’Environnement (1992) and, most recently, as the first major industrial participant in WWF’s Conservation Partnership Programme (2000). Admittedly a troublesome concern for a cement manufacturer, climate change mitigation is recognised by Lafarge as having both environmental and strategic business importance. Hence, within the framework of its partnership with WWF, the group has taken a clear and proactive approach, declaring its preparedness to shoulder its climate responsibility by making a unilateral commitment. In November 2001, Lafarge announced its intention to decrease its absolute carbon dioxide emissions in industrialised countries by 10% from 1990 to 2010.1 This initiative might be compared with the Kyoto commitment of the European Union to reduce its greenhouse gas emissions by 8%. In addition to this first target, which is related to but not dependent on production volume, Lafarge also makes a more general commitment of decreasing globally by 20% from 1990 to 2010 its specific carbon dioxide emissions (in kg CO2 per tonne cement). Three principal strategies are brought forward as means through which to fulfil these reduction objectives: • Energy efficiency • Energy substitution • Materials substitution Where applicable, greater energy efficiency may be realised through investments in technical upgrades or process changes to reduce losses of heat and calcined particulate matter. Energy substitution, meaning a switch to less carbon-rich fuels than the presently predominant coal and petroleum coke, may reduce greenhouse gas emissions by considerable amounts. In particular, Lafarge considers wastederived alternative fuels as an interesting option, whereas natural gas and renewable energy such as biomass are less attractive from a cost perspective. Due to the 1

Lafarge, who in its own calculations includes displacement of fossil fuels through substitution by waste-derived fuels, states a total carbon dioxide reduction commitment of 15%. According to WWF’s more conservative method of carbon accounting, however, this corresponds to a reduction of 10%.

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intense heat in a cement kiln, it is quite suitable for waste incineration of, for example, used engine oils, solvents and tyres, a process for which there is an increasing need, not least in Europe, where stricter regulations on waste disposal are being introduced. Since such incineration would reduce overall consumption of primary fossil fuels, Lafarge, in its own book-keeping, considers it to be carbon dioxideneutral. On this point, opinions differ between the company and its partner WWF.2 Also, the use of waste as an alternative fuel source can be problematic as it may worry local stakeholders, causing emotional debates (cf. WBCSD 2002a; Sprigg and Klee 2002). Materials substitution, finally, involves making use of cementitious properties found mainly in by-products of other industries, thereby partially replacing the clinker used in cement. Blast-furnace slag from steel production and fly ash from coal-fired power generation are two well-known and established examples of such by-products. Reducing the need to produce clinker obviously reduces carbon dioxide emissions.

Outcome The Cement Sustainability Initiative has provided a rich set of reference materials about the cement industry and sustainable development. More than 1,500 pages of research reports were developed during the study phase. Between March 2002 when the results were released, and October 2002, more than 100,000 documents were downloaded from the project website, indicating quite a remarkable interest in such a specialised topic in an industry with a very low public profile. More importantly, the Initiative has provided a possible model of changing industrial performance by following a process of independent expert research, extensive stakeholder consultation, co-operative industry planning and peer review of the entire process. It is noteworthy both for its magnitude and its timing in the absence of crisis ‘firefighting’ or industry failure. Moreover, the risks of being a single first mover have been handled by adopting a united front, although a line has also had to be drawn between co-operation and competition. This aspect is evident in the Agenda for Action, the first comprehensive, voluntary plan in the cement sector to address real industry needs: commitments for each of the six priority areas presented are split into joint and individual actions to be taken over an extended time-frame. These actions include developing sets of good-practice guidelines in several areas, agreeing on common standards for measurement and public reporting of performance, improving stakeholder engagement, and communicating publicly about progress. Of course, the real proof of a successful approach will be in the results achieved, not in the plans made, and it is still too early to assess results. The formal publication of the action plan and time-line took place in July 2002. The members of the Working Group Cement only form part, albeit a substantial one, of the global cement sector. In order to really live up to their motto of ‘making a difference’, a wider stance is necessary, and therefore the Sustainability Initiative is designed to be inclusive. Creation of enterprise value, importance of stakeholders and developing-country concerns are topics that have been brought forward. Not

2

See footnote 1 on previous page.

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least from such perspectives will the longer-term outcome of this initiative be interesting to monitor (cf. Nicholls 2002). As a commodity, cement is mostly limited to regional markets but, as actors, cement producers operate globally. Therefore, it can be argued that this sector offers a particularly suitable stage for observations of the effects of proactive, industrial sustainability strategies. In some trade theories, concepts such as pollution havens and race for the bottom imply that mechanisms exist that compel authorities (not least in developing countries) to use lax environmental standards for industry as a means of encouraging foreign investment and relocation of industry (Rauscher 1999). The real effects of such mechanisms are disputed, but cannot be expected to interfere with cement production, which will not move easily from local markets. Instead, and as a consequence, the sector presents an opportunity for investigations of the conditions for, and possible effects of, a converse relation: the pollution halo. Through this mechanism, it is assumed that sound environmental practices may spread among local actors, producers as well as authorities, once forerunners demonstrate the potentials for new corporate values to create business advantages (OECD 2002: 584). Though there may be no immediate crisis for the international cement industry, it is clear that the climate issue poses real, potential risks for the future, including risks of business impediments. The ongoing political and scientific processes of the United Nations Framework Convention on Climate Change (UNFCCC) and the Kyoto Protocol make this evident. It is not explicitly stated in the documentation of the Initiative; still it is not misleading to point out these factors as driving forces for many Working Group members to participate. Not surprisingly, the corporations with large markets in Europe have been among the most active within the Initiative.

Bystanders Not all cement companies participated in the Sustainability Initiative. The research phase involved substantial contributions of both time and funds, and many companies lack the resource base to make these contributions. This is not surprising. After all, the initiative is one of leadership, through which major and leading companies are trying to set a long-range programme in place. Not everyone can nor wants to be a leader, but, in its effort to be inclusive, the Initiative is making all its results publicly available and promoting them via consultation with trade associations and others, hoping that other companies will adopt parts of the programme that suit their circumstances and capabilities. That way, they will not have to spend their resources developing other approaches or solutions. It is encouraging to note that several other cement companies are expressing interest in joining the Initiative, including Uniland from Spain, Secil from Portugal, Titan from Greece, and several others.

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Developing countries Within the Cement Sustainability Initiative, three corporate members are based in developing countries (Cemex, Siam and Votorantim), and others, like Lafarge, have substantial business interests in the developing world, where opportunities for growth and expansion are still significant. Issues of particular importance to developing countries are naturally brought forward within the Initiative. Perhaps even more acutely than in other parts of the world, the triple bottom line of sustainability, as a whole, represents a pressing challenge for authorities as well as for business in developing countries. Economic prosperity and socially secure living conditions are urgent needs for people in poverty-stricken areas. When the pursuit for development occurs at the expense of environmental stewardship, however, serious problems that are detrimental to sustained improvements in economy and welfare alike will ensue in the longer run. Common barriers to balanced development in developing countries are lack of capital and capacity, and inefficient governance. Through their expressed commitment to the triple bottom line, as well as through their stakes and interest in developing countries, the Initiative members might contribute, in line with theories such as the pollution halo hypothesis, in lowering somewhat the thresholds of such barriers. Meant to reinforce and strengthen this kind of incentive in business, the Kyoto Protocol provides industry with the so-called Clean Development Mechanism (CDM). The CDM allows for the generation of Certified Emission Reductions (CERs) when a project, undertaken in a non-Annex B country, results in reductions of greenhouse gas emissions compared with a baseline scenario in the absence of that same project. After being issued, the CERs may be traded and used in countries that need them to stay in compliance with their commitments to limit emissions, as stated in Annex B to the Protocol. Many details remain to be settled before CDM projects can get under way, and there is justified uncertainty about how effective they may be in reducing greenhouse gas emissions and promoting sustainable business initiatives in the developing world. Still, the evident and considerable potential for emissions reduction that exists in developing countries today is reason enough for transnational cement corporations to expressly state their serious interest in future CDM projects. Technical facilities, know-how and equipment, as well as developed practices and transparency in management, may spread through business investments and lead to real improvements within the global cement sector. Although uncertainty remains about the mechanism as such, the CDM framework currently represents an additional spur for cement corporations to consider such investments for the future. For the cement industry, China is a particularly important developing country, interesting from a CDM perspective and also because of the sheer size of its market. From a sustainability point of view, great opportunities for improvement exist. The next few sections expand on this topic.

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China’s cement sector Since China began its economic reform policy in 1978, Chinese cement production has increased more than sevenfold. Today, around 600 million tonnes of cement are produced every year in China alone, representing more than one-third of global cement production. Figure 9.2 illustrates the magnitude of China’s cement sector in 1998 compared with the aggregated shares of the 12 next-largest cement-producing countries. China 536 India 88

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figure 9.2 Cement production by country in 1998 (the figure for Spain refers to 1997): China compared with the aggregated production of the 12 nextlargest cement-producing countries Source: UN 2001

Chinese cement production attracts attention not only because of its volume. The unusual structural and technical profiles of China’s cement industry are also a characteristic feature. In contrast to the large-scale plants, in terms of production capacity, and the high degree of corporate consolidation that are seen elsewhere, enterprises in China are generally very small, as well as scattered both geographically and in terms of ownership. And, whereas rotating cement kilns dominate internationally, Chinese output is mainly generated in vertical-shaft kilns, which are rare in most other parts of the world. Prior to market reforms, regional self-sufficiency was highly promoted in China, both in agricultural and industrial production. A tradition of small-scale, rural industrialism was established. In the 1980s and 1990s, soaring demand for cement led to massive but unco-ordinated investment in new production capacity in rural areas. Thousands of so-called township and village enterprises, or TVEs, emerged. Owned collectively and by local authorities at different levels, or even privately, installations were typically low-technology, labour-intensive shaft-kiln plants, needing far less capital for upfront investments than do modern, automated plants using rotary kilns with pre-heaters and pre-calciners. As a result, close to 80% of all cement in China is now produced by small enterprises, often suffering severely from inefficient use of energy and other resources, problems with high variability in output quality, and high pollution levels. Dust emissions, in particular, constitute a

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major threat to the local environment, and energy inefficiency contributes to unnecessarily excessive emissions of carbon dioxide from fossil coal. Authorities and the industry acknowledge most of these problems, and measures are being taken to overcome them. China’s influential State Economic and Trade Commission has blacklisted old and outdated technology, and modern production methods are promoted. A domestic consolidation trend can be observed and is being encouraged. Dust emissions, resource inefficiency, deficient product quality, and the plethora of technically and financially inadequate producers are targeted weaknesses within the sector. The climate change issue, despite apparent connectedness and the potential opportunities at hand, does not usually enter into this equation at all when considered by domestic actors (Nordqvist and Nilsson 2001).

The Sustainability Initiative in China Because of its size, as well as its need for structural reform, the Chinese cement market is a stage with great expansion potential for the transnational actors of the Sustainability Initiative. Several of the corporations in the Working Group already operate in China. So far, however, their activities within this huge market remain marginal. A brief overview of important actors in Chinese cement production is presented in ZKG International (2002). Among the most involved and most active foreign companies is Lafarge, which currently operates two joint-venture cement production facilities in the country: Chinefarge near Beijing (since 1994), and Dujiangyan near Chengdu in the south-central province of Sichuan (commissioned in 2002). Both plants represent illustrative cases of improvements in sustainability performance compared with prevalent conditions in the sector. Heidelberg, Holcim and Taiheiyo have also established themselves within China. The importance placed by the Cement Sustainability Initiative on China is evident and demonstrated not only through the fact that the concluding workshop in a series of Stakeholder Dialogues was held in Beijing in December 2001. In addition, complementing the series of 13 sub-study reports, a special regional study was conducted to highlight conditions specifically in China (Soule et al. 2002). Although the Chinese authorities claim to welcome foreign investment, there are many obstacles that impede participation in the market by foreign-owned actors, and hence their possible halo effect as well. Clashes in management cultures and the importance of strong goodwill relations, so-called guanxi, with local authorities are part of the explanation. National and local protectionism also play a role. There are, nevertheless, encouraging signs that, in some parts of administration, issues pertaining to sustainability are gaining recognition. For example, the China Council for International Co-operation on Environment and Development, an advisory group to China’s State Council, is addressing a number of such issues. Composed equally of senior Chinese and foreign experts, the China Council has recently set up a task force for industry and sustainability, co-chaired by Björn Stigson, President of the WBCSD.

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Rings on the water? At central government levels, local pollution is recognised as a major industrial problem for China, and efforts are being directed at curbing it. Also, transboundary and global environmental problems are acknowledged. For local authorities, the overriding development goals, however, are increasing volumes and short-term economic growth. In the current study case, the cement industry, less money is spent on pollution abatement than in other industrial sectors in China (Soule et al. 2002: 26). One important environmental concern that is widely recognised by all sector actors, however, is particulate emissions. Since the late 1990s, the cement industry has been responsible for more than 40% of all industrial particulate emissions in China. As a consequence, other pollutants receive little or no attention. In particular, carbon dioxide is a non-issue. Awareness about greenhouse gases, and about the possible implications of China’s active participation in the UNFCCC, is very low within the industry. In wording and intention, China’s regulations and laws for environmental protection in industry are strict, but their application is weak, which means that, in effect, the regulatory framework is lax. At the same time, a general condition for foreign companies to be allowed to operate in China is their willingness and ability to comply with existing regulations, which tend to be emphasised more with new and foreign parties than with established enterprises. In themselves, these regulations are not a barrier to foreign investment in cement production. International actors usually operate under even stricter regulations than the Chinese ones. A problem in China, however, is the inconsistency with which such regulations are enforced. Although China’s cement market is huge, profitability is almost non-existent as the market overflows with cheap, low-grade cement. Moreover, local protectionism and guanxi generally favour domestic actors over foreign ones. Still, foreign investment in cement production is increasing, but from an extremely low level. Currently, the possible opportunities for CDM projects contribute to fuelling the interest of foreign actors in making further investments but, within China, such lines of thinking do not create much of a response. There are several reasons for this. The most immediate one may be lack of awareness within the Chinese cement sector about the climate issue. Carbon dioxide, although a major pollutant from the industry, is simply not recognised as a problem. Dust remains the overshadowing concern. Therefore, local actors, even if they are aware of the mechanism, do not appreciate it as an opportunity to attract investment. On a political level, the dominant attitude in China towards the CDM has been one of scepticism so far. There are concerns that it would provide a means for Annex B interests to exploit the situation in developing countries, thereby allowing them to avoid taking action at home. Of late, however, a shift in official positions towards a more open stance can be discerned. Within the important State Development and Planning Commission, for example, arguments in favour of China hosting CDM projects are brought out. Still, opposing views or lack of awareness remain dominant in many parts of the complex Chinese structure of administrative bureaucracy, as well as in business. Therefore, though hoping for a constructive mechanism to be put into place eventually, potential CDM investors see many uncertainties that need to be sorted out before anything can actually happen. The question of ownership of CERs produced in China is one such concern being voiced, to which, at present, there is no answer.

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Against this background the prospects, at present, for the spread of cementrelated climate action within China may seem bleak. Still, it is not unfeasible to think that domestic actors, if recognition increases of climate as a concern in industry, can pick up speed and adopt appropriate action using the momentum already gained within the Cement Sustainability Initiative. Further studies and evaluations in and around this field may contribute to better-informed policy decisions, by administrative as well as corporate actors, in order to encourage such a development. They may also contribute to the building of a broader base for academic theories on technology diffusion, trade and corporate behaviour in transitional and developing countries.

Summary and conclusions A group of progressive and heavyweight actors within global cement production has set out to ‘make a difference’ in a move toward a more sustainable cement industry. This move entails efforts in scrutinising and adjusting their own activities, individually and in co-operation with each other, as well as with stakeholders in local communities and with authorities. Such aspects are important not least in developing countries, where the potential for really making a difference is considerable, and where, due to infrastructural and construction needs, there is still room for significant market growth. The largest and fastest-growing market is China, but it is isolated and only beginning to be penetrated by international influences. Whether and how the momentum for sustainability can be picked up by Chinese enterprises and policy-makers in the ongoing and fundamental sectoral restructuring process for domestic cement production are important questions for future study. The argument is sometimes heard that concerns about sustainable performance by industry are a luxury afforded only in developed countries, and that corporate actors in the developing world, due to weak protective regulation by governments, are compelled by market mechanisms to neglect their moral responsibilities by overexploiting labour, resources and the environment alike. The members of the Cement Sustainability Initiative, however, argue that creation of enterprise value must include social concerns and environmental stewardship. Through their Agenda for Action, therefore, these ten cement corporations have formalised a framework in order to realise their visions for the future: that cement companies integrate sustainable development into their global operations, and that they be known as leaders in industrial ecology and innovators in carbon dioxide management. Furthermore, they shall be regarded as attractive employers, and have established relationships of trust with the communities in which they operate (WBCSD 2002b). The cement industry differs from many other industries in that the product generally cannot profitably be transported over large distances. Therefore, production has to be located in close proximity to the market, which means that for cement producers the notion of pollution havens does not apply. Instead, the Cement Sus-

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tainability Initiative offers an opportunity to examine the possibility of a detectable pollution halo effect, not least within the restructuring process presently under way in Chinese cement production.

References Battelle (2002) Toward a Sustainable Cement Industry (Geneva: World Business Council for Sustainable Development, www.wbcsdcement.org, 8 August 2002). Hendriks, C.A., E. Worrell, L. Price, N. Martin, and L. Ozawa Meida (1999) ‘Greenhouse Gases from Cement Production’, in The Reduction of Greenhouse Gas Emissions from the Cement Industry (Report number PH3/7; Cheltenham, UK: IEA Greenhouse Gas R&D Programme). Humphreys, K., and M. Mahasenan (2002) Toward a Sustainable Cement Industry. Substudy 8: Climate Change (Geneva: World Business Council for Sustainable Development, www. wbcsdcement.org, 8 August 2002). Lafarge (2001) Building a Sustainable World (Paris: Lafarge). Marland, G., T.A. Boden and R.J. Andres (2001) Trends: A Compendium of Data on Global Change (Oak Ridge, TN: Carbon Dioxide Information Analysis Center, Oak Ridge National Laboratory, US Department of Energy, cdiac.esd.ornl.gov/trends/emis/em_cont.htm, 8 August 2002). Nicholls, M. (2002) ‘Setting Sustainability in Stone?’, Environmental Finance, May 2002: 20-21. Nordqvist, J., and L.J. Nilsson (2001) ‘Prospects for Industrial Technology Transfer in Chinese Cement Industry’, in 2001 ACEEE Summer Study on Energy Efficiency in Industry. Proceedings. II. Increasing Productivity through Energy Efficiency (Washington, DC: American Council for an Energy-Efficient Economy): 223-36. OECD (Organisation for Economic Co-operation and Development) (2002) China in the World Economy: The Domestic Policy Challenges (Paris: OECD). Rauscher, M. (1999) ‘Environmental Policy in Open Economies’, in J.C.J.M. van den Bergh (ed.), Handbook of Environmental and Resource Economics (Cheltenham, UK: Edward Elgar): 395-403. Soule, M.H., J.S. Logan, and T.A. Stewart (2002) Toward a Sustainable Cement Industry: Trends, Challenges, and Opportunities in China’s Cement Industry (Geneva: World Business Council for Sustainable Development, www.wbcsdcement.org, 8 August 2002). Sprigg, G., and H. Klee (2002) ‘Sustainable Development’, International Cement Review, April 2002: 67-70. Stigson, B. (2001) The Business Case for Sustainable Development (Bergamo: Italcementi, www. italcementigroup.com/newsite/stigson.htm, 8 August 2002). UN (United Nations) (2001) Statistical Yearbook (New York: UN; 45th issue). Vanderborght, B., and U. Brodmann (2001) The Cement CO2 Protocol: CO2 Emissions Monitoring and Reporting Protocol for the Cement Industry. Guide to the Protocol, Version 1.6 (Geneva: World Business Council for Sustainable Development, www.wbcsdcement.org/pdf/co2-protocol.pdf, 8 August 2002). WBCSD (World Business Council for Sustainable Development) (2002a) ‘Cement industry embarks upon road to sustainability’, International Cement and Lime Journal 1/2002: 54-56. —— (2002b) The Cement Sustainability Initiative: Our Agenda for Action (Geneva: WBCSD, www. wbcsdcement.org, 8 August 2002). ZKG International (2002) ‘High Grade Cement Challenges in China’, ZKG International 55.9: 21-26.

10 Climate change and the insurance sector its role in adaptation and mitigation Andrew Dlugolecki* University of East Anglia, UK

Mojdeh Keykhah* University of Oxford, UK

This chapter discusses the past and future involvement of the insurance industry with the issue of climate change, and why some sections have been more active than others. The introductory section outlines the broad scale of operations and the relevance of climate change to the sector; it is assumed that readers are familiar with the basics of the insurance process. The next section examines the aspect of adaptation to impacts, particularly property damage. Then we set out a possible way forward, before conclusions are drawn in the final section. The insurance industry generates $2.2 trillion premium income (turnover) annually (Swiss Re 2001). This is divided between the life and pensions branches, and general insurance (property/casualty or p/c). In the US alone, life insurers possess $2.8 trillion in assets, including real estate worth about $59 billion (UNEPFI 2002a). Clearly, therefore, the industry has considerable financial leverage which it might exert, although there are many regulatory constraints on the deployment of these funds. Climate change can affect insurers in a variety of ways. Often these are seen as predominantly negative, but there could be various opportunities as well (UNEPFI 2002a). For example, p/c insurers and reinsurers could suffer from claims due to extreme events resulting in excessive cash outflows and unmanageable caseloads. On the other hand, there will be probably be more demand for risk transfer, and the possibility of carrying higher prices, and there may be new business associated with mitigation or adaptation projects. On the wider front, invested assets may be affected through a combination of loss of value due to threatened or actual damage *

The authors wish to thank Professor David Levy for his suggestions during the drafting process.

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from changing climatic conditions, and from unplanned liabilities incurred to the investments through economic and political actions to reduce greenhouse gas (GHG) emissions. Here again, there could be positive outcomes: for example, associated with investment in renewable energy, and indeed some actors are already actively seeking opportunities in this field.

The insurance industry and adaptation There has been an upsurge in weather-related catastrophic events since 1986 (see Figure 10.1). Several individual events or event clusters have caused in excess of $10 billion economic losses—for example, multiple storms in Europe in early 1990 and December 1999, and in the US Hurricane Hugo in 1989—but the clarion call to a new threshold of catastrophe sounded with Hurricane Andrew in 1992. Its geographic track through southern Florida and the US Gulf states precipitated over $19 billion in insured losses, in a year that witnessed over $24 billion in total insured catastrophe losses. Several insurance and reinsurance companies collapsed, precipitating a market-wide plunge in available capital to cover future risks and a steep rise in reinsurance rates. One study estimated that, if Hurricane Andrew had travelled only 50 miles further north into metropolitan Miami, insured losses would have mounted to over $50 billion, sufficient to pierce the solvency of the industry as a whole (Doherty 1997a; Changnon et al. 1997). 100,000

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Many reinsurers attributed the unprecedented losses of the late 1980s and early 1990s to climate change. The quotes below illustrate this early perception by reinsurers of hazards as becoming ‘increasingly unpredictable’, thereby exposing this private-sector coverage provider to an unwelcome level of vulnerability. The General Manager of Swiss Re, H.R. Kaufman, cautioned in November 1990: There is a significant body of scientific evidence indicating that last year’s record of insurance losses from natural catastrophes was not a random occurrence. Instead it may be the result of climatic changes that will enormously expand the liability of the property-casualty industry (cited in Freedman 1997).

Lloyd’s of London Deputy Chairman, Dick Hazell, contributed this statement at about the same time: there is no reason to expect the recent spate of disasters was just bad luck or statistical oddity. The long-term impact of global warming on the world’s weather patterns and the incidence of disasters due to man-made constructions or industry pollution may both ensure that a significant number of large-scale catastrophes occur somewhere around the world each year (cited in Freedman 1997).

It was natural for the companies that were hit to think that climate change might be the culprit (Dlugolecki et al. 1995). Similar claims were made by environmental groups such as Greenpeace. However, extensive analysis suggests that the main reasons for the increase were socioeconomic: rapid development in hazardous areas, coupled with other factors such as the increasing vulnerability of modern materials to water damage. At the same time there is a natural variability in the occurrence of extreme weather, which produces peaks and troughs in losses and makes it hard to detect the onset of new trends or indeed to predict future behaviour. Currently, the science of climate change has not advanced sufficiently to provide accurate, detailed projections of future weather extremes such as storms, floods and droughts (Vellinga et al. 2001). Apart from the difficulty of constructing detailed climate models and reconciling differences between them, the major problem is that the weather is inherently very variable. Nevertheless, it is clear that as the climate shifts there will be impacts: flood and storm damage to infrastructure, and drought to crops. More resources will be sought to pay for property damage and sustain the poor (Freeman and Warner 2001). Since the traditional method of assuming that the future will copy the past is incorrect, and there is no accurate method of predicting future event patterns, it is impossible to calculate the weather risk. From the point of view of insurers, this increased uncertainty leads to heightened risk aversion, e.g. higher insurance rates, unwillingness to accept risks, and a desire to reinsure those risks that are accepted. What is surprising at first sight is that insurers have not been more concerned about climate change, but in fact most property losses are not insured. As Figure 10.1 shows, they are financed in some other way. Also, catastrophes are sporadic, so that the temptation is to ignore them in their periods of absence. Indeed their very rarity makes it difficult to gather information on them and, when they do occur, then data

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collection is generally a low priority (Walker 1995). This is particularly so if reinsurers are willing to take the bulk of the risk with no attempt at selecting good from bad (Walker 1995; ISDR 2002). We now consider the experience of four of the more active sectors in this area: the UNEP Insurance Industry Initiative, the UK insurance industry, the World Bank and global reinsurers, and we look at the reasons why the US insurance industry has been less active. This suggests common principles that could be used more generally.

UNEPFI Insurance Industry Initiative The UNEP (United Nations Environment Programme) Insurance Industry Initiative came into being in 1995. Its formation was deliberately planned at the time of the COP 1 (one of the authors was a founding committee member).1 Although it has a remit to consider all aspects of sustainability, its focus has always tended to be climate change, since that is a genuinely international problem, and there is no other global insurance forum. Its activities on climate change are now channelled through the Climate Change Working Group (CCWG) of the UNEP Finance Initiatives (UNEPFI), which allows banks and other institutions to collaborate. At its inception it was a useful counterbalance to the powerful fossil fuel lobby but has always lacked the resources to match them (Leggett 1999). Its members have provided valuable input to the Intergovernmental Panel on Climate Change (IPCC), the World Summit on Sustainable Development (WSSD) and other forums. It has produced a series of position papers, the latest at COP 7, in which it calls strongly for a precautionary approach, moving soon to a long-range framework for GHG emissions abatement (UNEPFI 2001). More recently, UNEPFI commissioned a full-scale study of climate change and the finance sector, discussed in detail later (UNEPFI 2002b, 2002c). Of the 87 listed members, only 79 are currently underwriting. Two-thirds of the membership is from western Europe, and North America is hardly represented. This is discussed more fully later, but it is worth noting here that the US insurance industry is rather inward-looking, and also that the UNEP image has less appeal to Americans. One large US reinsurer initially showed some enthusiasm, but this soon faded in the face of hostility from its conglomerate parent, which viewed emissions reduction as a business threat. From the outset, UNEPFI members agreed that investment needed to be subject to the principles of sustainability, in the same way as underwriting and internal operations. This was a considerable decision, since some potential members were deterred from joining because they felt that asset management should be performed on a narrow definition of economic performance, with regard to security and returns. The UNEPFI view was that ‘non-financial’ aspects would (and should) be monetised sooner rather than later, and to ignore them would result in suboptimal decisions. In the case of climate change, for example, it was seen as inevitable and proper that emissions controls would arrive, and therefore the appropriate strategy was not to fight them but to anticipate their effect on equities. 1

COP: Conference of the Parties to the Kyoto Protocol.

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The UK insurance industry The UK insurance industry has been much more proactive on climate change than other nations. There are several reasons for this. British insurers often had international interests through subsidiaries, and through global reinsurance (Lloyd’s of London). British insurance coverage is generally much wider than elsewhere: it specifically includes flood and storm as well as subsidence and uplift of the ground. Communication with the scientific community on climate change has been strong since 1988, owing to the strong contribution of UK science to the IPCC process. The first time insurance was considered in a national climate change review was in the UK (CCIRG 1991) and in 1994 the Chartered Insurance Institute commissioned a report on climate change from its fellowship members (CII 1994), since repeated (CII 2001). The premier trade association, the Association of British Insurers (ABI), drew up a research plan to improve its knowledge of climate-related hazards, possibly spurred by a projection that climate change might add 50% to weather claims (CCIRG 1991), resulting in a number of reports, often available for other stakeholders (CII 2001):

Subsidence of clay soil Damage to buildings from soil movement cost the UK insurance industry £3 billion in claims during the 1990s. Some countries have evolved more effective ways of tackling this, through better construction and self-insurance for minor damage (Radevsky 1999).

Flood risk on UK rivers The ABI commissioned an assessment of the flood risk from British rivers. It indicated that there is a considerably higher risk than previously realised, with a maximum insured loss of as much as £2 billion from a single event. It was published just two weeks before the disastrous floods of autumn 2000 (ENTEC 2000).

Insurance and the planning process The ABI assisted in drawing up new guidelines for local authority planners in Scotland (NPPG 7). These guidelines recommend that planners set up flood appraisal groups involving a representative from the insurance industry. Of particular interest is the idea that there should be differentiated standards of acceptable flood risk for development, relating to the purpose of the building (Crichton 2002). England and Wales now have Planning Policy Guideline 25—development and flood risk, which is somewhat weaker, but will be reviewed after three years.

UK national flood claims database With ABI assistance, 25 leading insurers agreed to contribute flood claims data to a new national database of flood claims. The results of the first analysis, covering all major floods from 1993 to 1998, were published in 1999 (Crichton 2002).

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Assessments of coastal flood risks The ABI has commissioned consulting engineers Halcrow to produce studies on coastal flood risk including the identification of ‘weak links’ in sea defences and the hazards of flood in the Thames upstream of the Thames Barrier (Halcrow 1994, 1995, 1997).

Windstorm vulnerability and climate change The ABI supported a research project on windstorm claims to assess which types of building were most vulnerable to windstorm damage. The results are of significance to those involved with building standards, but a bigger sample and more research is needed (Mootoosamy and Baker 1998). Since it appears that climate change is already changing the flood pattern adversely, the ABI has decided to harden its stance on flood insurance (Crichton 2002). From 2003, four types of situation are unlikely to receive continued cover owing to the lack of physical protection. Also, terms for other properties may be modified from the implicit national flat rate to reflect local variations in risk.

US insurers and differences from European insurers US insurers remain sceptical on the issue of climate change. They declare their ignorance of climate science but at the same time argue, somewhat disingenuously, that climate science has little to do with the business of insurance underwriting (Mills et al. 2001). Unlike Europe, the US had often experienced weather catastrophes before the onset of climate change, which meant that such events were less likely to be seen as manifestations of global change. Among sources of climate information that insurers find reliable, the most trusted is the IPCC. However, there is criticism of the IPCC’s changing forecasts of hazards linked to climate change, such as tropical windstorm trends (Henderson-Sellers et al. 1998). Insurers also cite the lack of detail in climate models both spatially and temporally, and the uncertainty surrounding government versus insurance obligations in catastrophes (Keykhah 2000). Moreover, US insurers remain conservative and cautious about potential involvement in climate negotiations. For example, the UNEPFI programme consists mainly of European players. This partly reflects the reluctance of big business in the US to endorse emissions controls, and, more recently, the US’s disengagement from the Kyoto Protocol. The hesitance may also be explained by the inward-looking nature of the US insurance community: the industry is heavily regulated at state level, so that there is not a single domestic market to serve as a base for overseas expansion. Indeed, there are very few US insurers that could be termed international, and so this isolates them from concerns about global issues such as climate change. The traditional insurance strategies of dealing with disasters by raising premiums, relying on investment returns or withdrawing from certain insurance markets is a response that focuses only on consequences, not causes, of disaster losses (Keykhah 2002). In Europe, the insurers’ emphasis has been more

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holistic: their strategies embrace both the causes and effects of hazards’ related losses (Mills et al. 2001). The most important difference, however, between the European and the American insurance communities is their time-frames and priorities. American insurers are concerned with the short term, the quarterly financial statements, the stock market, and their viability in the coming year (Packard and Reinhardt 2000). European reinsurers, on the other hand, who exert a powerful influence on all insurance markets, are not bound by quarterly indices, and can envision a five-year or longer time-frame in which issues such as viability, sustainability and government–insurance–client partnerships can evolve.2 Until recently Lloyd’s, the global insurance organisation, required its member syndicates to re-establish themselves every year as market participants (called the annual venture), which created a focus on the short term, but this too has ended with the influx of corporate capital. It is thus the larger, long-standing European players, with resources to devote to research, who are more active voices among the insurance community. Those insurance and reinsurance companies that have been formed as a merger with banks also exhibit this risk-averse and longer-term focus.

The World Bank Concerned by the vulnerability of the Caribbean region to natural catastrophes, with the possibility of a deterioration due to climate change, the World Bank has sponsored considerable research into the question of how the risk can be managed, including physical measures and innovation or improvements in risk financing (CGCED 2002). Valuable lessons from experience with today’s extremes could provide a good guide to the insurance industry’s resilience to climate change. The problem is that storms are infrequent, and most of the risk is transferred offshore to reinsurers who do not wish to become involved in local risk management. This is compounded by the competition for business among insurance agents (Vermeiren 2000). An attempt to link insurance terms to building standards in Barbados failed for those reasons. However, success was achieved in St Lucia when a bank made grants for resilient construction (the hurricane-resistant home improvement programme) linked to insurance. The attraction to the insurer is that the houses are independently certified and correctly valued. Similarly, in the French Antilles where statutory decennial insurance means insurers require buildings to be inspected, hurricane damage was notably less than in the adjacent Dutch Antilles (CGCED 2002). In general, inertia and apathy prevent adaptation. Walker (1995) notes that Fiji was obliged to adopt a building certification scheme by insurers, but this was only because there had been three hurricanes in three years—the construction standards were no worse than on any other small island. The consequences of less rigorous building can be out of all proportion to the savings in construction costs. For example, Port Zante in St Kitts and Nevis was hit twice by hurricanes during construction. The additional costs came to $36 million, 2

Personal communication with Frank Nutter, President, Reinsurance Association of America, Washington, DC, 17 October 2000.

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including lost revenues during a four-year delay in start-up. With a planned construction cost of $22.5 million, it would have taken just $3 million to make the original design storm-resistant (CGCED 2002).

Reinsurers The insurance industry has long relied on the reinsurance industry to cover catastrophic risk liabilities. This reliance is historical and dates back to the creation of reinsurance from, on the one hand, the merger of banks and insurance companies in the German-speaking countries, to the dispersion of risk through capitalised ventures under the Lloyd’s insurance organisation. Reinsurance is often purchased to cover losses in excess of a certain amount (excess-of-loss or XL contracts). Excessof-loss contracts can be further reinsured, resulting in truly global trading of catastrophic risk among all sizes of reinsurance companies. Ideally, reinsurance companies wish to diversify their geographic commitments in order not to be too greatly exposed to any particular geographic region. For example, the Caribbean is greatly exposed to seasonal hurricanes, and therefore is a reinsurance-seeking region. At the same time, California faces a grave earthquake threat and is also reinsurance-seeking, as are Florida, the Mississippi basin and the US Gulf states. Companies such as Munich Re, the largest reinsurance company in the world, ideally take small amounts of excess-of-loss contracts worldwide, resulting in a diversified book of reinsurance coverage. The reinsurance company is paid for their assumption of liability, but this payment, the premium, must in some way reflect the risk being covered. The threat of climate change alters this tradition of reinsurance in two important ways. First, the estimation of potential catastrophic losses was made on the basis of records of past losses. This past record is no longer a valid reference. Traditionally, reinsurance pricing has been based on induction (from empirical data from regions with weather records), and analogy (the carrying-over of pricing from regions with data to regions without data). If there has been no windstorm losses in a region, such as central France, then reinsurance companies will price based on historical records from other regions, such as the south of France, or based on the premium income of the insurance company being reinsured. Unfortunately, climate change will bring surprises to this methodology, since on average regions will not experience such uniform climate and weather phenomena as in the past. The ‘millennium’ storms Lothar and Martin in France and Germany attest to this potential for surprise. As part of this awareness of the need for detailed data and greater scientific sophistication, catastrophe models have gained entry into the reinsurance underwriter’s toolkit. A calculable risk of a loss based on statistics is simply not possible if the past does not resemble the future. Instead of a ‘risk’, therefore, the reinsurance community faced a considerable level of uncertainty, or inestimability of future losses. They turned to scientific expertise in order to be able to incorporate simulations of possible weather conditions, not simply historical records (indeed the latter are often not available in a reliable form anyway). In other words, their strategy for facing the rise in weather-related losses is to ‘invest in acquiring better information’ (Packard and Reinhardt 2000), particularly from modelling of weather-related

10. climate change and the insurance sector Dlugolecki and Keykhah 155

property losses. Indeed, the use of (natural) catastrophe models within insurance has rapidly proliferated over the past 15 years. Part of this growth is due to demand wrought by the insurance sector’s ‘cognition of catastrophe’ after the watershed losses of Hurricane Andrew (Meszaros 1997). Another factor is due to the advances in computing power to combine and visually display the results from thousands of simulations. The model combines hazard, vulnerability and insurance variables. While the output is technologically sophisticated and visually stunning, catastrophe models contain a number of assumptions and, some may argue, omissions, both at the level of global climate variables and local conditions. Indeed, underestimating the uncertainties involved is a grave mistake, counsel two catastrophe modellers from Risk Management Solutions (Boissonnade and Collignon 1999). They take the example of their tropical cyclone model, and the four hurricane forecasts that were used as its basis. The RMS modellers remark on the patchy success records of the forecasters themselves and that the accuracy of forecasting US landfalling hurricanes has been ‘inconsistent’. Complicating the uncertainties involved in catastrophe models are their proprietary status: they have been termed ‘black boxes’ since their source codes, data, assumptions and uncertainties are generally kept out of the practitioner’s eye. Moreover, catastrophe modelling is primarily a probability simulation of potential future losses, based on past or hypothetical individual events or event patterns. There has been criticism that catastrophe models do not include enough current climate information, including the influence of El Niño on hazard. Very recently, the consultancy group AIR Worldwide Corporation revealed that it is to attempt to overcome this by applying numerical weather prediction techniques to seasonal storm forecasts. Effectively, this is equivalent to using a general circulation model (GCM), but over a much shorter period—months rather than decades (Dailey 2002). The second revolution in reinsurance decision-making because of the threat of climate uncertainty may be the supply of capital, given the threat of much greater loss exposures. Reinsurance market pricing is often predicated on market supply and demand, much less so on scientific prediction techniques or sophisticated risk estimates. Climate change will challenge this practice of pricing based on market mechanisms. Indeed, market share underwriting, and recouping losses from expected returns in stock markets and other investment vehicles, undermines the principle of insurance which is to assess the risks covered and price accordingly. It is not sustainable to rely on bail-out from the stock markets if underwriting contracts draw in enormous losses. As Patrick Liedtke, Secretary General of the Geneva Association, remarked with respect to catastrophe risk: ‘insurance companies needed to abandon the practice of accepting losses on underwriting business in the hope of covering the loss by high investment returns’ (Williams 2002). Such a smoothing of prices would be very desirable, but it does assume that alternative sources of capital can be found. Several European countries use government backup for catastrophes, e.g. France, Spain, Norway and the UK (for terrorism only). Another alternative is taxallowable catastrophe reserves—used in Germany, Switzerland and the UK. There are also the capital markets (alternative risk transfer or ART), disaster relief, lines of credit, savings, extended family networks, etc.). Indeed, the statistics in Figure 10.1 demonstrate that less than 20% of weather losses are financed from traditional

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reinsurance and insurance. However, not all of these sources are direct substitutes, because often they are provided on a non-economic, not-for-profit basis. At the same time that insurers, reinsurers and brokerages have been consolidating, the enormous losses of Hurricane Andrew and other large natural catastrophes have encouraged the development of ART, or alternative risk transfer. These products mainly feature the securitisation of catastrophe risk, usually in the form of a bond. In one version, the bond pays coupons in the event no contingent catastrophe (for which the bond was issued) causes losses past a certain trigger. Once the trigger is exceeded, investors lose the bond principal and all future coupons. The securities vary in duration, providing protection to mostly large insurance or reinsurance companies who wish to have their uppermost catastrophe layers protected in this fashion. The legal and logistical fees for securitisation are comparably higher than for catastrophe reinsurance, and so securitisation remains uncommon in the marketplace (to date only 40 or so contracts have been concluded). There are also potential risk management problems with the securitisation route. The financial marketplace provides an anonymous diffusion of risk and responsibility that could contribute to moral hazard problems. Also, no catastrophe bond has yet had to perform, and it is suspected that the subsequent supply may be pretty fragile in the event of loss actually happening (Doherty 1997a; Punter 1999). Other factors that have hindered their development relate to the caution that potential investors have about the confidence that they can place in the catastrophe models that are used to price the contracts, and also the weakness in traditional reinsurance rates (at least prior to 11 September 2001). Thus the early hopes that ART would decouple the insurance market from climate shocks have not matured.

after hurricane andrew precipitated the collapse of a number of insurance and reinsurance companies, eight specialised catastrophe reinsurance companies established themselves on Bermuda, an Atlantic island that has developed a thriving financial services infrastructure, made more attractive by its tax status. These companies, funded by mostly American and British capital providers, formed an international reinsurance hub committed to catastrophe reinsurance. In addition to operating independently, several of them decided to form the Risk Prediction Initiative (RPI)—an industry–academic research consortium— with the Bermuda Biological Station for Research as the scientific partner. At the time of its inception, interest among reinsurers in catastrophe assessments and favourable market conditions boosting reinsurers’ financial resources had both reached a peak. Thus, there was great momentum to provide a financial infrastructure for this type of science–reinsurance interaction. The RPI framed its approach as the open alternative to catastrophe models. It does not engage in climate science research per se or use GCMs (general circulation models). Its focus has been much more temporally and geographically specific: to develop historical (i.e. palaeological) records of tropical windstorm landfall in the US Gulf coast, to model tropical windstorm formation and propagation in the Atlantic Ocean, and to propose seasonal forecasts of tropical windstorm activity (Malmquist 1997, 1998). Results from the research, essentially commissioned by the Bermudan reinsurers who are members of the RPI, are presented at workshops and meetings throughout the year. Potentially, the new information will inform catastrophe modellers and result in a better understanding of the natural variability and genesis of hurricanes, but the emphasis is on basic research, rather than immediate pay-offs.

box 10.1 The Risk Prediction Initiative

10. climate change and the insurance sector Dlugolecki and Keykhah 157

Insurance and the Kyoto Protocol While the Kyoto Protocol is focused on mitigation, the Conference of the Parties in Marrakech 2001 (decision 5.7 of COP 7) decided to proceed with the issue of vulnerability of developing nations (Articles 4.8 and 4.9 of the Protocol). In particular, workshops are proposed on insurance and risk assessment in the context of weather extremes, and on what specific insurance-related actions could be taken to address the concerns of developing countries. In principle, a variety of funding mechanisms are available under the Protocol to support the research and at least pilot implementation. It must be remembered that climate variability is not strictly the same as climate change, but in practice it may be impossible to differentiate (van Aalst and Burton 2000). As a side issue, of course many mitigation projects will also be exposed to climate change impacts: for example, sea level rise, and will require insurance themselves (Janssen 2000).

Discussion As Figure 10.2 shows, traditionally the insurance industry has not been involved in general regulation for construction or development standards, nor in site-specific

inactive

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general regulation and design, not at specific site planning, design, construction, finance at specific site insurance of specific property occupation of property at specific site extreme event occurrence at site extreme event planning at site

figure 10.2 An integrated property damage system

sequence of events information flow

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decisions. This inactive approach sees insurers as passively signing cheques when damage arises, with no systemic questions asked. In the reactive state, the insurers pay more attention to the claims costs, and pass information to other stakeholders that may improve future standards and guidance. However, this still permits damage to build up on accumulated building stocks. Only by taking a proactive role will the insurer be able to ensure that the costs are reduced as low as possible. National systems of course differ, but a key message is that public–private partnerships will be necessary for an efficient solution to adaptation to climate impacts. Turning to developing countries, Hoogeveen (2000) argues that for a covariate risk such as catastrophe weather, i.e. where many losses can occur simultaneously, formal insurance is the most efficient approach as long as the pool of risks is broad, and there is sufficient capital. Vatsa and Krimgold (2000) agree but point out the need for physical risk control. The main problem is that many risks are not financial and that the poor are excluded. There needs to be a preparatory phase of information-gathering, and build-up towards a more formal property-owning system for less developed countries (Litan 2000). However, alternatives to insurance such as micro-credit face major problems with covariate risks. For example in the Bangladesh flood of 1998, 1.2 of 2.3 million members of the Grameen Bank were affected, resulting in difficulties in servicing loans (ISDR 2002). There are problems, of course: the volumes of premiums may be low by world standards and the administration costs high. Developing countries are not generally profitable markets for financial services, but there may be scope for public–private partnerships to solve some of these difficulties. Change is a time for evolution, and climate change may provide this opportunity for insurers. If the weather becomes more unpredictable, this constitutes a risk, and therefore a potential new market. Already banks and brokers are exploring new tools such as weather derivatives and ART, and if they become too risk-averse then insurers could find themselves marginalised, as happened with corporate insurance in the US.

The way ahead There are four types of barrier to action that must be overcome in order to make progress: cognitive, political, analytical and operational (UNEPFI 2002c). The most fundamental blockage is cognitive: decision-makers in the insurance industry do not feel that climate change has any relevance for them. They are unsure about the science, and anyway they feel it is a long-term international issue for politicians, rather than a business management issue within the planning horizon. In part this is due to political inaction: there is a perception that politicians are not committed to fundamental policies on mitigation, so that business-as-usual is the most prudent strategy for investors. Regulatory or government concern is not evident in such elementary procedures as security exchange listing regulations, and there is little evidence of government action to reduce its own GHG emissions, or to kick-start alternative energies in a big way.

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Apart from these perceptual issues, there are real practical difficulties. Climate change research has too great a time-horizon and too little resolution spatially to be of significance to smaller insurance companies who may well be facing other crises, such as asbestos liability. The analytical tools are lacking to translate direct climate impacts into financial costs, or indirect mitigation penalties into asset valuation. Partly this is due to the absence of the raw data on future climatology or corporate GHG emissions, but the low awareness among key advisory groups such as actuaries or ‘sell-side brokers’ is also a contributory factor. As with any new field, there are operational problems that are hindering progress, but these are not generally critical, since commercial forces will tend to iron them out. However, from the standpoint of institutional investors, many of the opportunities are unappealing, because they feature either small-scale investments or high-risk factors (such as novel technologies or less stable national economies). Climate change was discussed at the annual round-table of the Geneva Association, a forum of the 70 largest insurers in the world, in June 2001, and the key presentations have been published (Harvey 2002). The key issues were seen as: • Communication within the industry, to policy-makers and to stakeholders • The use of commercial links to leverage strategies: for example, along the supply chain, and through socially responsible investment (SRI) into mainstream investment thinking • Changing the short-term nature of performance focus • Accessing the larger capital markets to provide capacity for the likely increase in demand for catastrophe cover, which the current market will not be able to satisfy More recently, sparked by a paper on climate change as a risk to investors (Mansley and Dlugolecki 2001), the Carbon Disclosure Project was launched. This initiative, supported by major European insurers, aims to persuade the global top 500 listed companies to disclose more about their strategies on climate change, in particular their GHG emissions. The first results have been reported (CDP 2003) and a second phase is in train. There can be no standard answer to meeting the new challenges posed by climate change, because of the great diversity in national insurance industries. This is reflected in the whole gamut of operational characteristics: the different roles of the private and public sectors, the overlap with other sectors of the financial industry (e.g. pensions provision, banking), the scale of individual enterprises, the mix of distribution channels from underwriter to customer, and the very nature of the insurance product—what hazards are covered, and on what basis of indemnity (Vellinga et al. 2001; Dlugolecki et al. 1995). What seems clear is that effective insurance will require a much closer partnership between public and private sectors. In the case of weather insurance, the potential liabilities (e.g. costs of extreme weather events) may be beyond the scope of private enterprises to accept, but the skills and resources required to handle the casework (e.g. pricing individual risks, issuing contracts of insurance, handling compensation claims) reside within the private sector. An effective solution could

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• Mobilise support

• Work with government to: 1. manage risks (storm,flood, drought) 2. imbed sustainable investment 3. educate stakeholders • Develop new products/services/tools • Invest on SRI principles • Behave sustainably • Lobby international policy-makers through UNEPFI SRI = socially responsible investing; UNEPFI = United Nations Environment Programme Finance Initiatives

box 10.2 Climate action plan for insurers

be found by involving both sectors, as happens with the National Flood Insurance Program in the US. As for asset management, regulators can harness the power of institutional investors through skilful crafting of the framework that determines the provision of basic data such as GHG emissions and ensuring that environmental reporting extends to include the carbon-intensity of investment portfolios, for example. Having ensured that the basic information is available, regulators can then rely on competitive forces to exploit it for the common good. This is not to overlook the need for innovation within the insurance sector itself. Though new risk management tools such as weather derivatives, catastrophe bonds and micro-insurance are being studied by insurers and reinsurers, there is little evidence that they will become a significant part of the standard repertoire of underwriting products. The innate conservatism of the industry has left most of the research and development to brokers and bankers. Indeed, banks have begun to explore the provision of such services as weather derivatives as adjuncts to their own credit services. In the field of asset management, the scope for innovation on a grand scale may be limited by regulations aimed at protecting beneficiaries by a very directional use of funds. UNEPFI (2002c) recognises the difficulty of mobilising commercial enterprises on climate change, where the impacts are so uncertain and are likely to be felt beyond the usual business operating cycle of one to three years. It recommends the creation of a taskforce of senior business executives to drive home the message that climate change is a relevant business issue, requiring individual companies and executives to respond. This would be paralleled by two technical working parties, focused on investment activity. The first would provide a ‘carbon asset pricing model’ to capture the asset pricing and valuation implications of GHG-related issues on mainstream equities analysis, while the second would consider how to monetise the various environmental aspects of capital projects. The financial sector differs from industrial sectors on the issue of climate change in its reluctance to become involved in lobbying policy-makers. This arises because of the cognitive gap, already discussed, but also because commercial sectors tend to respect one another’s interests since there are often strong cross-linkages, such as

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supply chain relationships, board memberships and investment, and finally because there is no commonly accepted global trade association for the finance sector. European insurers have been more outspoken, reflecting their wider interests around the world, and perhaps a keener sense of environmental duty. One policy issue that insurers are beginning to examine is the need for agreement on a long-term framework for emissions control. The Kyoto Protocol runs only up to 2012, the targets for GHG cuts involved are very small, and less developed countries have accepted no quantitative goals. Unless more determined action is taken, there is a real possibility that climate change will run away, resulting in major disruptions from abnormal weather and sharp, unplanned and inefficient changes in energy policy. This poses obvious risks for the finance sector, including the insurance industry. In its position paper for COP 7, UNEPFI commends ‘Contraction and Convergence’ (C&C) to policy-makers as a method that tackles these problems.3 C&C sets a longterm vision for emissions by specifying a decline to prudent levels in global emissions. It clearly shows all actors that the future energy economy must pursue energy efficiency and renewables in order for economic development to continue (see Figure 10.3). Further, by assigning emissions rights to less developed countries, 5 4 3 2 1

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• ‘Contraction and convergence’ assigns everyone equal rights to carbon emissions, with effect from a given future date, to allow time to adjust. • Segments 1–3 show how CO2 emissions must fall 60% in total to limit atmospheric carbon. • The dashed line shows how energy demand would rise, in a business-as-usual scenario, with growth. • The gap can be filled by alternative energy and more efficient technology.

figure 10.3 ‘Contraction and convergence’ Source: Global Commons Institute, London

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See Meyer 2000 for details of C&C.

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C&C creates a window of opportunity for emissions trading. Ironically, this same feature also addresses the US’s main criticism of the Kyoto Protocol: that it does not engage major emitting nations such as India and China. To date, insurers have been reluctant to promote any specific policy, but this situation may change in the face of continued delay by policy-makers.

Conclusions The insurance industry has been largely uninvolved in the development of answers to climate change. This reflects the fact that most debate has been, and continues to be, around the question of mitigation. It has absorbed most of the attention of policy-makers and NGOs, and much of the creative resource in the wider financial sector. Insurance, on the other hand, is associated with extreme weather event losses, and adaptation to such impacts has been rather neglected because the consequences of climate change in that respect are uncertain and rather distant. Additionally, of course, most weather damage is not insured and in the past decade storms have largely avoided the US and Japan, countries that are the greatest foci of insurable property. The most active participants have been European companies, because of their greater exposure to losses, and perhaps a greater willingness to enter into debate on environmental matters, at least in northern Europe. More recently this has begun to change, with the realisation that most insurers are in fact investment companies, and that the earliest impacts of climate change for them could be through unanticipated shifts in their return on assets, not through catastrophe claims. This realisation is still not widespread, and the analytical tools do not yet exist to convert qualitative concern into quantitative assessment and reasoned decisions, but this new insight could be a powerful force for action. Successful engagement on climate change means overcoming a range of technical, cultural and organisational barriers. However, the growing emphasis on corporate governance, stakeholder involvement, socially responsible investment and environmentalism should ease the transition. National approaches will differ, reflecting the varying social priorities, local opportunities and risks, and historical frameworks. However, a key lesson is already clear: only with strong public–private partnership linkages can the insurance industry help society to reduce vulnerability at the local level. The same principle applied to asset management can help to avert the further progression of climate change through more enlightened investment policies.

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References Boissonnade, A., and O. Collignon (1999) ‘Insurers braced for ill winds’, Reactions, July 1999. CCIRG (Climate Change Impacts Review Group) (1991) The Potential Effects of Climate Change in the United Kingdom (First Report by the CCIRG on behalf of the Department of the Environment; London: HMSO). CDP (Carbon Disclosure Project) (2003) Carbon Finance and the Global Equity Markets (report prepared by Innovest Strategic Advisors for CDP; London: CDP). CGCED (Caribbean Group for Co-operation in Economic Development) (2002) Natural Hazard Risk Management in the Caribbean: Revisiting the Challenge (unpublished discussion document; CGCED, World Bank). Changnon, D., E. Fosse, D. Hoganson, R. Roth, Sr, and J. Totsch (1997) ‘Effects of Weather Extremes on the Insurance Industry: Major Implications for the Atmospheric Sciences’, Bulletin of the American Meteorological Society 78.3. CII (Chartered Insurance Institute) (1994) The Impact of Changing Weather Patterns on Property Insurance (ed. A. Dlugolecki; a research report by the Society of Fellows of the CII; London: CII). —— (2001) Climate Change and Insurance (ed. A. Dlugolecki; a research report by the Society of Fellows of the CII; London: CII). Crichton, D. (2002) ‘Residential Flood Insurance: Lessons from Europe’, in D.I. Smith and J. Handmer (eds.), Residential Flood Insurance: The Implications for Floodplain Management Policy (Canberra: Water Research Foundation of Australia): 41-58. Dailey, P. (2002) ‘Forecast for Upcoming European Windstorm Season’, paper presented at The Evolving Risk Markets Conference, 10–11 October 2002 (London: IBC Global Conferences). Dlugolecki, A. (1991) ‘Financial Sector’, in CCIRG (Climate Change Impacts Review Group), The Potential Effects of Climate Change in the United Kingdom (First Report by the CCIRG on behalf of the Department of the Environment; London: HMSO): 97-104. ——, K.M. Clark, F. Knecht, D. McCaulay, J.P. Palutikof and W. Yambi (1995) ‘Financial Services’, in T. Watson, M. Zinyowera, R. Moss and D. Dokken (eds.), Climate Change 1995: Impacts, Adaptation, and Mitigation of Climate Change: Scientific-Technical Analysis (Cambridge, UK: Cambridge University Press, for Intergovernmental Panel on Climate Change, Working Group II). Doherty, N. (1997a) ‘Insurance Markets and Climate Change’, Geneva Papers on Risk and Insurance 83. —— (1997b) ‘Financial Innovation for Financing and Hedging Catastrophe Risk’, in N. Britton and J. Oliver (eds.), Financial Risk Management for Natural Catastrophes, proceedings of a conference sponsored by Aon Group Australia Ltd (Brisbane: Aon Group Australia Ltd and Griffith University): 191-210. ENTEC (2000) Inland Flooding Risk (ABI Research Report No. 10; London: Association of British Insurers). Freedman, S.A. (1997) ‘Global Climate Change and its Policy Implications for the US Insurance Sector’, master’s thesis, Center for Energy and Environmental Policy, University of Delaware. Freeman, P., and K. Warner (2001) Vulnerability of Infrastructure to Climate Variability: How does this affect infrastructure lending policies? (unpublished report; Washington, DC: Disaster Management Facility, World Bank and Prevention Consortium). Halcrow (1994) Identification of Coastal Flood Areas in England and Wales (London: Sir William Halcrow & Partners). —— (1995) Identification of Coastal Flood Areas in England and Wales: Supplementary Report Updating the Sea Defence Survey (London: Sir William Halcrow & Partners). —— (1997) Identification of Coastal Flood Areas in England and Wales: Supplementary Report. Single Storm Impact Study (London: Sir William Halcrow & Partners). Harvey, R. (2002) ‘The Debate on Global Warming’, The Geneva Papers on Risk and Insurance: Issues and Practice 27.1 (January 2002): 78-88. Henderson-Sellers, A., et al. (1998) ‘Tropical Cyclones and Global Climate Change: A Post-IPCC Assessment’, Bulletin of the American Meteorological Society 79.1 (January 1998). Hoogeveen, J.G.M. (2000) ‘Risk and Insurance by the Poor in Developing Nations’, in A. Kreimer and M. Arnold (eds.), Managing Disaster Risk in Emerging Economies (Disaster Risk Management Series, No. 2; Washington, DC: The World Bank, June 2000): 103-28.

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ISDR (International Strategy for Disaster Reduction) (2002) Living with Risk: A Global Review of Disaster Reduction Initiatives (Geneva: ISDR).

Janssen, J. (2000) ‘Implementing the Kyoto Mechanisms: Potential Contributions by Banks and Insurance Companies’, The Geneva Papers on Risk and Insurance: Issues and Practice 25.4 (October 2000): 602-18. Keykhah, M. (2000) ‘Global Hazards and Catastrophic Risk: Assessments, Practitioners and Decision Making in Reinsurance’, in J. Jaeger and A. Farrell (eds.), Design of Environmental Assessment (Global Environmental Assessment Project, Belfer Center for Science and International Affairs, Harvard University, forthcoming). —— (2002) ‘Elementary My Dear Watson: On Condition and Cause in Catastrophe Risk’, School of Geography Working Paper, University of Oxford, UK. Leggett, J. (1999) The Carbon War: Dispatches from the End of the Oil Century (London: Allen Lane). Litan, R. (2000) ‘Catastrophe Insurance and Mitigating Disaster Losses: A Possible Happy Marriage?’, in A. Kreimer and M. Arnold (eds.), Managing Disaster Risk in Emerging Economies (Washington, DC: World Bank): 187-93. Malmquist, D.L. (ed.) (1997) Tropical Cyclones and Climate Variability: A Research Agenda for the Next Century (Los Angeles: Risk Prediction Initiative). —— (1998) ‘Forecasting the Big One’, Reactions, July 1998. Mansley, M., and A. Dlugolecki (2001) Climate Change: A Risk Management Challenge for Institutional Investors (Discussion Paper, No. 1; London: Universities Superannuation Schemes Ltd). Meszaros, J.R. (1997) The Cognition of Catastrophe: Preliminary Examination of an Industry in Transition (Working Paper; Philadelphia, PA: Wharton Risk Management and Decision Process Center). Meyer, A. (2000) Contraction and Convergence: A Global Framework to Cope with Climate Change (Schumacher Briefing, No. 5; London: Green Books). Mills, E., E. Lecomte and A. Peara (2001) US Insurance Industry Perspectives on Global Climate Change (Lawrence Berkeley National Laboratory MS 90–4000; Berkeley, CA: US Department of Energy, University of California). Mootoosamy, V., and M. Baker (1998) Wind Damage to Buildings in the United Kingdom (LPR8; London: Loss Prevention Council). Packard, K., and F. Reinhardt (2000) ‘What Every Executive Needs to Know about Global Warming’, Harvard Business Review, July/August 2000: 128-35. Punter, A. (1999) ‘The Spectrum of Alternative Risk Financing Opportunities’, in N Britton (ed.), The Changing Risk Landscape: Implications for Insurance Risk Management, proceedings of a conference sponsored by Aon Group Australia Ltd (Sydney: Aon Group Australia Ltd): 121-50. Radevsky, R. (1999) Subsidence: A Global Perspective (London: Association of British Insurers). Swiss Re (2001) World Insurance in 2000 (Zurich: Swiss Re). UNEPFI (United Nations Environment Programme Finance Initiatives) (2001) ‘Climate Change Working Group Position Paper for COP 7’ (Geneva: UNEP). —— (2002a) Industry as a Partner for Sustainable Development: Finance and Insurance (Geneva: UNEP). —— (2002b) Climate Change and the Financial Services Industry. Module 1: Threats and Opportunities (Geneva: UNEP). —— (2002c) Climate Change and the Financial Services Industry. Module 2: A Blueprint for Action (Geneva: UNEP). Van Aalst, M., and I. Burton (2000) ‘Climate Change from a Development Perspective’, in A. Kreimer and M. Arnold (eds.), Managing Disaster Risk in Emerging Economies (Washington, DC: World Bank): 91-98. Vatsa, K., and F. Krimgold (2000) ‘Financing Disaster Mitigation for the Poor’, in A. Kreimer and M. Arnold (eds.), Managing Disaster Risk in Emerging Economies (Washington, DC: World Bank): 129-53. Vellinga, P., E. Mills, G. Berz, L. Bouwer, S. Huq, L. Kozak, J. Palutikof, B. Schanzenbascher, G. Soler, C. Benson, J. Bruce, G. Frerks, P. Huyck, P. Kovacs, A. Olsthoorn, A. Peara and S. Shida (2001) ‘Insurance and Other Financial Services’, in A Dlugolecki, J. McCarthy, O. Canziani, N. Leary, D. Dokken and K. White (eds.), Climate Change 2001: Impacts, Adaptation and Vulnerability (Cambridge, UK: Cambridge University Press for Intergovernmental Panel on Climate Change Working Group II).

10. climate change and the insurance sector Dlugolecki and Keykhah 165 Vermeiren, J. (2000) ‘Risk Transfer and Finance Experience in the Caribbean’, in A. Kreimer and M. Arnold (eds.), Managing Disaster Risk in Emerging Economies (Washington, DC: World Bank): 166-74. Walker, G. (1995) ‘Insurance as a Tool for Reducing Natural Hazard Impact’, in N. Britton, J. MacDonald and J Oliver (eds.), Insurance Viability and Loss Mitigation: Partners in Risk Resolution, proceedings of a conference sponsored by Alexander Howden Reinsurance Brokers (Australia) Ltd (Brisbane: Griffith University): 211-24. Williams, F. (2002) ‘The unthinkable was insured—this time’, Financial Times, 11 September 2002.

11 An institutional comparison of two sectoral responses to the political economy of climate change Jesse Uzzell* DNV, Norway

As we near the start of greenhouse gas (GHG) emissions trading in the USA and Europe, and a possible entry into force of the Kyoto Protocol, it is interesting to look back to compare the responses from industry. This chapter will focus in particular on the responses from companies in two different sectors of industry: cement and petroleum. Both sectors have many elements in common. For example, they have both contributed substantially to infrastructure development and wealth creation; both sectors are characterised by distinct and conservative business cultures; both sectors are dominated by a handful of companies that have undergone major consolidation at the international level; and both sectors are major global emitters of greenhouse gases. The goal of this chapter is to shed light on the different paths these two CO2intensive industries have taken on the issue of climate change through the lens of institutional theory as presented by DiMaggio and Powell (1983), Meyer and Scott (1992), Oliver (1997), Hoffman (2001) and others. Institutional theory offers insight into how organisations behave at a macro level. Much of institutional theory focuses on the influence that ‘external stakeholders’ can have on an organisation. Thus it is useful for examining the drivers behind the responses of the cement and oil and gas sectors to the issue of climate change. Andrew Hoffman, in his institutional history of corporate environmentalism, combined the concepts from new and old institutional theory to explain how events trigger realignments of the organisational fields to which companies belong. Once

*

I would like to express thanks to the KLIMATEK Programme at the Norwegian Research Council and to DNV for supporting my PhD research, on part of which this chapter is based. I would also like to thank Howard Klee of WBCSD, Steve Sawyer of Greenpeace, Jean-Paul Jeanrenaud of WWF and Chris Boyd of Lafarge for their insights into these industries.

11. an institutional comparison of two sectoral responses Uzzell 167

this field shift takes place the institutional structures and rules which were set in place through isomorphic behaviour are reset to reflect the political interests of the newly (re-)formed field. Periods of stability and isomorphic behaviour are interspersed between these events. Hoffman coined this ‘cyclic behaviour dynamic isomorphism’ (Hoffman 2001).

Overview of the cement and oil and gas sectors The oil and gas industry is synonymous with climate change. It will not be possible in this chapter to give proper justice to the history of the oil and gas industry and its role in the climate change debate. However, some main issues will be mentioned in order to set the context. The oil and gas sector has undergone a series of mergers during the last decade which has resulted in five ‘supermajors’. The five oil companies commonly classified as supermajors are ExxonMobil (Esso), BP (formerly British Petroleum, Amoco and Arco), Royal Dutch/Shell (Shell), TotalFinaElf and ChevronTexaco. The main GHGs from these companies are CO2 and methane from the exploration, production and refining of petroleum products and gas. Table 11.1 gives an idea of the scope of the GHG emissions from these corporations and their products, which rival the emissions of major industrialised countries. Table 11.1 also illustrates the economic might these companies represent: the annual 2001 turnover produced by the half a million people in these companies is slightly more than half the GDP of the UK or France. The responses of the supermajors (or their constituent companies prior to merging) to the issue of climate change policy have evolved from a collective defence to a publicly visible rift. Fossil fuels were immediately identified as a source of the global warming problem. This resulted in the industry collectively lobbying hard and very publicly against climate change policies in the US and internationally, through associations such as the Global Climate Coalition (GCC) and American Petroleum Institute (API) (Beder 2001). The European-headquartered supermajors, spearheaded by BP and Shell, were the first to publicly recognise that actions should be taken to reduce GHG emissions. The BP and Shell statements were eventually followed by specific group GHG targets in 1998 (Table 11.1), followed by the creation of internal emissions trading systems and the independent verification of their annual group emissions. Both BP and Shell have invested strongly in solar energy and other renewables. TotalFinaElf has recently joined BP and Shell in making emission reduction commitments, though it has opted for intensity targets in its petroleum group as opposed to total emission targets. The behaviour of TotalFinaElf has been less public and attracted less attention than BP and Shell, mainly because of its predominantly neutral engagement in the issue (van den Hovea et al. 2002). In the USA, ChevronTexaco (2002) has not made any specific group targets or published GHG statistics, but states that it is ‘responding to the concern about climate change with a four-fold plan of action’. ChevronTexaco is a member of the World Business Council for

a A rough estimate made by assuming that 85% and 100%, respectively, of the annual oil and gas production is combusted and that 3.08 tons of CO2 per metric ton of crude oil and 1.95 tons of CO2 per 1,000 cubic metres of natural gas are released during combustion. Note that this estimate does not include emissions from crude oil stocks purchased from external suppliers, the inclusion of which could add substantially to the product emissions.

table 11.1 The size of the problem: annual CO2 emission estimates for the five supermajors, compared with emissions from selected countries Sources: Shell, ExxonMobil, TotalFinaElf, ChevronTexaco and BP emissions data and reduction targets from the respective companies’ 2001 annual reports and Internet sites during October 2002. National data quoted from the 2002 CIA Factbook. Carbon dioxide emissions data is for 1999 (except for Mexico which is 1998) from the latest UNFCCC National Communication.

11. an institutional comparison of two sectoral responses Uzzell 169

Sustainable Development (WBCSD) and takes part in the activities of the Energy and Climate Programme along with BP, Shell and other companies. In essence, ChevronTexaco is walking a middle-road when one compares the rhetoric and actions. ExxonMobil has published its group GHG emissions on its website, but otherwise its recent approach is consistent with its pre-Kyoto Protocol stance: emphasise the uncertainties involved in climate change, and delay any action to curb or limit GHG emissions. ExxonMobil has received support for this position within the Bush Administration, the US Congress, and the US petroleum industry (Skodvin and Skjærseth 2001). ExxonMobil’s climate change strategy has been described by one reporter as being founded on the idea that if the problem is proven to be real then it will buy the technology or companies it needs to solve the problem (Vaitheeswaran 2001). By not changing its stance on climate change, ExxonMobil has become increasingly scrutinised by its shareholders over these policies (Mansley 2002) and has been painted as the number one threat to proactive climate policy by environmental NGOs (Greenpeace International 2002). In their analysis of oil company responses to climate change, Levy and Kolk (2002) point out that US-headquartered ExxonMobil and ChevronTexaco management (prior to mergers) both had bad experiences with renewable energy investments in the 1980s. The lessons of the incurred losses prejudiced these managers against the business case for renewable energy. Lacking such history, BP and Shell management have been more open-minded in their approach to the issue. On 20 November 2002 ExxonMobil made an announcement that could signal a change in direction: a US$100 million grant to Stanford University’s Global Climate and Energy Project. Together with corporate sponsors General Electric, Schlumberger and EON, the initial research of this project will focus on hydrogen technologies, advanced combustion systems and sequestration technologies. Presently it appears that this does not represent a real shift in climate change policy, but more of an alignment with Bush administration policy and public action to quiet critics.

The cement industry CO2 is the primary greenhouse gas emitted by the cement industry. It is emitted directly on-site through fuel consumption and off-site through electricity usage at the facilities, which accounts for roughly 45% of CO2 emissions. Another 50% is emitted through the calcination of the limestone to form ‘clinker’, the main constituent of Portland cement. Other activities, such as transport, account for the remaining 5% (Humphreys and Mahasenan 2001). It is not possible to produce cement from limestone without emitting CO2. Furthermore, an often-quoted statement is, ‘Cement is the key constituent of concrete, which is the second most consumed material on the planet.’ If true, this point clarifies the scale of the impact that cement consumption and its byproducts have on the planet.

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The cement sector contributes an estimated 5%1 of the industrial CO2 with the trend in emissions increasing steadily, primarily in the developing countries. Cement production is very energy-intensive because it is necessary to roast the limestone at 1450°C; therefore 30–40% of the production cost of clinker can be attributed to energy consumption. Similar to the oil and gas sector, the cement sector has undergone tremendous consolidation during the last decade. Table 11.2 lists the ten major cement manufacturers taking part in the WBCSD’s Cement Sustainability Initiative, which produce about a third of the global production. Approximately another third of global production resides within China, which primarily uses kilns with outdated technology. The rest of the global production is manufactured throughout the world by local or regional suppliers. A recent industry study reports that the global cement industry emissions in 2000 were 1.4 billion tons of CO2 equivalent for the 1.57 billion tons of produced cement (Humphreys and Mahasenan 2001). This corresponds to approximately 25% of the CO2 emissions from the USA, or the total combined CO2 emissions from France, Germany and the UK.2 If one assumes that 30% of the global cement industry CO2 emissions, or 420 million tons, are attributable to the ten companies in Table 11.2, then these emissions are comparable in size to the direct emissions from the five oil and gas supermajors listed in Table 11.1. Therefore, the cement industry is a major global emitter of greenhouse gases and will face significant challenges if limits are imposed. Historically the cement sector has not been visibly involved in the climate change debate. The American Portland Cement Alliance was a member of the GCC, and Cembureau, the European cement manufacturers’ association, is active in lobbying the EU on climate change issues. Only in more recent years has the cement industry made headlines regarding climate change. In a well-orchestrated effort, the ten major cement producers in Table 11.2 released their Agenda for Action at the World Summit for Sustainable Development (WSSD) in Johannesburg (WBCSD 2002). Their co-operative approach to sustainable development issues was fostered through the Cement Sustainability Initiative at the WBCSD. This project was started in 1999 in the Cement Working Group and finished its scoping stage with the release of an industry study from the Battelle Institute (Battelle 2002), which forms the basis for their Agenda for Action. In June 2003 it was announced that two more cement companies had joined the project: Titan, headquartered in Greece, and CRH of Ireland. The agenda’s vision of the cement industry by 2020: Cement companies have integrated sustainable development into their global operations, are known as leaders in industrial ecology and innovators in carbon dioxide management, are regarded as attractive employers, and have established relationships of trust with the communities in which they operate.

1

2

The actual estimate has undergone debate, with estimates slightly above and below this number. See New Scientist 1997; Global Cement and Lime 2002. See also Humphreys and Mahasenan 2001. Based on 1999 GHG inventories from the Third National Communications to the UNFCCC (United Nations Framework Convention on Climate Change) Secretariat.

table 11.2 Published annual CO2 emission estimates in millions of tons for the major cement manufacturers who are part of the WBCSD Sustainable Cement Initiative

Sources: Direct emissions data and reduction targets from the respective companies’ 2001 annual reports and Internet sites

25,500

35,846

Holcim

CEMEX

HeidelbergCement

17,426

Italcementi

5,600

Votorantim Cement

3,022

8,084

557

3,636

7,535

1,241

5,992

6,923

8,085

1,306

−473

19.1

179.9

246.4

123.6

506

1,331

611

1,041

Net profit/ income 2001 ($ million)

16 production

29.5 sales in Japan only

24.2 production

39 production

20 capacity

16.7 sales

45 sales

80 capacity

84.3 sales

87.6 production

Annual cement production/sales or capacity for 2001 a (million metric tons)

not reported

18.7

not reported

not reported

not reported

not reported

34.3

not reported

40.0

45.0

Direct CO2e equity emissions 1990 (million metric tons)

not reported

not reported

not reported

not reported

2.43 (UK only)

not reported

29.4

not reported

56.0

45.0

Direct CO2e equity emissions for 2000 (million metric tons)

No

No, energy reduction target of 3% by 2010

No

No

No

No

No

No

Yes, 20% CO 2-specific reduction (perton of cement produced) from 1990 to 2010

Yes, 20% CO 2-specific reduction (per ton of cement produced) from 1990 to 2010

GHG reduction commitment

a Most companies did not report cement production but instead cement sales and/or production capacity. Actual annual production is less than cement sales and capacity.

2,605

Taiheiyo C ement

Siam Cement Company

34,064

RMC Group

5,974

47,362

Lafarge

Cimpor

83,000

Company 12,270

Annual Total turnover employees 2001 ($ million) 2001

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Climate change and CO2 management figure high on their stated agenda, with the members committing to group- and company-specific actions. To date only Lafarge, Holcim and Heidelberg Cement have released group-wide GHG inventory data, and only Lafarge and Holcim have made GHG reduction commitments. According to their Agenda for Action schedule, all ten of the companies will produce GHG reduction targets by 2006. Reducing GHG emissions will be particularly challenging for Japanese firms (currently only Taiheiyo Cement is part of the cement project) as their CO2 emissions per ton of cement are the lowest in the world and have not changed since 1990. While the overall ambition of these cement companies is high, as a group their actions on GHG emissions significantly lag behind the leaders in the oil and gas sector.

Data sources To receive more historical insight into the normative values of the two industries, a review of oil and gas and cement industry trade journals was undertaken. The journals selected were the Oil and Gas Journal, published weekly in the USA, and the International Cement Review, published monthly in the UK. The time period of interest was from 1990 to 2001. A review of Greenpeace Business was also undertaken to gain insight into the interaction between these two sectors and the organisational field of climate change activism as represented by environmental NGOs. Greenpeace Business (GB) is published on a bi-monthly basis from the NGO’s London office. The first issue was published in June 1991 with the following introduction (abridged): Greenpeace Business will be read by more than 2000 corporate decision makers, investors, city analysts and the business media. We do not expect readers to accept our positions 100%, but we do feel that by providing you with a clear vision of our campaigning agenda, you will be in a much better position to respond positively—not simply to satisfy Greenpeace or just to improve the environment, but as a measure of enlightened selfinterest.

Greenpeace’s publication was selected because Greenpeace has a more confrontational agenda than some NGOs and spends much of its efforts on campaigns against selected businesses and industries. At the same time, Greenpeace Business is a unique publication among the international environmental NGOs because through it Greenpeace simultaneously offers a hand of partnership to the main audience: business. It thus makes an interesting, but by no means comprehensive, candidate to study the diverse organisational field of environmental NGOs and their interaction with business. Any article or news brief that mentioned climate change issues, global warming, greenhouse gases and so on was identified in the three publications to produce basic statistics and articles for review.

11. an institutional comparison of two sectoral responses Uzzell 173

Analysis and results The oil and gas industry Figure 11.1 shows the normalised number of articles mentioning climate change issues in the Oil and Gas Journal and Greenpeace Business. It is not relevant to compare the annual number of articles between the two publications because one is published weekly and the other bi-monthly. What is interesting is the trend in the coverage from year to year. In OGJ there are three upward trends in the coverage of climate change which correspond to three major international events: the first Earth Summit in Rio de Janeiro in 1992, the Kyoto Summit in 1997 and the Bush administration’s rejection of the Kyoto Protocol in 2001. Less pronounced but corresponding trends are also seen in the coverage of Greenpeace Business. These trends should not come as a surprise to anyone who is involved with climate change. What is more interesting is studying how the issue is portrayed in the publications over time. In July 1990 an article quoted John Collins, then the next chairman and chief executive of Shell UK, as having ‘no doubts when he named global warming as the biggest challenge facing the energy industry’. He was also quoted as saying that the ‘consequences of man made global warming are so worrying that concerted international action is clearly called for’ (OGJ 1990). Such a statement conflicts with 6 OGJ: GHG articles/52

5

GB: Oil and gas articles/6 GB: GHG articles/6

4 3 2 1 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 The number of articles was normalised by dividing by the annual publication rate (i.e. 52 issues per year for OGJ and 6 issues per year for GB).

figure 11.1 Trends for the number of articles mentioning climate change or GHG issues from 1990 to 2001 in the Oil and Gas Journal (OGJ) and Greenpeace Business (GB). The trend for articles mentioning the oil and gas sector (or companies) in Greenpeace Business is also shown

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the business of climate change

the widely held notion that industry was unified against global warming policies in 1990. Overall, the OGJ treatment of climate change in 1990 was not emotional and tended to focus on the costs, possibility of carbon taxes and the uncertainties in the science of global warming. That tone did not last long, however. In 1992 the rhetoric heated up with editorials and articles aimed at informing the industry of the poor science and politics of global warming (OGJ 1992): The build-up to June’s Earth Summit in Rio de Janeiro is generating demands that the White House join an international panic over global warming. Bush has resisted the stiff carbon tax touted as a remedy, calling instead for better understanding of the alleged problem. This is global leadership, and Americans should be grateful. A carbon tax would be another economic disaster rooted in pseudoscientific fear-mongering, of which the US has had quite enough. All that is certain about global warming is that scientists can’t agree on the nature or extent of the problem—or even whether a problem exists. Last week, for example, former Washington Gov. Dixy Lee Ray, a scientist and author, called global warming a myth. Yet the European Commission proposes a stiff tax on fuels containing carbon, wants the US to share the sacrifice, and will use the Earth Summit for moral leverage. Nothing would benefit Planet Earth more than an Earth Summit that collapsed under its own weight . . . The prospects are not dire. Temperatures rise and fall all the time, all over the world, and have for millennia. If human activity plays some role in these extremely complex temperature swings, so what? Why should any temperature change that might result from human activity be treated as more threatening than change that would have occurred anyway? . . . By standing firm against the anxious global warming crowd, President Bush is declaring that enough is enough. The US and the rest of the world cannot afford to spend money on each and every theoretical environmental alarm. The world has real problems—problems that science can measure and test, problems that do deserve some diversion of economic resources. So far, global warming isn’t one of them.

The OGJ editorial board (and certainly a good percentage of their readers) represent what one could call ‘American free-market energy policies’. Before the collapse of Enron and WorldCom and other corporate scandals, the prevailing ideology in business circles was that unregulated global markets were sacrosanct. In the US at least, cheap energy supply is linked to issues of economic growth, capitalistic freedom and political sovereignty. Climate change policy is a direct affront to these ideals, as the following quote from 1993, entitled ‘Industry must Avoid Gas vs. Oil Civil War’, will illustrate (OGJ 1993): The political case against oil consumption is weak. Most of it now centers on oil’s environmental disadvantages, which are grossly exaggerated… The other environmental rap on oil—its role in alleged global warming— hinges on computer models and assumptions that don’t hold up under scientific analysis. . . . And where’s the consumer in all this? Market freedom, benefits of which by now should be beyond question, implies consumer choice. Yet all possible government efforts to suppress oil use in favor of pet alternatives would reduce or distort choices available to individuals. Such an

11. an institutional comparison of two sectoral responses Uzzell 175 undemocratic step isn’t worth taking for the sake of doubtful environmental gains and security interests that the government refuses to pursue in other, more meaningful ways. Furthermore, the inefficiencies of nonmarket fuel selection would hurt the economy. . . . Gas producers and pipelines must not support the flawed environmental litany against oil in pursuit of market advantage; bad science eventually hurts everyone. . . . Above all, industry and government both must keep in mind the paramount rights of US consumers to act in their own economic interests, as they see them. In any civil war that oil and gas interests fight on government turf, the first casualties will be economic freedoms of individuals. The industry doesn’t need that kind of blood on its hands.

Judging from the views expressed in OGJ, companies and personnel that spoke in favour of natural gas on the grounds of reducing CO2 emissions, or acknowledged the need for limits on GHGs, faced the possibility of being ostracised by their peers. Such institutional pressure supports the status quo. By analysing the organisational field of the oil and gas industry from the lens of institutional theory, one can explain the change in policies of some of the supermajors using dynamic isomorphism. If the defining ‘event’ during that period was the Kyoto Protocol Summit in December 1997 then one can argue that this event, supported by evidence in Figure 11.1, caused a shock in the oil and gas organisational field. Realignment was made possible by these new circumstances, and new values could be legitimised as sketched in Figure 11.2.

Proactive climate change policies

‘American’ freemarket energy policies GCC API US senators

Environmental NGOs EU politicians TotalFinaElf

IPCC

WBCSD Renewable energy companies

BP ExxonMobil Shell ChevronTexaco IETA

API = American Petroleum Institute; GCC = Global Climate Coalition; IETA = International Emissions Trading Association; IPCC = Intergovernmental Panel on Climate Change; NGO = non-governmental organisation; WBCSD = World Business Council for Sustainable Development BP and Shell find legitimacy with other stakeholders by embracing proactive climate change policies. Other companies within the oil and gas field start to follow the first movers and the centre of gravity in the oil and gas field shifts to align with new legitimising values.

figure 11.2 Searching for a ‘licence to operate’ in a new organisational field

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the business of climate change

But is this model too simplistic? By focusing on a defining event does it ignore the possibility of a slow evolutionary process? Not really, because dynamic isomorphism is built on the foundation of institutionalism which often theorises about longer-term interactions between organisations. Organisations can have differentiated attention when the different organisational fields to which they belong have competing or conflicting demands (Hoffman 2001). Institutional pressures that affect the oil sector’s response to climate change can be classified as divergent or isomorphic; these pressures can operate independently, and wax and wane at different times. Levy and Kolk (2002) state that the divergent pressures impacting the oil sector stem from each firm’s home-country environment and organisational history; sources of convergent/isomorphic pressure are ‘participation in the global petroleum industry and the climate change issue itself’: that is, the emerging organisational field of proactive responses to climate change. During the 1990s, and continuing today, the five supermajors were constantly interacting with environmental organisations, business associations and regulatory bodies through their HSE, policy and PR departments. This interaction is reflected in Greenpeace Business. Examining GB in Figure 11.1 shows a consistent trend of targeting the oil and gas sector. At the highest points in 1998 and 2001, the number of articles mentioning the oil and gas industry represented approximately one-quarter of the annual articles. Published contact between oil companies and Greenpeace was not limited just to protests. Greenpeace instigated a consistent campaign to influence oil companies to invest in renewable energy and to commit to a new ‘carbon logic’. The famous Brent Spar incident occurred in 1995 and was a milestone event for Greenpeace: it forced the oil companies to admit that Greenpeace (and by extension other NGOs) were a force to be reckoned with, even if they did not represent a ‘logical’ force in the eyes of the industry. Not logical because industry and UK authorities had followed the applicable laws, guidelines and scientific advice, but had not considered principles other than regulatory and scientific. For an industry predicated on engineering analyses and quantitative decision-making the public outcry and disregard for industry’s evidence came as a surprise. The fallout from the Brent Spar influenced industry’s approach to climate change in two ways: • The public debate would be fought by focusing on principles in anti-Kyoto campaigns, e.g. unfair agreement, economic freedoms at stake, and so on. • The public would support cautionary principles for the environment even in the face of conflicting evidence from industry. One reason for the success of the Greenpeace campaigns is the negative perception the public has regarding the oil and gas companies, making them easy targets for NGO protests. In 2002 industry still recognises the image problem and the disadvantage it brings into environmental debate (OGJ 2002): The other area that needs work is the ideological disadvantage the industry drags into every political fight. To most of the US, oil and gas companies are alien and suspicious. Most Americans see no connection between affordable, secure supplies of energy and the activities of oil and gas companies.

11. an institutional comparison of two sectoral responses Uzzell 177 That must change. And the change requires money, people, and persistence. Until it happens, comprehensive energy legislation reasonably free of ethanol mandates, global-warming placebos, and other expensive distractions will remain an elusive goal.

In a revealing article entitled ‘Campaign Strategy: What Drives Greenpeace Forward’ from 1996, Greenpeace gives insight into why the oil industry is one of its main targets (Greenpeace Business 1996): Because Greenpeace’s strategy is one of acting on values that create an imperative or action, Greenpeace has no prescription of environmental remedies as its vision . . . Many technological and social solutions to environmental problems are known but not implemented. This deliberate neglect is as much an abuse of power as is direct destruction. Consequently, the major environmental task is shifting from demonstrating the existence of problems to implementing solutions. . . . Whereas many environment groups work by analysing environmental problems, Greenpeace analyses the systems of power which lead to such problems and tries to intervene to change the direction of powerful influences such as major industries.

Some inferences can be made from these last two quotes: • Greenpeace repeatedly targets the oil and gas industry for campaigns because of the perceived political power it wields and not necessarily because of its environmental record. • This message resonates with the general public which in turn may force oil and gas companies to spend even more on campaigns to improve their image and influence political debate. The ideology and circular logic inherent in the above opinions is reminiscent of arguments supporting the arms race during the Cold War. The power from industry originates within the technical dimension while for NGOs it originates within the institutional dimension. Because environmental policy debate is played out primarily within the institutional dimension, Greenpeace, and others like it, can successfully challenge what would appear to be much more powerful organisations. An important aspect of the ideological Greenpeace position as outlined in Greenpeace Business is its consistency over time. In 1992 GB listed halting global warming as one of its top campaigning areas, and reported about Shell’s ‘schizophrenic environment policy’: that is, corporate activities inconsistent with its environmentally concerned CEO, John Collins (Greenpeace Business 1992). Greenpeace also attempted to pressure fossil fuel companies to support renewable energy and reduce emissions through long-term dialogues with institutional investors and insurance companies. Some insurance companies were particularly sympathetic to the cause owing to fears about their long-term financial exposure. Greenpeace UK also started Greenpeace Business Conferences in order to foster dialogue between companies and Greenpeace. Reinforced by earlier statements from the leaders of BP and Shell that they had determined precautionary action would be necessary to combat possible anthropogenic climate change, Greenpeace started its most serious anti-fossil fuel efforts to date in mid-1997 (Greenpeace Business 1997):

178

the business of climate change Because politicians are failing, Greenpeace must act. Preventing ecologically and socially catastrophic climate change means: limiting total global use of fossil fuels, burning no more than half the existing oil reserves already known, and halting any further new oil exploration activities world-wide.

It is difficult to imagine how the oil industry could not take this as a ‘call to arms’. If there was any doubt about Greenpeace’s intentions towards their industry then this ended them. But an interesting thing happened: despite the intense lobbying of industry the Kyoto Protocol was signed in December 1997, and the European supermajors started revising their stance on climate change in earnest. A (temporary) victory had been won for the environmentalists (again). This process fits the major models of institutional theory. In the case of BP and Shell, it was deemed that their future ‘licence to operate’ meant superseding mainstream ‘free market energy policy’ demands with proactive climate change policies to which Greenpeace and EU governments belong. Some industry pundits thought such action was crucial to adapting to future challenges and supported their new imperative to evolve from ‘oil companies’ to ‘energy companies’. In an article entitled ‘Climate change issue a litmus test for oil company survival’, David Knott, Associate Chief News Editor of OGJ, likened Exxon and other oil companies that rejected global warming outright to the next dinosaurs, while Shell and BP would be like the ancestors of today’s birds and survive by embracing the precautionary principle and transforming (Knott 1999). Such a transformation will not happen overnight, nor without internal struggle (Skodvin and Skjærseth 2001) or criticism from the industry itself, as reflected in this bitter editorial (OGJ 2000): Collapse of climate-change talks in The Hague last month gives the oil and gas industry a reprieve but no reason to rest. Political forces supporting the probably doomed Kyoto Protocol have not subsided. Pressure builds to sacrifice human well-being to alarmist speculation. And the oil and gas industry remains divided. . . . Inevitably, companies oblige their governments. Some European companies, therefore, support Kyoto. For taking that position, they will receive no encouragement here until scientists can provide greater assurance than is now possible that Kyoto sacrifices would represent valid responses to a real problem. . . . The problem with Kyoto has never been its threat to petroleum markets. It is instead the way Kyoto and climate-change politics have discounted science and skewed discourse on behalf of state manipulation of people. A world governed by orders to suspend scientific doubt in service to communal notions of righteousness benefits neither the oil and gas industry nor its customers. This unapologetically American concern for personal liberty needs attention as a diminishingly American business works to repair its ideological rift.

Not long after the above editorial was written, the ‘American free energy market’ supporters (oil companies being major contributors) produced their trump card with the Presidential election of George W. Bush, Jr. Little time was wasted by the Bush administration in rolling back environmental legislation, including the rejection of the Kyoto Protocol. Unexpectedly, Bush’s actions galvanised international

11. an institutional comparison of two sectoral responses Uzzell 179

support for the Kyoto Protocol, and the negotiations brought an affirmation of the rest of the world’s commitment at COP 6bis, and later at COP 7 in Marrakech. Currently, companies and NGOs taking a proactive stance regarding emissions trading in the USA and Europe are discussing how to bridge this transatlantic divide. At the other extreme, ExxonMobil has been singled out by Greenpeace as the premier enemy of the Kyoto Protocol and a ‘StopEsso’3 campaign was launched in 2001 which continues today. In contrast to ExxonMobil, BP and Shell are regular presenters at environmental and emissions trading conferences. At these events, BP is quick to point out that it has now met its targets ahead of schedule and with a financial gain of over US$750 million (Grohmann 2001). The European supermajors are now instructing the rest of the oil industry, and other sectors, on sustainable development and corporate social responsibility (OGJ 2002). Overall, BP and Shell have received much NGO and political goodwill through their engagement on the global warming and sustainable development issues. There remain questions over how long this goodwill will last because of the following points: • Renewable energy investments are dwarfed by BP and Shell’s commitments to continued fossil fuel exploration (Austin and Sauer 2002). • There is no appreciable difference between BP, Shell and ExxonMobil with regard to the exposure of their current assets from future climate policies (Austin and Sauer 2002; Levy and Kolk 2002). In the opinion of Steve Sawyer of Greenpeace:4 If you look at the big three, at what they say, and the role that they play politically, and fortunately or unfortunately in 2002 that’s really important, there is a big difference between Shell and BP on the one hand, and ExxonMobil on the other. If you look at what they do they are pretty much alike.

Such assertions, however, do not preclude co-operation where there is common ground. For example, Steve Sawyer and Charles Nicholson from BP shared another type of platform when Greenpeace and the WBCSD called for governments to adopt a common framework to combat climate change at the World Summit for Sustainable Development in Johannesburg (Greenpeace 2002). Furthermore, it is incorrect to think that ExxonMobil is not hedging its position for the future through its assets and participation in industry climate change initiatives: for example, participating in the development of IPIECA’s Petroleum Industry Guidelines for Reporting Greenhouse Gas Emissions (IPIECA 2003). ExxonMobil cannot ignore the upcoming EU ETS (emissions trading scheme), and is taking steps to prepare for it and manage its exposure in Europe. Therefore, the challenge for BP and Shell is to translate policy and actions beyond risk mitigation, and into additional real or perceived shareholder value when

3 4

Esso is ExxonMobil’s corporate name in many countries outside of the USA. Personal interview, Amsterdam, 11 December 2002.

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the business of climate change

compared with the other oil supermajors.5 In the recent words of Lord John Browne (2003) to a meeting of institutional investors: The actual or perceived consequences of human activity on the global climate—what is generally called climate change—matter to BP because we’re interested in the long term sustainability of what we do. We want to be able to continue to sustain our core activity—applying our skills and experience to produce and develop hydrocarbons. The interest in sustainability is driven by our shareholders who are predominantly pension funds. They look for sustainability in their investments—companies capable of regenerating their activity and their ability to produce revenue and wealth on a long term basis . . . As a business we need to be able to respond to the concern now, even if significant uncertainty exists. We have to take the appropriate steps in order to ensure that our business remains sustainable. That’s our starting point. It is now six years since we first acknowledged that precautionary action was necessary. Over those six years the work we and many other companies have done has given us confidence that business does have a positive role to play in the process. And it has given us the confidence that the future of oil and gas is secure and sustainable . . . The world’s need for energy continues to grow and we believe that oil and increasingly natural gas will remain the most significant sources of that energy for many decades to come.

The cement sector Compared with the oil and gas sector, the analysis of the International Cement Review showed a much lower recognition rate of the issue of climate change. Likewise, Greenpeace Business contained only two articles naming a cement company or the cement sector during the decade reviewed, both of which dealt with the issue of toxic emissions from waste burning in cement kilns and not greenhouse gases. This was unexpected considering the magnitude of sectoral CO2 emissions and the permanent linkage to the manufacturing process of Portland cement. Figure 11.3 compares the trends in the two publications. Note that there is no spike in the number of articles mentioning climate change issues in ICR. The average number of articles was around three per year with the largest numbers appearing in 1995 (5) and 2001 (8). To put this in perspective, a typical year of ICR would produce around 250 articles and news briefs. Unlike the oil and gas industry, a renewed interest in climate change was not evident in an increase of published articles in the trade journal during the period surrounding the Kyoto Protocol agreement. This does not mean that the issue was 5

The reverse also holds for ExxonMobil. As long as ExxonMobil receives reinforcement from the finance sector, e.g. share price and company ratings, for being the most profitable oil company in the world irrespective of public policy, then why change? The institutional pressure generated from the finance sector to conform to its values has an enormous impact on companies and society. The difference between risk perception and the support of broader values within finance is too broad a topic for this chapter. One starting point for interested readers is Greider 2003.

11. an institutional comparison of two sectoral responses Uzzell 181 2.5 OGJ: GHG articles/52

2

ICR: GHG articles/12

1.5 1 0.5 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 The number of articles was normalised by dividing by the annual publication rate (i.e. 52 issues per year for OGJ and 12 issues per year for ICR)

figure 11.3 Trends for the number of articles mentioning climate change or GHG issues from 1990 to 2001 in the Oil and Gas Journal (OGJ) and the International Cement Review (ICR)

forgotten by the industry, but suggests that it was not one of the primary concerns for cement management at that time. The few articles from this period mention the technical challenges, plans for reducing CO2 emissions and CO2 tax proposals in Japan and Germany (ICR 1997; Hargreaves 1997). Only one article mentions the Kyoto Protocol and portrays the issue in a positive manner: ‘These factors assist in meeting the requirements of the recent Kyoto Summit and contribute to making the world more sustainable for future generations’ (Boarder 1998). To verify whether this neutral attitude was reflected only in ICR, World Cement was searched during 1997/1998 for relevant articles. Only one article was found, entitled ‘Atmospheric CO2 and the US Cement Industry’, published a few months before the Kyoto Summit (Cahn et al. 1997). It outlined the history of the international political process, the technical factors related to CO2 emissions in cement production, and the stakes for the cement industry. The authors then conclude that, because options for CO2 reductions within the industry exist, this ‘builds a strong case for a voluntary proactive stance by the industry instead of a reactive one which may invite regulations or CO2 taxation’. The important point is that in 1997 people within the US cement industry were advocating a proactive approach to climate change, and that there was an absence of articles advocating resistance to possible policy measures. Cement trade journals, a reflection of the normative pillar of the organisational field, showed only minor interest in global warming and greenhouse gas emission limits that were facing the industry during the 1990s. One of the earliest mentions of global warming in ICR was an article covering the benefits of energy efficiency and some of the drivers behind its research in Japanese

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industry (Nakajima 1990). Japan had made improvements in energy efficiency by 1990 which gave it the best CO2 emission rate for cement in the world. Progress in this area was not made afterwards and the same CO2 emission rate continues today (Humphreys and Mahasenan 2001). A short ICR article from 1991 entitled ‘CO2: The Next Great Challenge’ raised a red flag for the industry, but follow-up in the trade journal was not very visible (ICR 1991). The vast majority of articles, which covered processes, energy improvements or environmental issues, did not follow up on this warning during the 1990s. On the other hand, many articles were published throughout the decade covering the burning of waste in cement kilns and the recycling of materials. Occasionally these issues were linked to CO2 savings but not on a consistent basis until the late 1990s. By then a few of the major cement companies had established groups researching industrial ecology or had even spun off separate companies that dealt with hazardous wastes and alternative fuels. So how and why did the cement industry move from an industry where there was apparently little focus on climate change issues, little NGO pressure and no obvious crisis, to an ‘enlightened’ industry taking a voluntary united stand on sustainable development and climate change? Some clues come from Geneva, Switzerland.

Geneva: a nexus for sustainable development? Since 1991 Geneva has been the headquarters for the Business Council for Sustainable Development (BCSD). The Swiss businessman Stephan Schmidheiny founded the original BCSD in 1991 as a response to the Earth Summit in Rio. At that time Stephan Schmidheiny was appointed to be the UNCED6 principal adviser on business and industry for Secretary-General Maurice Strong. Schmidheiny gathered 48 business leaders to form the BCSD. In January 1995 the WBCSD was formed by a merger between the BCSD in Geneva and the World Industry Council for the Environment (WICE) in Paris. From a membership of 48 companies in the BCSD in 1991 the WBCSD has grown to 160 member companies in 2001. The Schmidheiny family had controlling interest in Holcim Cement through Holderbank, where Thomas Schmidheiny was the chairman and managing director at the time. He is also Stephan’s brother and no doubt their activities were known to one another. According to Dr Howard Klee, the project manager for the WBCSD Sustainable Cement Initiative in Geneva, Lafarge was an original member of the WBCSD. Holderbank (parent company of Holcim) joined in 1999 and the council member for them was Thomas Schmidheiny. Around this time, WBCSD representatives7 from Cimpor (who had joined earlier), Holcim and Lafarge discussed setting up a cement sector project similar to that for paper and pulp industries. The pulp and paper

6 7

United Nations Conference on Environment and Development Rio de Janeiro, Brazil, 3–14 June 1992—a.k.a. the Rio Earth Summit. Representatives to the WBCSD consist of at least council members, typically CEO level, and liaison delegates, typically environmental directors or equivalent. Other company representatives can be involved in different projects and initiatives. Council members from Lafarge, Holderbank and Cimpor were, respectively, Bertrand Collomb, Thomas Schmidheiny and António de Sousa Gomes.

11. an institutional comparison of two sectoral responses Uzzell 183

sector project had begun the tradition of sectoral initiatives in the WBCSD in 1994.8 Cimpor had become very interested in sustainable development issues because of controversy in Portugal regarding burning of waste in cement kilns. These three companies set about recruiting the other cement companies and thus the Cement Project was born.9 Taiheiyo Cement in Japan was immediately interested in joining because of its long involvement with industrial ecology. What was the primary driving factor for other companies to get involved? ‘Peer pressure’, stated Noel Morrin, International Environment Director for RMC Group. According to him it was much easier to get key management approval and interest once he mentioned that Lafarge and Holcim were involved.10 In addition to the Sustainable Cement Project, Lafarge and Holcim are active members in the WBCSD Energy and Climate Programme, along with Shell, BP and ChevronTexaco. This programme explores solutions for the Kyoto flexible mechanisms, advocates ideas for enhancing renewable energy usage and sponsors stakeholder dialogues regarding climate and energy issues. Next door to the WBCSD is the International Emissions Trading Association (IETA), an organisation that fosters knowledge exchange regarding international and national market-based emissions reductions solutions. Lafarge, BP, TotalFinaElf, Cemex, Holcim and Shell are all active members. Another interesting Geneva connection is the Lafarge partnership with WWF International, based outside Geneva. What started as a ‘fairly serendipitous’ meeting in 1997 regarding an idea to plant trees for Lafarge employees, developed into participation in WWF reforestation projects, according to Jean-Paul Jeanrenaud from WWF. From this activity there was a rapid development in their relationship whereby WWF began advising on climate change and other environmental issues. This is the first and only heavy industrial conservation partner for WWF, and there was internal conflict over working with a ‘dirty company’. Others within WWF successfully argued that, without working with industrial companies such as Lafarge, how could they expect to solve the climate change problem?11 Their partnership is not without its conflicts, however. WWF does not entirely agree with Lafarge’s accounting of waste in its GHG inventory, and there is disagreement about a decision to develop a Lafarge quarry on the Scottish island of Harris. According to Chris Boyd of Lafarge, WWF ‘upped the ante’ considerably when it negotiated Lafarge’s GHG targets. In his opinion, the greatest benefits from the WWF partnership are the symbolic elements which aid in changing attitudes inside the company.12 From this brief history it appears that early discussions regarding issues of climate change had been taking place in high-level interactions between top indi8

9 10 11 12

There are currently six sector projects: forestry products industry; mining, minerals and metals; cement sustainability initiative; sustainable mobility; electricity utilities; and the financial sector. Source: www.wbcsd.org. Howard Klee, personal interview, Geneva, 3 September 2002. Noel Morrin, consultation at EyeForEnergy: Emissions Trading Europe 2002, Amsterdam, 20 February 2002. Jean-Paul Jeanrenaud, personal interview, Geneva, 5 September 2002. Christopher Boyd, personal interview, Brussels, 5 December 2002.

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viduals in a few key cement companies, and their personal networks played a strong role in the formation of their company’s stance on climate change. Interactions at this level were not captured by the reporting in the industry trade journal.

Conclusions Investigating the normative sphere through trade journals analyses only one of what Scott (2001) refers to as the three institutional pillars, the other two being regulatory and cognitive. No investigation of cognitive influences was undertaken here, and the regulatory regimes are still being formed at the national and international level. But the threat of GHG regulation has loomed over both industries during the entire time period of study. In 1997 there was a clarifying event for the future regulations facing the industries through the Kyoto Protocol national commitments. This sent a signal to both industries and at that point the normative values for each company were tested. Having already forged a visible collective response, the major oil companies could only reaffirm their commitment to it or abandon it. Even if climate change did not appear on the radar screen of many cement company managers prior to the Kyoto Protocol, it was more natural for the ten WBCSD companies to choose to engage with the challenge in a proactive manner for several reasons: • Energy efficiency and savings has always been a major focus of modern cement manufacturers because it is one of the few ways to increase profits and guard against fluctuating fuel prices. To this end, companies began experimenting with alternative fuels in the late 1980s and early 1990s, many of which are less carbon-intensive. Immediate steps and actions for CO2 reductions through alternative fuel usage were considered as familiar and already part of the industry culture by the mid-1990s. • By the late 1990s there were no longer any major American-owned cement companies. Therefore top management of these ‘sustainable’ cement companies saw primarily governments and stakeholders friendly to the idea of limits on GHGs and the impending legislation for such. • Ideological arguments and carbon taxes aside, the cement companies may have seen less of a threat from the Kyoto Protocol because the current and future growth markets for them are in the non-Annex I countries which have no GHG limits under the Protocol. This contrasts with the oil supermajors whose main markets for their products are in the Annex I countries. • Facing no public environmental NGO pressure to act quickly, cement companies did not face the same institutional pressure as oil and gas companies to respond publicly immediately following the Kyoto Protocol. This gave them time to develop a group strategy, which lowered their individual risk and the advantages/disadvantages of first-mover responses.

11. an institutional comparison of two sectoral responses Uzzell 185

Sustainable development became a buzzword in both industries by the end of the 1990s, with companies in both sectors beginning to explore what that meant to their operations and products. Owing to the nature of the concept, personnel in the companies could not discuss it in isolation but needed to expand their networks in order to engage with the issue. A natural ideological conflict between sustainable development and the anti-Kyoto policies held by mainstream elements of the oil industry caused oil company managers seeking to engage in sustainable development to look elsewhere for guidance and dialogue. Thus their interactions increased with like-minded people in business associations, with investors interested in ‘sustainable’ companies and with NGOs. Through this engagement they received more positive feedback from stakeholders than they could generate through lobbying campaigns. Even though it was a calculated strategic decision, the institutional pressures within the oil industry underscore that it was still a brave decision when BP’s management and then Shell’s announced their commitments to proactive climate change policies. The exploration and extraction side of the oil and gas business is inherently risky, more so than refining or cement production. The individual oil companies that decided to engage in reducing GHG emissions may have moved quicker because they had greater inherent capacity for managing risk-taking enterprises, and more experience in engaging stakeholders, than the cement sector. This is reflected in the more ambitious GHG reduction programmes and schedules undertaken by BP and Shell, and their greater progress to date compared with any of the cement companies. Many employees of BP and Shell feel encouraged by their engagement policies and actions to reduce emissions. They do not enjoy being portrayed as the ‘bad guy’ in society, especially since in the past oil companies were seen as positive forces for societal development. The leading companies in both sectors perceive real dividends in the recruitment and retention of quality personnel, and in the long run realise that younger recruits will look elsewhere for employment if they are not perceived as being engaged in sustainable development issues. Another tenet from institutional theory predicts what will happen in the oil and gas sector regarding climate change responses: the first movers and adopters of new structures will make cognitive changes, while the followers and laggards will tend to make symbolic changes that do not modify the cognitive values of the company (Hoffman 2001). Even within the WBCSD cement group there are leaders and followers; which end of this spectrum will dictate the progress of this project is not known but will require further observation. Even though the progress of the individual WBCSD cement companies lags behind that of BP or Shell with regard to GHG reductions, in fairness it should be recognised that these companies are attempting the difficult task of merging different organisational field interests into a cohesive strategy on sustainable development. By tackling sustainable development through a collaborative effort and using the network of the WBCSD, these cement and oil companies are forming the structures of ‘metatextual organisations’.13 Their key leaders are beginning to act as ‘network 13

‘A metatextual organisation is . . . characterised by its engagement with a diverse set of actors from many communities of practice that do not necessarily have a economic motivation for sharing knowledge, for collaborative action and for adaptive behaviour’ (Roome 2001).

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champions’ who connect diverse communities in order to link up an action-learning network and become a force for change (Roome 2001). A forerunner of this metatextual model is also employed by NGOs such as Greenpeace and WWF through their networked organisational structure, and ad hoc industry and community interactions. It is interesting to note that, as industry copies structures from NGOs and vice versa through these ‘green alliances’, the power relationship between them may also shift (Arts 2002). Further research is needed in this area but some points can be suggested as follows. The shift in climate change strategy by the supermajors such as Shell and BP represents, among other things, a realisation that confrontation with NGOs becomes a vicious cycle. It is less costly to engage on environmental issues to seek solutions, or even to engage with NGOs in order to pre-empt or delay costly actions by them. This lesson was also learned by the cement industry through observation of other sectors and by limited experience through mainly local environmental issues. This suggests that, as multinational companies have become more adept at engaging stakeholders, they are also more adept at using the strategy of engagement and delay with NGOs inside or outside of their ‘green alliances’. For their part, NGOs such as Greenpeace and WWF,14 seem content to allow companies this small victory in order to obtain the envisioned greater environmental benefits; or, possibly, they have not solved how to properly defend against such strategies in a way that garners public support without destroying their alliances and/or proactive dialogues with industry. This is not to suggest that the majority of companies who engage with NGOs are insincere in their environmental efforts. Rather, the main struggle between them is often about the time-frames of implementation, and/or the superiority of market-based environmental solutions. As expressed by the publications reviewed, the progress and response of the oil and gas sector to the challenge of climate change policy fits the pattern posited by dynamic isomorphism. Some elements of the response of the cement industry can be explained by institutionalism. However, lacking outside institutional pressure or a crisis, the main drivers for co-operative action occurred at the highest levels in the industry and did not follow the same pattern as the dynamic isomorphism apparent in the oil and gas industry. One could argue that the Kyoto Protocol was the defining event for this sector, but its impact was not acknowledged by middle management in the cement sector to nearly the same degree as in the oil and gas sector. Therefore, a model for explaining the behaviour of the cement organisations ought to place emphasis on change agents or network champions as the central drivers. Finally, further research needs to be done to establish how these multinational companies prepare for a carbon-constrained future, and what lessons they have learned through their experiences so far. For example, what role do networks play in diffusing learning and innovations within companies and within/between sectors? How effective are they? How can such ‘green’ networks be promoted within

14

However, WWF recently sold its BP shares in protest at BP’s major investments in Russian oil fields and its business practices in Alaska. WWF International has also been criticised publicly by Friends of the Earth for its partnership with Lafarge, because of its planned construction of a ‘superquarry’ in the Isle of Harris in the Western Isles of Scotland, which local FoE and WWF offices oppose.

11. an institutional comparison of two sectoral responses Uzzell 187

companies that have substantial resistance to change and/or a culture of risk aversion and conservativeness?

References Arts, B. (2002) ‘ “Green Alliances” of Business and NGOs: New Styles of Self-Regulation or “Deadend Roads?” ’, Corporate Social Responsibility and Environmental Management 9.1: 26-36. Austin, D., and A. Sauer (2002) Changing Oil: Emerging Environmental Risks and Shareholder Value in the Oil and Gas Industry (Washington, DC: World Resource Institute). Battelle (2002) Toward a Sustainable Cement Industry (Geneva: World Business Council for Sustainable Development). Beder, S. (2001) ‘The Decline of the Global Climate Coalition’, Engineers Australia, November 2000: 41. Boarder, R. (1998) ‘Improving Performance’, International Cement Review, November 1998. Browne, J. (2003) ‘Climate Change’, transcript of speech for the Institutional Investors Group, Gibson Hall, Bishopsgate, London, 26 November 2003, www.bp.com. Cahn, D., W. Greer, E. Mikols and R. Moir (1997) ‘Atmospheric CO2 and the US cement industry’, World Cement, August 1997. ChevronTexaco (2002) ‘ChevronTexaco’s Position on Global Climate Change’, www. chevrontexaco.com/social_responsibility/environment/global_climate.asp, October 2002. DiMaggio, P.J., and W.W. Powell (1983) ‘The Iron Cage Revisited: Institutional Isomorphism and Collective Rationality in Organisational Fields’, American Sociological Review 48 (April 1983): 147-60. Global Cement and Lime (2002) ‘Climate Change and the Cement Industry’, Global Cement and Lime: Special Environmental Issue, 2002. Greenpeace (2002) ‘Traditional adversaries call for action on climate change’, Johannesburg, www.greenpeace.org/news/details?news_id=23790, 28 August 2002. Greenpeace Business (1992) ‘Shell: Schizophrenic Environment Policy Shows Signs of Cracking’, Greenpeace Business 5 (February 1992). —— (1996) ‘Campaign Strategy: What Drives Greenpeace Forward?’, Greenpeace Business 29 (February/March 1996). —— (1997) ‘Editorial. Why Rockall Matters: Preparing for a Future without Oil’, Greenpeace Business 38 (August/September 1997). Greenpeace International (2002) Exxon’s Weapons of Mass Deception (Amsterdam: Greenpeace International). Greider, W. (2003) The Soul of Capitalism: Opening Paths to a Moral Economy (New York: Simon & Schuster). Grohmann, W.-R. (2001) ‘Emissions Trading: The BP Experience’, presentation at the Swiss Re Conference: Reducing Greenhouse Gas Emissions, Zurich, 11 October 2001. Hargreaves, D. (1997) ‘International Report: German Cement’, International Cement Review, July 1997. Hoffman, A.J. (2001) From Heresy to Dogma: An Institutional History of Corporate Environmentalism (Stanford, CA: Stanford University Press). Humphreys, K.K., and N. Mahasenan (2001) Towards a Sustainable Cement Industry: Substudy 8: Climate Change (Conches–Geneva, Switzerland: World Business Council for Sustainable Development). ICR (International Cement Review) (1991) ‘CO2: The Next Great Challenge’, International Cement Review Asian Cement, November 1991. —— (1997) ‘Environmental Advances in Japan’, International Cement Review Asian Cement, January 1997.

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IPIECA (International Petroleum Industry Environmental Conservation Association) (2003) Petroleum Industry Guidelines for Reporting Greenhouse Gas Emissions (London: IPIECA).

Knott, D. (1999) ‘Climate Change Issue a Litmus Test for Oil Company Survival’, Oil and Gas Journal, 13 December 1999. Levy, D.L., and A. Kolk (2002) ‘Strategic Responses to Global Climate Change: Conflicting Pressures on Multinationals in the Oil Industry’, Business and Politics 4.3: 275-300. Mansley, M. (2002) ‘Risking Shareholder Value? ExxonMobil and Climate Change: An Investigation of Unnecessary Risks and Missed Opportunities’, Claros Discussion Paper, www. campaignexxonmobil.org, May 2002. Meyer, J.W., and W.R. Scott (1992) Organizational Environments: Ritual and Rationality (Thousand Oaks, CA: Sage). Nakajima, Y. (1990) ‘Energy Outlook in the Japanese Cement Industry’, International Cement Review, February 1990. New Scientist (1997) ‘The Concrete Jungle Overheats: Estimates of carbon dioxide emissions from one of the world’s growth industries have been grossly underestimated’, New Scientist, July 1997. OGJ (Oil and Gas Journal) (1990) ‘Watching the World Industry’s Biggest Challenge’, Oil and Gas Journal, 9 July 1990. —— (1992) ‘Editorial: Bush Standing Firm on Global Warming’, Oil and Gas Journal, 30 March 1992. —— (1993) ‘Editorial: Industry Must Avoid Gas vs Oil Civil War’, Oil and Gas Journal, 5 January 1993. —— (2000) ‘Editorial: The Collapse of Kyoto’, Oil and Gas Journal, 4 December 2000. —— (2002) ‘Editorial: Energy Bill Founders’, Oil and Gas Journal, 28 October 2002. Oliver, C. (1997) ‘The Influence of Institutional and Task Environmental Relationships on Organizational Performance: The Canadian Construction Industry’, Journal of Management Studies 34:1 (January 1997). Powell, W.W., and P.J. DiMaggio (1991) The New Institutionalism in Organizational Analysis (Chicago: University of Chicago Press). Roome, N. (2001) Metatextual Organisations: Innovation and Adaptation for Global Change (Rotterdam: Erasmus University, Centre for Sustainable Development and Management, 2 February 2001). Scott, W.R. (2001) Institutions and Organizations (Thousand Oaks, CA: Sage). Skodvin, T., and J.B. Skjærseth (2001) ‘Shell Houston, We Have a Climate Problem!’, Global and Environmental Change 11 (November 2001): 103-106. Vaitheeswaran, V. (2001) ‘What Responsibilities Does the Media Have, or Not Have?’, presentation at the Swiss Re Conference: Reducing Greenhouse Gas Emissions, Zurich, 11 October 2001. Van den Hovea, S., M. Le Menestrel, and H.-C. de Bettignies (2002) ‘The Oil Industry and Climate Change: Strategies and Ethical Dilemmas’, Climate Policy 2.1: 3-18. WBCSD (World Business Council for Sustainable Development) (2002) The Cement Sustainability Initiative: Our Agenda for Action (Geneva: WBCSD). Williams, B. (2002) ‘Oil Industry Adapting to Evolving New Paradigm on Corporate Governance, Accountability’, Oil and Gas Journal, 28 October 2002. WWF and Lafarge (2001) ‘Global Commitment by Lafarge to Reduce CO2 Emissions’, press release, 6 November 2001.

12 The chemical industry’s response to climate change Frans van der Woerd Vrije Universiteit, The Netherlands

This chapter compares climate strategies of six major corporations in the chemical industry. The chemical industry is dominated by large corporations that operate internationally and can be characterised as a process industry. Chemical companies contribute substantially to climate change, both directly in their production processes and indirectly in the life-cycle of their products. A major feature of the chemical industry is its heterogeneity: chemical companies produce a large variety of products, some in large volumes (e.g. basic chemicals, plastics, fertilisers) others in smaller volumes (e.g. colorants, healthcare). It is common to distinguish between bulk chemicals and speciality chemicals. Bulk and speciality chemicals differ substantially in technical, environmental and market properties. As the product mix of individual companies can be quite specific, one must always be careful in making generalisations. Table 12.1 presents core data for the six companies that were investigated. We included dominant companies, according to the Fortune Global 5001 list and a number of companies that produce hydrofluorocarbons (HFCs). We studied three large American and three large European corporations. In contrast to the big oil and automotive companies, chemical companies are not among the biggest corporations overall. In Europe, two German companies and one British company were selected. It would have been interesting to investigate corporations based in other European countries such as France or Switzerland as well, but they rank lower. Finally, we left out pharmaceutical corporations. From the selected companies, three (DuPont, Honeywell and ICI) produce HFCs. Before 1995 they produced CFCs as well. For these companies, we specifically investigated their strategies towards HFCs.

1

Internet information at www.fortune.com, May 2000.

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Name

Headquarters

Sales 2002 (US$ billion)

Employees

Major products

E.I. du Pont de Nemours

USA

24

78,000

Life sciences, materials, energy

Dow Chemi cal

USA

28

50,000

Chemicals, plastics, agriculture products

Honeywell

USA

22

100,000

Aerospace, automotive, engineered materials, fibres, plastics

Bayer AG a

Germany

27

117,500

Healthcare, agriculture, polymers, chemicals

BASF AG

Germany

30

93,000

Health, colorants, chemicals, plastics, oil/gas

ICI

UK

10

36,000

Speciality products, paints, additives, fragrances

a Bayer AG plans to split activities in 2004 into ‘New Co’ (polymers, chemicals) and Bayer (healthcare, agriculture).

table 12.1 Core data for selected chemical companies Source: Corporate websites in 2000 and 2003: www.dupont.com; www.dow.com; www.honeywell.com; www.bayer.com; www.basf.com; www.ici.com

Generic trends in USA and Europe The heterogeneity of the product mix in the chemical industry offers substantial room for company-specific markets and institutions. In this section we look for trends among and differences between US and European-based corporations. The most striking result for the chemical industry is that one cannot observe a generic antagonism of greenhouse gas (GHG) strategies between US-based companies and European-based companies. The US–Europe dichotomy, which can be observed in oil and—up to 1997—in automotive corporations, cannot be found in the chemical sector. USA-based companies range between most proactive (DuPont: prepares for CO2 emission trading and has set a 2010 target of 10% energy use from renewable resources) and most reactive (Honeywell: no stance on climate problem and ‘economic development has priority over environment’). The European companies are somewhere in between (a ‘wait and see’ policy for Bayer and ICI). In fact every company seems to have a specific stance. It is daunting to speculate where this diversity comes from: from the composition of business units, from history, from the CEO’s commitment? Looking at product strategy, DuPont and ICI are moving from bulk to speciality chemistry, Dow sticks to bulk products, Bayer and BASF stick to an existing combination of bulk and speciality chemistry, while Honeywell is in fact an outsider from the engineering industry. A proposition that producers of speciality chemicals are

12. the chemical industry’s response to climate change van der Woerd 191

less vulnerable to climate change policies and therefore will have a more proactive stance does not hold per se. Chief executives’ commitment certainly plays a role in certain cases. Examples are the proactive speeches of DuPont’s CEO Chad Holliday and Dow’s initiator in the eco-efficiency movement, Claude Fussler (Fussler and James 1996). In contrast, the German-based companies Bayer and BASF seem to be well organised but demonstrate few instances of related publicity and public statements of board members. Chemical companies on both sides of the Atlantic Ocean adhere to the Responsible Care initiative. This implies that chemical businesses have committed themselves to monitor environmental impacts and to publish environmental data. Does this support an easy comparison between the six companies? Until 2000, this was not the case (van der Woerd et al. 2000). However, after 2000 corporate practices show a convergence in reporting of GHG emissions. With regard to GHG target setting, companies remain different. As far as monitoring of GHG emissions is concerned, all companies except Honeywell monitor GHGs other than CO2 such as N2O, CFCs and HFCs. All companies except Honeywell now report on both CO2 and the sum of all GHGs. Since 2000, comparisons have become easier. What can be seen is that chemical corporations, combining several substances from the Kyoto basket, succeeded in achieving remarkable results in the 1990s: a reduction in GHG emissions of 30–68% in CO2 equivalents has been achieved (e.g. DuPont, Bayer, ICI). We can conclude that chemical companies are among the winners of the decision to include non-CO2 gases in the climate negotiations, because they provide them with much ‘low-hanging fruit’. In fact, successes as reported are mainly due to elimination of N2O process emissions and replacement of CFCs by HFCs. With respect to CO2, the overall picture is that energy savings are more or less offset by production increases (DuPont, Dow, Bayer, BASF). With regard to quantitative targets for reduction of GHG emissions, we see two different approaches. Some companies have relative targets for energy efficiency improvements (Dow, BASF, ICI); others provide absolute emission targets (DuPont, Bayer). All companies (except, again, Honeywell) provide targets for the Kyoto GHG basket. Again, the use of a specific format of targets is not related only to US or European companies. Instead, each company has developed its own system of targets. As growth in future production is uncertain, it is almost impossible to compare absolute and relative energy targets. DuPont is unique as this company has an explicit 10% target for use of renewable energy by 2010. We investigated whether the six corporations under review apply specific investment criteria for reduction of GHGs. It appears that most companies mention rather generic criteria such as improving energy efficiency or enlargement of cogeneration. Bayer uses gas instead of coal in its power plants as part of a strategy to lower CO2 emissions. Surprisingly little is published about actual investments in environmental protection, let alone about investments in energy savings and other climate change-related investments. Only DuPont and Bayer publish data about overall environmental investments. Finally, we present some examples of organisational innovations made by the companies under review. ICI introduced the Environmental Burden System for monitoring and reporting of emissions. For the topic of climate change, ICI’s system

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includes all GHGs and converts them into CO2 equivalents. Under Claude Fussler, Dow developed its Eco-Innovation Compass as a guideline for product development. Energy intensity of products is one of the six criteria for product development at Dow. Both ICI and Dow are moderately active with regard to climate strategies. This implies that innovative tools do not automatically bring about proactive strategies.

Economic situation and market positioning We mentioned above the heterogeneity of the product mix in the chemical industry. This heterogeneity has implications both for the energy dependency of the specific businesses and for market positioning. Generally speaking, bulk chemicals are more energy intensive (both as feedstock and as auxiliaries in production processes) than speciality chemicals. The market for speciality chemicals tends to be better than for bulk chemicals because there is a higher probability of growth markets and/or niche markets. This fact, combined with the fact that value added of specialities is higher than for bulk, implies that a product mix dominated by bulk chemicals is generally considered a weak point whereas specialisation in specialities is considered a strong point of a company. What evidence on product line acquisitions or diversification do we find? Of our six companies, two shifted from bulk to speciality chemistry (DuPont in the USA; ICI in the UK). The other companies stuck to their existing portfolio: Dow relies heavily on bulk chemicals; Bayer and BASF continued a mix of bulk and speciality chemicals; Honeywell produces speciality chemicals in a predominantly engineering company. In 2003, Bayer announced that it wanted to split bulk activities (polymers, chemicals) from speciality activities (healthcare, agriculture; Bayer 2003).2 It appears that the product mix strategy of the six corporations is quite companyspecific. Again, various strategies appear on both sides of the Atlantic. A USA– Europe dichotomy cannot be found. What specific changes in product portfolios to combat GHG emissions do the six companies mention? From what has been said above, it will be no surprise to find that DuPont (investment in biotechnology and life sciences; divestment in an oil company) and ICI (investment in speciality chemicals, food additives and fragrances; divestment in plastics) report important changes in their product portfolio and coinciding GHG emissions reductions. Interestingly enough, Bayer also decided on changes in its energy-related portfolio (investment in photovoltaic energy; divestment in oil feedstock). On a more tactical level, DuPont (renewable energy), Dow (cogeneration), Bayer (conversion of power stations from coal to gas, cogeneration) and BASF (cogeneration) indicate changes in their fuel mix. Honeywell is most unwilling to discuss policies to combat GHG emissions; while acknowledging that improvements in energy efficiency offer win–win options, ‘power output remains necessary for sustainable economic development’. 2

Internet information at www.bayer.com.

12. the chemical industry’s response to climate change van der Woerd 193

Three of the six corporations under review—DuPont, Honeywell and ICI—produce HFCs as replacements for CFCs. With regard to HFC production, all three producers state that they are committed to continue production. The reason is that they consider HFCs the best available substitute for CFCs. We did not find initiatives for early replacement of HFCs by substitutes with less impact on climate change. However, in order to limit HFC emissions all three HFC producers invest in process optimisation and in recovery/recycle schemes for customers. In this context, BASF mentions a replacement of CFCs by pentanes instead of by HFCs.

Regulatory context USA policy-making is characterised as legalistic, based on technical arguments,

while European policy-making shows a more consensual style based on political arguments. Can we recognise this difference in the public stances of chemical corporations? All companies except Honeywell have public stances on climate change on their websites and in environmental reports. Interestingly enough, USA-based DuPont and Dow are more pronounced in support of climate policies than the more reserved European-based Bayer, ICI and, to a lesser extent, BASF. Also with regard to the economic consequences of GHG emission reduction policies, DuPont and Dow are more positive than Bayer and ICI. In a US–Europe comparison, basic positions of the chemical industry do not follow those found, for example, in the oil industry. How can such a contrast be explained? A first possibility is that some chemical companies are more keen than others to utilise sector-specific opportunities through a change in the product mix or by showing a favourable emission history including non-CO2 GHGs such as N2O, CFCs and HFCs. The information available, as presented in Table 12.2, does not show a direct link between product mix and/or inclusion of non-CO2 GHGs and policy stance. One possible explanation for this missing link may be that the six investigated chemical companies are insufficient to provide an overall picture. Several companies discuss the Kyoto Protocol. BASF states that the company is committed to the Kyoto targets. ICI and Bayer reveal a neutral stance, describing history so far. DuPont shows a negative attitude towards Kyoto, as ‘the protocol will work negatively because its targets are too aggressive’. With regard to policy instruments to curb climate change, DuPont, BASF and ICI clearly state that they favour worldwide emissions trading. In 2003, BASF entered the World Bank’s Carbon Fund to experiment with Kyoto’s CDM (Clean Development Mechanism). Dow supports emissions trading as well, because this instrument improves efficiency. DuPont refers positively to its participation in the US EPA (Environmental Protection Agency)’s voluntary Climate Wise Program, while ICI mentions positively voluntary agreements on energy efficiency in the UK and in the Netherlands. At a European level, voluntary agreements for the chemical industry do not yet exist. For obvious reasons, the most proactive company, DuPont, demands credits for early actions.

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Company

Stance on climate change

Change in product mix

Inclusionof non-CO2 GHG in monitoring

E.I. du Pont

Positively

Yes

Yes

Dow Chemical

Positively

No

Yes

Honeywell

NA

No

N/A a

Bayer AG

Neutral

No

Yes

BASF

Positive

No

Yes

ICI

Neutral

Yes

Yes

a Bayer AG plans to split activities in 2004 into ‘New Co’ (polymers, chemicals) and Bayer (healthcare, agriculture).

table 12.2 Stance on climate change: possible explanations Source: Corporate websites in 2000 and 2003

Not specifically related to climate change, but certainly interesting in a discussion about regulatory context, are divergent views between European companies about Western Europe as a remunerative base for industry: UK-based ICI proclaims a very negative attitude, caused by social and environmental pressures. In contrast, Germany-based Bayer and BASF are very positive about their ‘home market Europe’. Probably, this UK–Germany dichotomy reflects an antithesis between courtroom policy-making (UK) and consensual policy-making (continental Europe). A final element of the regulatory context has to do with corporate policies towards subsidiaries all over the world. Some companies state that they have uniform policies and that all subsidiaries have to meet identical corporate standards (Dow, Honeywell, Bayer). Other companies do not prescribe uniform policies (DuPont, BASF, ICI). In these companies, subsidiaries have to comply with local regulations. Again, the dividing line between uniform or non-uniform standards does not coincide with the Atlantic Ocean.

Societal context Europeans, it is often claimed, are seriously concerned about environmental issues. Americans, by contrast, are held to be more individualistic, more concerned about their lifestyles than the environment and more ideologically averse to regulation. One can repeat here what has been said above about climate change and the Kyoto instruments. On an abstract level, US companies are more pronounced in support of climate policies than European-based companies. On a more concrete level, the stances of US and European companies are more or less in equilibrium. The contrast with the oil industry remains marked; dominant USA players in the chemical industry show a positive attitude towards climate policies, whereas their European counterparts show a more reserved position.

12. the chemical industry’s response to climate change van der Woerd 195

The positive or neutral attitudes towards climate policies manifest themselves in membership of industry associations. The ‘prudently positive’ World Business Council for Sustainable Development (WBCSD) is a favourite in the chemical industry. Additional associations that show up are the NGOs Pew Center (DuPont) and Forum for the Future (ICI). With regard to co-operative programmes with local neighbours and NGOs, the USA shows more activity than Europe. In America, Community Advisory Panels at plant level have become common. This applies also to subsidiaries of European corporations. Moreover, DuPont and Dow mention additional initiatives in cooperation with NGOs and local communities. However, it can be hypothesised that European NGOs rely more on contacts with regulators.

Conclusions for the chemical industry In the chemical industry, stances on climate change and GHG policies are companyspecific rather than country-specific. A clear US–European dichotomy cannot be found. In fact, American companies range between most proactive and most reactive. European companies are in between. It is important to note that chemical corporations have sector-specific opportunities to limit GHG emissions, by changing their product mix and by limiting emissions of non-CO2 GHGs such as N2O, CFCs and HFCs. These companies are favoured by the inclusion of non-CO2 GHGs in the Kyoto Protocol. With regard to monitoring, all companies—except Honeywell—report on both CO2 emissions and total emissions of GHGs. As for target setting, two companies use absolute targets (DuPont, Bayer), while three companies have relative targets (i.e. emissions per ton product: Dow, BASF, ICI). In the chemical industry, the regulatory context and societal context play a less clear-cut role than in the oil industry. Although specific determinants can be indicated for some companies as an explanation for their climate stance (e.g. CEO’s commitment, product mix), a coherent picture does not appear. The heterogeneity of the chemical industry makes it difficult to arrive at generic explanations.

References Fussler, C., and P. James (1996) Driving Eco-innovation (London: Pitman). Van der Woerd, K.F., K. de Wit, A. Kolk and D.L. Levy (2000) Diverging Business Strategies towards Climate Change: A USA–Europe Comparison for Four Sectors of Industry (Amsterdam: Bilthoven).

13 Multinational responses to climate change in the automotive and oil industries David Levy University of Massachusetts, Boston, USA

Ans Kolk Amsterdam Graduate Business School, The Netherlands

The climate issue poses a number of strategic dilemmas. Companies can attempt to postpone regulation by debating the science of climate change and the economic cost of greenhouse gas (GHG) controls, or they can invest in new low-emission technologies; companies can attempt to invest early and gain first-mover advantages, or wait until the technological turmoil and regulatory uncertainty has subsided. R&D resources can be directed towards incremental improvements to existing technologies or radically different ones. The decisions are difficult because, while the evidence of climate change is growing, investments in low-GHG products and processes still appear highly risky. The technologies associated with low-emission vehicles and renewable energy require radically new capabilities that threaten to undermine the competences of existing companies and open the industries to new entrants (Anderson and Tushman 1990). The different responses to the threat of climate change by European and North American multinational enterprises (MNEs) point to a wide gulf between a more proactive perspective in Europe and a more conservative approach on the part of many American businesses. These differences were especially pronounced during the 1990s. American companies expended considerable energies in aggressively challenging climate science, pointing to the potentially high economic costs of GHG controls and lobbying against the Kyoto Protocol. Technological strategies have tended to focus on long-term, more radical approaches, such as fuel cell vehicles. In Europe, by contrast, companies have been much quicker to proclaim their acceptance of the need for precautionary action and have acquiesced to policies leading to mandatory emission controls. European companies have also engaged in a range of substantial investments in low-emission technologies, including more short-term

13. multinational responses in the automotive and oil industries Levy and Kolk 197

approaches such as diesel cars and wind energy (Levy and Kolk 2002; Levy and Rothenberg 2002). Over time, however, the positions of European and US-based MNEs have tended to converge. This should not be surprising, perhaps, given that the companies involved are large multinationals engaged in each other’s markets, are actively involved in a process of globalisation of production and management structures, and are frequently active in the same industry associations. This convergence is also driven by a wave of international mergers and joint ventures, as well as the growth of industry organisations such as the International Chamber of Commerce and the Trans-Atlantic Business Dialogue. For MNEs, the formulation of a climate strategy has been especially complex because they are confronted with very different, often conflicting pressures, originating from the variety of contexts in which they operate. Rosenzweig and Singh (1991: 340) write that: On one hand, a multinational enterprise is a single organisation that operates in a global environment, with a need to co-ordinate its far-flung operations. On the other hand, an MNE is comprised of a set of organisations that operate in distinct national environments.

This chapter examines the responses of MNEs to the climate change issue in the oil and automobile industries. We argue that home-country effects and individual firm-level characteristics present MNEs with different social, economic and political pressures that can lead to divergent strategies. At the same time, these firms compete in industries with strong global dimensions and participate in the same debates concerning climate change, providing some convergent influences on strategy. The chapter draws from a study of eight MNEs, four in the oil and four in the automobile industry; two of the companies in each industry were based in the US, and two in Europe. The study encompassed most of the major companies in these regions: in oil, Exxon, Texaco, BP and Shell; and in autos, GM, Ford, Volkswagen and DaimlerChrysler.

Theoretical background Transatlantic differences in corporate responses to the climate issue have been most noticeable in the auto and oil sectors. These differences are not easily explicable in terms of the traditional determinants of strategy, such as the possession of particular assets and capabilities. For the oil industry in particular, the external competitive environment and internal resources and capabilities are similar for the large ‘majors’, wherever they are based. The more obvious characteristics of the companies, such as the carbon intensity of their production and reserves, are comparable (Rowlands 2000). Perhaps more than any other industry, oil companies apply global strategies in production and distribution (Ernst and Steinhubl 1999). We contend that institutional factors are particularly important in explaining strategic responses to climate change. Oliver (1991) has argued that institutional

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influences are stronger when uncertainty gives managers greater discretion. For MNEs facing the climate issue, great uncertainty surrounds the future of climate science, emission regulation, and markets for carbon credits and alternative technologies. Institutional environments are associated with particular organisational fields, which comprise ‘those organisations that, in the aggregate, constitute a recognised area of institutional life: key suppliers, resources and product customers, regulatory agencies, and other organisations that produce similar services or products’ (DiMaggio and Powell 1991: 143). These institutional environments shape corporate perceptions and interpretations of technologies and markets, and thus strategy formation processes. Multinational corporations are subject to conflicting strategic pressures arising from the institutional environments of their home country, the host countries and the global industry (Gooderham et al. 1999). The distinct regulatory and cultural context of the home-country environment exerts a powerful influence on MNE strategy formulation, creating divergent pressures on companies headquartered in different countries. The country-of-origin effect is not the only source of strategic heterogeneity. Each company’s unique history and culture affects its response to institutional pressures. For example, companies that experienced a history of losses associated with alternative energy sources are likely to hold a negative view of the future prospects of such technologies. While country-of-origin and individual company differences create divergent pressures on strategy, MNEs competing in global industries participate in a common industry-level field, creating some tendencies towards convergence for companies in the same industry. The progressive delinking of MNEs from their home countries and the growing importance of the global industry as the dominant organisational field in industries such as autos and oil constitutes an important force for strategic convergence. The trend towards cross-border mergers and acquisitions, such as BP–Amoco and Daimler–Chrysler, reinforces this orientation. The oil industry is even more global in scope than the auto industry, given the undifferentiated nature of the product and the international scope of oil extraction, refining and retail operations. In interdependent oligopolies, companies are also likely to copy each other’s moves (Chen and MacMillan 1992). Industry interdependence also takes a collaborative form, within industry associations and in alliances and joint ventures. Executives read the same trade journals and the same industry studies. The emergence of climate change as a ‘global issues arena’ constitutes a second convergent influence. The actors involved in a global issues arena interact frequently and develop their own organisational networks. The senior managers responsible for climate-related strategy in the companies studied know each other well and meet regularly at international negotiations, conferences and other events. They interact within issue-specific sub-groups of organisations such as the International Chamber of Commerce. These managers come to view climate science and the threats and opportunities arising from regulation and new technologies in similar ways. A key question here is whether MNEs need to pursue globally co-ordinated responses to climate change or are able to differentiate their responses according to local economic and regulatory conditions. Corporate political strategies generally

13. multinational responses in the automotive and oil industries Levy and Kolk 199

need to respond to local political and cultural contexts to a greater extent than product market strategies. Baron (1997: 146) argues that ‘Non-market strategies . . . tend to be less global and more multi-domestic, that is, tailored to the specific issues, institutions, and interests in a country.’ However, this emphasis on local responsiveness may not hold for industries and issues that are more global in scope. The evolution of the Kyoto Protocol to control GHGs is clearly an ongoing global process entailing multilateral negotiations and an international scientific assessment team, the Intergovernmental Panel on Climate Change (IPCC). It would make little sense for one arm of an MNE to be opposing the protocol while another is supporting it. This became evident for Shell in the mid-1990s, when Shell Europe moved towards acceptance of the need for internationally agreed greenhouse gas emission controls while Shell US was still a member of the Global Climate Coalition (GCC), the industry association that lobbied aggressively against any such measures. This inconsistency became a severe liability when it was publicised by environmental NGOs, leading Shell US to leave the GCC in 1998. The following two sections examine in more detail home-country contexts and individual, firm-specific characteristics, which help to explain some of the strategic differences between firms in the same industry. Subsequently, we explore industryspecific and issue-level factors, in order to characterise the common environment in which firms from different countries are located. Finally, we consider trends over time and some of the salient differences between the automobile and oil industries.

Home-country factors For the oil industry, home-country economic and resource conditions are unlikely to affect competences very much because the oil companies can tap their subsidiaries and independent specialist companies for technologies and resources. Inconsistent industrial policy in the US towards renewable energy appears to be a more important factor. Large subsidies initiated under the Carter administration were abruptly cut under Reagan. One Exxon manager stated that: ‘we are not looking to get into any business supported by government subsidies. We lost more than $500 million on renewables, and learnt a lot of lessons.’ European companies lacked this history of large losses. Moreover, where policy in the US favoured oil exploration through various subsidies, European policies of high fuel taxation and support for rail rather than road transportation signalled a less secure future for oil. In the auto industry, which is more regional in scope, home-country conditions are more likely to influence corporate strategy. The regulatory context differs substantially between the US and Europe. The primary concern in the US for many years has been local air quality. US industry was already subject to CAFE (corporate average fuel economy) standards under the Clean Air Act, and the California Air Review Board (CARB) was mandating zero emission vehicles in the longer term. Strict controls on SOx, NOx and hydrocarbons have led to precise electronic control of combustion and catalytic converter technology. The focus on local air quality induced US-based companies to invest in—and lose—considerable sums on radical

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technologies. GM, for example, invested more than US$1 billion in its electric vehicle during the 1980s and early 1990s, although less than 1,000 were sold (Shnayerson 1996). Company managers generally interpreted the experience as a commercial mistake. Ford had invested about US$500 million in sodium-sulphur batteries, only to abandon the project because of safety concerns. GM managers also felt that they had rushed too quickly to downsize their vehicles in response to earlier oil price shocks. With this shared historical experience, American companies did not see any advantages to being a first mover in emerging low-emission automotive technologies. Initially, US-based companies understood climate change as a continuation of this pressure to improve local air quality. As a Ford VP (vice-president) responsible for government affairs put it, ‘There was already huge pressure for reduction of smog precursors. So climate did not require a step function change in strategy; it was more of an organic evolution.’ Over a period of time, companies came to appreciate that many technological approaches involved trade-offs. The introduction of catalytic converters in the early 1980s, for example, caused a noticeable decrease in fuel efficiency. It was not easy for American companies to shift their technology strategies towards carbon reduction, however, because the regulatory system was ratcheting up controls on non-GHG emissions while paying no attention to CO2. In Europe, by contrast, pre-existing environmental concerns about automobiles were more aligned with the strategic challenge of climate change. Concerns about resource depletion and congestion had led to high fuel prices and investments in public transport that reduced fuel consumption and vehicle use overall. European innovation efforts were therefore already more directed towards lighter-weight, smaller vehicles with high fuel efficiency. This has not only given European companies greater expertise in small, fuel-efficient vehicles but also created more confidence that they can adjust to a carbon-constrained world. It is important to note that these differences between US-based and European MNEs appear to be more related to perceptions than to possession of firm-specific competences. There is no reason to think that European oil companies have more expertise in renewables than US firms—quite the opposite. It is the history of US losses that colours managerial perceptions of the future. In the auto industry, all the world’s major companies have made significant efforts towards fuel efficiency since the first oil price shock in late 1973. If anything, European companies might find it relatively harder to squeeze additional weight and efficiency out of their product range, and appear to be basing their strategies on the widespread adoption of diesel, at least in the short term. American auto companies tend to view the future potential market for low-emission vehicles through the lens of their earlier failures with electric vehicles. A third aspect of the home-country environment is the context of cultural values and institutional norms regarding business–government interactions. The conventional wisdom is that: Europeans demonstrate their considerable concern about environmental issues in their behavior as voters, consumers, corporate managers, and policy makers . . . [while] people in the United States are more individualistic, more concerned about their lifestyles than about the environ-

13. multinational responses in the automotive and oil industries Levy and Kolk 201 ment, and more ideologically averse to regulation (Levy and Newell 2000).

On the other hand, sensitivity to societal concerns regarding environmental issues, as expressed in annual corporate environmental reports, appears equally strong on both sides of the Atlantic (Kolk et al. 2001). European oil company managers expressed explicit concern for their legitimacy and image. A BP manager stated that ‘as a company trying to act with corporate social responsibility, is it sensible to turn a blind eye to this issue? Our response was no.’ Similarly a Shell executive discussed the ramifications of negative publicity: ‘Here there is a real concern for legitimacy and what the community thinks. There is a fight for the hearts and minds of the public.’ Following the Brent Spar incident, consumer boycotts were organised in European countries and Shell’s market share dropped noticeably in Germany. One of Shell’s long-term planning scenarios, termed People Power, discussed the risk of significant public pressure. Exxon, by contrast, saw little value in improving its image. As one manager put it, ‘If we appear more green, it might get us a better seat at the policy table, but the real question is whether it would improve our access to resources and markets.’ In the political arena, the American system of business–government relations has a tradition of contentious policy battles being waged on the basis of detailed technical studies. Several US managers acknowledged that adopting an adversarial stance concerning climate change did not cost them much credibility with regulators; one GM manager said, ‘The Hill works by compromise, so you need to go to the extreme. It ends up completely polarised.’ An Exxon manager stated, ‘they cannot ignore us anyway; we are the big elephant at the table’. This aggressive approach was typified in the activities of the GCC, an industry association formed in 1990 to represent major fossil fuel users and producers, which has strongly challenged the scientific basis for action, questioned the legitimacy of the IPCC and highlighted potential economic costs (Newell 2000). By contrast, key stakeholders in Europe tend to engage in more collaborative bargaining, resulting in a more corporatist and consensual system (Jasanoff 1991). European managers viewed GHG regulation as inevitable and thought that an adversarial approach would only hurt their credibility and political access. As a result, challenging the scientific basis for regulation was seen as futile. An official with the German environmental ministry said: ‘If the companies here argued the way they do in the States, it would create an image disaster. And they wouldn’t argue the science to me or I would kill them.’ Over a period of time, and perhaps as a result of these interactions among MNE units, the Americans began to soften their position. Ford’s VP of Economics and Strategy, Michael Kaericher, acknowledged that: appearing negative hurts. We lost the first round of battles. We are now trying to be more positive with the science, while still pointing to the high cost of precipitate action before scientific uncertainties are resolved. Our actions will be less strident in the future.

The home-country influence would also diminish as top-management teams became more international. By 1995, Exxon, Mobil and Texaco still had no board members from outside North America, but annual reports indicate that an increasing number

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of senior executives had spent significant portions of their careers outside the home country. Top management in Detroit was becoming increasingly cosmopolitan in outlook in the mid-1990s and was therefore perhaps more sensitive to the market and regulatory environments in Europe and elsewhere. Ford implemented its Ford 2000 project, which pushed towards the rationalisation of production and management worldwide, and GM began to move in a similar direction. Ford Europe, for example, became responsible for the Fiesta-size class of small cars worldwide, as well as for the development of advanced diesel technology. According to one Ford Europe manager, ‘What has changed is the global focus. Now we have global managers in top management, people who grew up in other cultures. Ford understands the importance of Europe now, and this really puts pressure internally on the US focus.’

Firm-specific factors MNEs are likely to respond differently to the climate change issue because of the specificities of their own histories, cultures and structures. In the oil industry, for example, Exxon has been the most aggressive in implementing a lean model of cost reduction and efficiency, leading to the highest returns on capital in the industry. The company’s status as the most profitable of the oil majors created little stimulus to reconsider its successful strategic focus. Instead of investing in renewables, on which it had lost large sums in the 1980s, Exxon has focused its efforts on fuel cell research and carbon sequestration, technologies that complement oil-related technologies. For Texaco, in contrast, one impetus to re-evaluate strategy was the financial crisis caused when oil prices fell below US$15 a barrel at the end of the 1990s. Texaco managers also asserted that their gasification technologies could generate hydrogen for fuel cells. BP, Shell and Texaco expressed the belief that early investments in renewables would generate significant first-mover advantages. For Shell, this approach was a continuation of the company’s institutional history of organic, internal growth. Interviewees at Exxon, in contrast, had a very clear perception of their company’s strengths. One commented: ‘we have learnt from the experiment with diversification that businesses such as office products, with rapid product cycles and very different technologies, require competencies that Exxon lacks’. If the outlook for oil dimmed unexpectedly, Exxon managers expressed confidence that an acquisition strategy would enable the company to obtain the required technologies expeditiously. Firm-level differences in organisational structures and processes also appeared to play a role. MNEs such as Exxon and Ford tightly controlled their strategic planning from the centre, leaving little room for local discretion or dissent. Perspectives from these companies’ European operations did not easily permeate into the deliberations of top management. By comparison, GM was more decentralised, enabling its research labs to develop an electric vehicle even in the face of opposition from corporate headquarters. Similarly, a traditionally decentralised multinational such

13. multinational responses in the automotive and oil industries Levy and Kolk 203

as Shell was less prone to insular thinking and more open to international perspectives. The company’s renowned scenario planning process emphasised a longer time horizon than at Exxon and deliberately set out to incorporate diverse perspectives.

Industry characteristics In global industries, MNEs from different countries face similar competitive conditions, creating convergent pressures. Oil is the archetypal global industry, and the major companies tend to adopt similar global strategies in their extraction, production and refining operations (Grant and Cibin 1996). All of the oil companies studied are large, integrated multinationals with comparable strategic capabilities, and they possess production and distribution operations throughout North America, Europe and the Middle East. As a result, they are subject to similar sets of regulatory pressures. Their technological capabilities are also comparable, according to interviewees, and they all access the services of independent specialised exploration and drilling companies. The ratio of oil to gas reserves, and the proportion of operations in developing countries (not covered by the Kyoto Protocol) are quite comparable among the companies (Rowlands 2000). As a result of this global oligopolistic structure, the companies have tended to move through phases of diversification, restructuring and consolidation in a synchronised fashion (Grant and Cibin 1996; Ernst and Steinhubl 1999). Despite the fact that oil companies are among the oldest MNEs, it was only during the 1990s that they abandoned geographic structures and moved towards globally integrated business units. Accompanying this structural shift, senior management became more internationalised, further reducing the dominance of the home country. The auto industry is somewhat more regional in nature, both in terms of supply chain integration and the degree of product differentiation (Shaffer 1992). These regional differences can explain, in part, the more accommodating stance of European companies. Under intense pressure from the EU authorities, in 1998 the European Automobile Industry Association (ACEA), which includes Ford and GM’s European subsidiaries, accepted a voluntary agreement to reduce CO2 emissions to 140 g/km by 2008 (about 38 mpg), with a 120g/km target for 2012. European companies have addressed these regulatory pressures by introducing very small, light-weight cars and investing substantial amounts in a range of technologies from diesel to fuel cells. Daimler has aggressively pursued fuel cell technology, investing US$320 million in Ballard in April 1997. The short-term commitments would be met through large investments in advanced diesel technology. By comparison, US-based auto companies were planning a car of the future that would not require any change in transportation patterns, road infrastructure or social conceptions of cars; rather, all the burden of emissions reduction would be placed on advanced automotive technologies. This was the conception underlying a collaborative venture called the Partnership for a New Generation of Vehicles (PNGV), launched in 1993 with substantial government funding and the participa-

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tion of the three US manufacturers. This project focused on longer-term and more radical approaches to emission reduction, without sacrificing car size, comfort or other features. Such efforts were necessarily expensive, generating pessimism about the likely markets for such cars and resistance to emission controls in the short term. Meanwhile, companies were free to sell large and highly profitable SUVs and trucks in the US market, where fuel remains cheap and particulate emissions from diesels are more tightly regulated. At the same time, US auto companies have successfully fought off efforts to raise CAFE standards above the current 27.5 mpg. Despite these regional differences, a trend towards convergence is also evident in the auto industry. By January 1998, GM was acknowledging that climate change was a cause for concern and entered a project organised by the World Resources Institute called Safe Climate, Sound Business. At the end of 1999, Ford resigned from the Global Climate Coalition. The technology strategies of US companies increasingly began to converge with those of European firms. In December 1997, Ford invested US$420 million in the joint venture between DaimlerChrysler and the Canadian fuel cell company Ballard, and GM formed an alliance with Toyota to invest in a range of technologies. To satisfy needs for shorter-term technologies, Ford and GM turned to outside suppliers for diesel expertise (Simison and Quintanilla 1998). One reason for this convergence lies in the nature of the threat posed by climate change to the auto industry. In some ways, the threat to the American auto industry is more immediate and severe than to oil. No practical substitutes for oil exist in the transport sector for the next 10–15 years, but a sharp increase in price in the short term could shift demand for cars substantially to smaller, more efficient cars in which American companies lack market strength and lose money. American managers did not want to be caught unprepared again in a high oil price environment and acknowledged that, if the regulatory environment tightened, implications for the industry could be dramatic. At the same time, low-emission technologies constitute less of a fundamental threat to the auto industry than to oil. Even if powered by hybrid drives or fuel cells, a car still comprises a chassis, power train, accessories and so on. The core competences of automobile companies in applying lean production techniques to largescale assembly and in managing complex supply chain relationships would not be fundamentally threatened. In contrast, renewable energy sources such as photovoltaics and wind present a profound long-term threat to oil company capabilities in prospecting, extracting, refining and distributing petroleum products. Oil companies are experts at geology, chemistry and large-scale continuous process operations. Photovoltaics and wind, by contrast, rely on electronics and turbinebased technologies, respectively. The global oligopoly in the oil industry promoted frequent interactions among senior executives and a shared perspective on the energy sector. For example, although all the oil companies had initially perceived climate change as a serious threat to their core business, over time they became less pessimistic. None of the oil company managers interviewed expected renewables to pose major threats to oil before mid-century owing to cost and infrastructure limitations. Emission controls were not expected to be severe and the common view was that the outlook for core oil and gas businesses remained strong in the medium term; demand for gas for power generation was booming even without carbon controls, while oil would

13. multinational responses in the automotive and oil industries Levy and Kolk 205

remain the primary fuel for transport. Any improvements in fuel efficiency would be more than offset by growth in air transport, car sales and miles travelled, particularly in developing countries, while radical technologies such as fuel cells still faced many cost and technical barriers. The oligopolistic nature of these industries also sensitised companies to each other’s actions. BP learned from Shell’s misfortune with the Brent Spar incident in 1995 that legitimacy and reputation can be more important than technical analysis. In turn, the 1997 speech by BP’s Browne caused other companies to reconsider their positions. One Texaco executive stated that ‘Texaco has always been stronger in engineering than public relations, but we’re trying to change. We saw how much mileage BP got from Browne’s speech.’ Texaco also began inventorying greenhouse gas emissions in 1998. A similar dynamic was observed in the auto industry. Toyota’s commercial launch into the US market in 2000 of the Prius, a hybrid electric–gasoline engine car, took the industry somewhat by surprise and caused other companies to accelerate their plans. Honda leapfrogged Toyota and launched its hybrid Insight in the US market in December 1999. Although most American executives were dismissive of the prospects for the car, they expressed concern that they might misread the market or fall behind a competitor. Daimler’s investment in April 1997 in the Canadian fuel cell company Ballard had a similar effect, with Ford joining the venture in December 1997.

Issue-level factors: convergence across countries and industries Multinational corporations are increasingly engaged with global issues such as climate change. These global issues are likely to exert institutional pressures for convergence on MNEs from different countries and industries. In the case of climate change, participation in industry associations and a multitude of negotiation sessions, scientific meetings and conferences have provided arenas within which expectations concerning science, policy, markets and technologies tend to converge. Key managers responsible for climate strategy in each of the companies studied were on first-name terms and had met each other frequently during the many years over which the issue emerged from scientific curiosity to the foremost environmental and policy concern facing the international community. In addition to negotiations and conferences, the institutional infrastructure established by industry has tended to encourage convergent views and attitudes. The Global Climate Coalition represented multiple sectors and included some European companies. The International Chamber of Commerce has an active climate working group. American automobile manufacturers were members of ACEA, the European industry association, while European companies were members of the Alliance of Automobile Manufacturers, the new US industry association formed in January 1999. In the oil industry, European companies have participated in the

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American Petroleum Institute while American companies attend European industry meetings. The London-based International Petroleum Industry Environmental Conservation Association (IPIECA), in which all the major oil companies participate, has an active working group on climate change and has served as a particularly important venue co-ordinating corporate positions.

Conclusion MNEs facing global issues such as climate change are immersed in multiple institutional contexts, subjecting them to competing pressures. The disparate reactions of US and European companies in the early phase of the climate issue were found to be related to corporate histories and experiences with alternative technologies, and national values and regulatory contexts. Convergent pressures tended to increase as the issue matured. Corporate representatives from a core group of oil, coal, automobile and chemical companies have been meeting several times a year at negotiation sessions, conferences and industry associations. As the companies became more aware of their competitors’ responses and more enmeshed in issuespecific international regulatory and scientific institutions, they increasingly began to co-ordinate their responses to the issue within national and cross-national industry associations and issue-specific working groups. As a result, the companies have developed similar outlooks on markets and technologies. It is noteworthy that those companies with prior experience in renewable technologies were most reticent in investing in renewables in response to climate change. Strategic responses were thus driven less by accumulated technological competences and more by the institutionalised memory of losses associated with prior investments. In general, managerial perceptions of markets, technologies and regulatory prospects appeared to dominate decision-making. A significant implication of this study is, therefore, that institutional frames provide strategic guidelines derived from historical and home-country experiences, which are not necessarily relevant to future global market conditions. The failure of renewable energy markets to maintain growth in the 1980s does not doom their prospects for the 21st century.

References Anderson, P., and M.L. Tushman (1990) ‘Technological Discontinuities and Dominant Designs: A Cyclical Model of Technological Change’, Administrative Science Quarterly 35: 604-33. Baron, D.P. (1997) ‘Integrated Strategy, Trade Policy, and Global Competition’, California Management Review 39.2: 145-69. Chen, M.-J., and I.C. MacMillan (1992) ‘Non-response and Delayed Response to Competitive Moves: The Roles of Competitor Dependence and Action Irreversibility’, Academy of Management Journal 35: 539-70.

13. multinational responses in the automotive and oil industries Levy and Kolk 207 DiMaggio, P., and W. Powell (eds.) (1991) The New Institutionalism in Organisational Analysis (Chicago: University of Chicago Press). Ernst, D., and A.M.J. Steinhubl (1999) ‘Petroleum: After the Megamergers’, The McKinsey Quarterly 2: 49-57. Gooderham, P.N., O. Nordhaug and K. Ringdal (1999) ‘Institutional and Rational Determinants of Organisational Practices: Human Resource Management in European Firms’, Administrative Science Quarterly 44.2: 507-31. Grant, R.M., and R. Cibin (1996) ‘Strategy, Structure, and Market Turbulence: The International Oil Majors, 1970–1991’, Scandinavian Journal of Management 12.2: 165-88. Jasanoff, S. (1991) ‘Cross-National Differences in Policy Implementation’, Evaluation Review 15.1: 103-19. Kolk, A., S.L. van de Wateringen and S. Walhain (2001) ‘Environmental Reporting by the Fortune Global 250: Exploring the Influence of Nationality and Sector’, Business Strategy and the Environment 10.1: 15-29. Levy, D.L., and A. Kolk (2002) ‘Strategic Responses to Global Climate Change: Conflicting Pressures on Multinationals in the Oil Industry’, Business and Politics 4.3: 275-300. —— and P. Newell (2000) ‘Oceans Apart? Business Responses to the Environment in Europe and North America’, Environment 42.9: 8-20. —— and S. Rothenberg (2002) ‘Heterogeneity and Change in Environmental Strategy: Technological and Political Responses to Climate Change in the Automobile Industry’, in A. Hoffman and M. Ventresca (eds.), Organizations, Policy and the Natural Environment: Institutional and Strategic Perspectives (Stanford, CA: Stanford University Press). Newell, P. (2000) Climate for Change: Non-state Actors and the Global Politics of the Greenhouse (Cambridge, UK: Cambridge University Press). Oliver, C. (1991) ‘Strategic Responses to Institutional Processes’, Academy of Management Review 16: 145-79. Rosenzweig, P.M., and J.V. Singh (1991) ‘Organizational Environments and the Multinational Enterprise’, Academy of Management Review 16: 340-61. Rowlands, I.H. (2000) ‘Beauty and the Beast? BP’s and Exxon’s Positions on Global Climate Change’, Environment and Planning 18: 339-54. Shaffer, B. (1992) ‘Regulation, Competition, and Strategy: The Case of Automobile Fuel Economy Standards 1974–1991’, in J. Post (ed.), Research in Corporate Social Performance and Policy. Vol. 13 (Greenwich, CT: JAI Press): 191-218. Shnayerson, M. (1996) The Car that Could (New York: Random House). Simison, R., and C. Quintanilla (1998) ‘Navistar is Ford’s Choice to Supply Diesel Engines’, Wall Street Journal, 6 March 1998.

Part 4 Case studies

14 Becoming a first mover in green electricity supply corporate change driven by liberalisation and climate change Peter S. Hofman* Center for Clean Technology and Environmental Policy, The Netherlands

Both energy companies and consumers have embraced the concept of green electricity where electricity produced by renewable energy sources is separately marketed and priced from conventional electricity based on fossil or nuclear sources. In 2002, one million Dutch households (14.5%) were buying green electricity, and more than 20 providers of the product had emerged. Yet, only a decade ago, renewable energy was sold as part of conventional electricity and green electricity was not marketed as a separate product. This chapter unravels the factors behind the invention of the concept by an energy distribution company, and its successful introduction. It explains how a process of change in corporate culture and marketing strategy provided a footing for the concept and was motivated by internalisation of external policy and market pressures emerging from climate change policy and liberalisation. It also reveals how the company revised its innovation strategy to cope with increasing demand for the product. In the process the company was able to reap some first-mover advantages but it also experienced serious problems as it diverged from the familiar path of fossil fuel-based electricity production and delivery. Some of the main problems were the company’s perceived lack of trustworthiness regarding the ‘greenness’ of the electricity and its unfamiliarity with biomass resource contracting outside the established channels for fossil fuels. Crucial in overcoming these obstacles were several partnerships the company built with actors outside the electricity sector. The chapter concludes by drawing some lessons for further divergent corporate strategies in the current turmoil of the electricity sector. *

The author acknowledges funding by the European Commission Targeted Social and Economic Research Programme and the Dutch National Research Programme on Global Air Pollution and Climate Change for two research projects on which this chapter is based (see Hofman 2001; Hofman and Marquart 2001).

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Incremental change in the electricity sector It is difficult to change the direction of technological developments in the electricity sector since, over decades, elements such as technology, infrastructure, knowledge, regulation, industrial organisation and user preferences have become mutually attuned (Unruh 2000). Innovation strategies of electricity companies are pathdependent due to routinised behaviour and R&D trajectories fixed around dominant guiding principles to improve central, large-scale, fossil-fuelled electricity generation (Martin 1996). Thus, electricity companies mainly implement incremental innovations within the boundaries of their competences, technologies and networks built on the established fossil-based technological trajectory. This reflects insights from evolutionary theorists highlighting the cumulative nature of innovation (Nelson and Winter 1982) and the way large technical systems, such as electricity, tend to become locked in to a dominant design and technology as they mature (Hughes 1983, 1987). This relative inertia becomes problematic when the side-effects of the system increasingly harm society. The association of the use of fossil fuels and its greenhouse gas emissions with climate change has led to increasing societal and political support for alternative energy sources. The generation of electricity in the Netherlands and the rest of the world makes a major contribution to CO2 emissions and thus to the climate problem. In the Netherlands it contributes 26% of CO2 emissions (ECN 2001: 112), while the global figure for carbon emissions is 37.5% (IPCC 2001: 235). The challenge is therefore to initiate a transition away from the fossil base of the electricity system. Energy companies have long shied away from the use of renewable sources because of their supposed immaturity, high costs and incompatibility with leading principles of the existing system, such as producing continuously on a large scale (Hofman and Marquart 2001). In a process lasting more than a decade, however, this focus on problems and limitations has shifted towards a focus on achievements and potential of renewable-based energy technologies.1 In the Netherlands, the energy distribution company PNEM2 was a front-runner in this change process with its invention of the concept of green electricity and the installation of an innovative biomass-fired power plant. The chapter further introduces this case to gain insight into how companies and governments alike can successfully escape the carbon lock-in.

1 2

Changing evaluation routines from the focus on problems and limitations to achievements and potential is a core element of path creation (Lampel 2001). Provinciale Noord-Brabantse Energie Maatschappij (energy company for the province of North Brabant). Until the Electricity Act of 1998 PNEM held a monopolistic position for the distribution of electricity in the province.

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Exploring new paths: establishing green electricity as a trademark Before 1993 the energy distribution company PNEM was involved in several renewable-energy projects that were mainly policy-driven. In 1989 the company had published an environmental action plan with CO2 reduction as an important objective. This was part of an agreement between the energy distribution sector and the Ministry of Economic Affairs, where an overall target for CO2 reduction for the distribution sector was set and a framework for raising the financial resources for the various projects was introduced.3 In parallel to this the Ministry of Economic Affairs provided financial resources through subsidies on projects for combined heat and power and renewable energy. With the relative volatility and uncertainty of money flows from subsidies, the question arose whether PNEM could achieve more independence through market funding of these projects. In 1993 the idea emerged of having customers pay a premium for so-called ‘green’ electricity, which would be used to finance renewable-energy projects, thus letting the market become more influential in deciding the development of renewable energy. Inside the company there was resistance to this concept because it would imply that customers would pay more for something that physically is the same: the electricity provided to their house. Various factors explain the emergence and acceptance of the concept. The company and its top management were committed to further development of renewable energy, and this initially mainly policy-driven commitment became more and more based on a strategy to develop a green profile for the company. Using this green profile in a strategy of product differentiation was part of the stronger market orientation the company developed in anticipation of a liberalised market. The change of dominance among top management from those with an engineering background towards an increase of business management background and the stronger focus on developing marketing strategies to attract customers underpinned this stronger market orientation. Acceptance of the idea of green electricity was also strengthened by market research indicating that a significant proportion of households was willing to pay a premium for electricity based on renewable sources.4 Consumers played a relatively passive role in the electricity sector until the 1990s, as they were ‘captive’ electricity consumers dependent on the electricity provider in their respective regions, and confronted with fixed prices. In a liberalised market the position of the consumers would become more active as they could freely choose products and services from different providers. In combination with continued and rising awareness regarding the environmental and particularly climate consequences, this could unlock previously latent user demands. Based on these

3 4

The proposed measures in the environmental action plan were financed by a surcharge on the electricity tariff, with a maximum of 2% of the electricity tariff (EnergieNed 1994). Market research indicated that around half of the customers would find an increase of 49 on the monthly electricity bill to be acceptable for green electricity (ECN 1996).

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findings and to secure first-mover advantage, the company decided to establish the product ‘green electricity’ as a trademark.5 A final factor facilitating the acceptance of green electricity was that the company could better plan investments in renewable energy, as it would become more market-driven and less policy-driven. The company felt that market developments were easier to influence and to forecast, compared with policy.6 The strategy to become less dependent on government subsidies was underpinned as the new 1994 Dutch government coalition of liberals and social democrats announced budget cuts in subsidies for energy distribution companies. With market research indicating a potential for green electricity and the good fit of concept in the emerging ‘green’ and proactive company profile, the company decided to launch green electricity through a pilot project in one city. First the Dutch branch of WWF was approached to act as an external verifier of the product. Market research had indicated hesitancy on the part of customers to buy the product because of some lack of trust regarding the sources of the electricity and the destination of the revenues, which were to be reinvested in renewable energy projects. The participation of WWF was expected to increase the legitimacy and trustworthiness of green electricity. For WWF, collaboration with PNEM was part of its changing strategy from fund-raising for nature conservation, with a neutral image, towards more actively seeking opportunities to co-operate with parties in civil society (Glasbergen and Groenenberg 2001). The co-operation of WWF with the energy utility also reflected the shifting culture of environmental organisations from one of protest to practical solutions (Hartman et al. 1999). The partnership fitted their changed strategy towards realising direct results, instead of working on agreements with government that are always subject to long-term implementation.7 WWF supported green electricity to stimulate sustainable energy use, and to counteract climate change, which was viewed as one of the biggest threats to global nature and conservation of diversity8 (Quarles van Ufford 2000). For PNEM the collaboration with WWF on green electricity gave the product the sustainable and trustworthy profile necessary to attract and commit customers. The positive results of the pilot project for green electricity in the municipality of Tilburg9 led to the launch of the concept in the province of North Brabant in 1995.

5 6 7 8 9

Telephone interview with Mr Van Gestel, Essent Verkoop, Product Manager Green Electricity, February 2001. Ibid. Interview with co-ordinator of WWF quoted in Glasbergen and Groenenberg (2001: 1). Telephone interview with Mr S. Schöne, Manager Climate Program of the WWF, March 2001. The project took place in May/June 1995 with support from the municipality. The first customer for green electricity was the alderman for environment of the municipality.

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Early success with green electricity: policy and competitors’ reactions Although initially the number of customers opting for the new product was limited, with 400 customers at the end of the pilot project (see Box 14.1), the launch was a success in several ways. An important objective was to make customers familiar with the product and to convince the general public of the reliability of its ‘green’ sources. As media coverage of the launch of green electricity was quite extensive, familiarity with the product rose steadily. The partnership with WWF, with the environmental organisation acting as a verifier of the renewable source for green electricity, gave the product the legitimacy it needed to transcend regular commercial product launches, through the flavour of being for the common good. Milestones in the introduction of green electricity are presented in Box 14.1. The new product also triggered reactions from other energy companies and policy-makers. Energy distributors started to imitate green electricity by introducing other names for electricity based on renewable sources in their region. Policymakers reacted by exempting green electricity from the regulatory energy tax that had been introduced in 1996. The supply-oriented policy approach towards renewable energy was at that time gradually shifting towards more demand orientation (Dinica and Arentsen 2001). The regulatory energy tax, initiated initially to promote energy-saving behaviour by households, thus became an important driver of green electricity. Exemption of green electricity from the tax turned out to be a rather effective policy strategy to support the concept. The exemption initially led to a small reduction in the premium paid for green electricity, but with tax rises in 1999 and 2000 it led to competitive prices for green electricity from 2000 on. The growing number of green electricity customers also led to the decision to separate the liberalisation of the market for green electricity and to accelerate this process to 2001, relative to the liberalisation of the regular electricity market for small consumers, which was planned for 2004. The measure worked well to spur competition, with all major providers engaged in extensive marketing campaigns and the number of providers growing from under 10 in 2000 to over 20 in 2002. From 1999 on, the increase in consumers of ‘green’ electricity was rapid, with a growth rate of 47% between 1 July 1999 and 1 January 2000. Activities by WWF were an important factor contributing to this increase. In September 1999, when green electricity had become available throughout the Netherlands,10 WWF began a campaign with the slogan ‘Don’t let the North Pole melt, go for green energy’ (Quarles van Ufford 2000). The campaign, supported by the Ministries of Economic and Environmental Affairs, consisted of advertisements in national newspapers, large-scale efforts with ‘polar bears’ handing out 300,000 application forms at train stations, and with the North Pole, climate change and green electricity as featured themes for one week in programmes by one of the 10

At that time other utilities had also adopted the principles of green electricity, although often under other names (nature power, eco-power) because Essent held the trademark on the name ‘green electricity’. WWF promoted the general idea of green electricity and not the specific trademarks. The initial role of verifier of the authenticity of green electricity was later taken over by systems of green labels and certificates controlled by professional bodies.

14. becoming a first mover in green electricity supply Hofman Year

1990 1991 1993 1994 1995

1996

1997 1998

1999

1999 2000

2001

2002

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Activity PNEM publishes first environmental action plan. Agreement on CO2 reduction targets in environmental action plan for the sector; introduction of levy to finance environmental action plans. Idea of green electricity emerges; business plan developed. PNEM registers the product name ‘green electricity’ as a trademark. PNEM approaches WWF to act as external controller for the product green electricity. Pilot project for ‘green’ electricity in the municipality of Tilburg results in 400 customers who pay a premium of around 44cts on top of the normal electricity price of 4 9cts per kWh. Green electricity introduced throughout province of North Brabant resulting in 2,350 customers at the end of the year (out of a total of around 800,000 electricity customers). Decision to construct biomass-fired power station to secure green electricity supply in anticipation of growing demand. Regulatory energy tax for small electricity consumers is introduced (41.5cts per kWh); exemption for renewable energy. Other energy companies also launch green electricity as a new product under other names (nature electricity, eco-electricity). Number of green electricity customers at PNEM rises to 10,000. PNEM merges with MEGA, forming an electricity distribution utility for the provinces of North Brabant and Limburg, with 40,000 green electricity customers at the end of the year. Approval of environmental permit for the biomass power plant at Cuijk, agreements with Staatsbosbeheer to supply clean wood as fuel for the power plant. National campaign for green electricity is started by WWF; the number of green electricity customers grows by 38% (44,000) in four months. The utility Essent is formed through a merger of PNEM-MEGA with the distribution company Edon. Essent has 65,000 green electricity customers in November (out of a total of around 2.4 million customers). The Cuijk biomass-fired power plant starts its operations, being able to serve around 70,000 green electricity customers. After a rise in the regulatory energy tax (to 44cts per kWh), prices of green electricity become competitive with conventional electricity; overall number of customers rises from around 120,000 in January to 200,000 at the end of the year. Liberalisation of green electricity market; customers are free to choose their own provider; the number of providers of green electricity rises to more than 20 and the number of customers rises sharply from 200,000 on 1 January to around 800,000 at the end of the year. On 1 July the number of green electricity customers reaches one million in the Netherlands; market share of Essent is around one-third.

box 14.1 Milestones in the introduction of green electricity Data based on interview November 2000 and personal communication February 2001 with Ing. R. Remmers, Essent Renewable Energy, Project Manager Cuijk Power Plant; telephone interview with Mr S. Schöne, Manager Climate Program of the WWF, March 2001; telephone interview with Mr van Gestel, Essent Verkoop, Product Manager Green Electricity, February 2001; telephone interview with Mr J. Vis, Consultant, Staatsbosbeheer (Forest Department), November 2000; information from Dutch newspapers; www.greenprices.com; Essent 2000 on green electricity customers.

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largest television broadcasting companies in the Netherlands. Overall the campaign led to an acceleration in the monthly growth rate of green electricity customers from around 2,500 to 10,000, and to a sharp increase in public awareness of green electricity.11 For Essent, the company in which PNEM merged in 1999 with two other energy distributors, the number of green electricity customers expanded from around 50,000 in 1999 to 100,000 in 2000, 200,000 in 2001 and 300,000 in 2002, out of a total of around 2.4 million households.

Expanding the supply base for green electricity The success of green electricity also reinforced the need to develop the supply of electricity based on renewable sources. At the time of the introduction of green electricity, the first steps had already been taken to assess the feasibility of a biomass-fired power plant. The increasing demand for the green electricity product and the expected further expansion of the product into other regions facilitated the decision in favour of building the Cuijk power plant. Electricity generation from the biomass-fired power plant would significantly reduce the risk that the company might let down potential green electricity customers because of limited supply. The problem of finding appropriate sites for wind energy in the Netherlands, the main competing alternative renewable source, also contributed to the advance of the company’s biomass plans. Moreover, a speedy process was necessary in order to secure contracts for biomass supply, as, with increased competition, other companies were considering the opportunities for biomass-based electricity generation. For its biomass supply the company had to develop new networks because it was unfamiliar with available biomass sources and its logistics. Finding the right partners for the biomass input was probably the most risky part of the innovation, because the firm was setting out into an area in which it was totally inexperienced. First contacts were established with Staatsbosbeheer, the state agency for forest conservation, in order to gain insight in the availability and price of clean wood. Staatsbosbeheer was keen to participate because it was facing problems in financing the maintenance of its forests, especially the process of thinning out. Collaboration with PNEM and later Essent was a way to make maintenance more costeffective.12 The collaborative effort proved to be successful because both the company and Staatsbosbeheer shared the commitment that only clean wood available from the maintenance of forests would be used for the power plant. Staatsbosbeheer was committed to this because of their environmental responsibility, and Essent because, according to the chairman of the board, the one-time use of a wrong material could ruin the whole concept of green electricity (van de Wiel 2001). The fact that PNEM was able to secure a contract with Staatsbosbeheer was crucial 11 12

Telephone interview with Mr S. Schöne, Manager Climate Program of WWF, March 2001. Telephone interview with Mr J. Vis, Consultant, Staatsbosbeheer (Forest Department), November 2000.

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because this was a reliable, trustworthy partner with its existence based on a green profile. The use of clean wood as a source for green electricity generation would be in line with the concept and was justifiable to customers. Feasibility studies concluded that clean, low-quality wood was available at a competitive price and suitable for combustion. The company therefore went through the necessary procedures to obtain approval for the biomass-fired power plant. Application for an environmental permit was made in 1997. The permit was issued at the beginning of 1998 after several obstacles were overcome in the application procedure related to discussion regarding the character of the input (waste or biofuel), the actual sources for the biomass, emission standards and the energy efficiency of the power plant. These issues were new for the government agencies involved and had to be resolved to determine the kind of procedure that was to be followed and the kind of standards that were to be set (Hofman 2001). The company was able to progress through various rounds of discussions and negotiations. On the one hand, it was a relatively powerful player in the Dutch electricity sector and had established good contacts both at the provincial and national level. On the other hand, the priorities of energy policy (for example, expressed in the objective to gain experience with biomass-based electricity generation) had the upper hand relative to waste policy. In April 1998 construction of the 24 MWe13 biomass power plant commenced, with a consortium led by Siemens, the successful tenderer; the plant commenced operation in August 1999. At the start of its operation, the biomass power plant was the largest wood combustion plant for clean wood in Europe (Essent 2000). As the contract with Staatsbosbeheer only satisfied part of the plant’s resource demand, the company had to expand its supplier network. This led to inclusion of a firm that delivered non-polluted wood chips from pruned wood, and of a joint venture of Dutch and German sawmills that delivered sawmill waste.14 Establishing this network was important because of the shortage of suitable local biomass sources and the emerging plans of competitors to utilise biomass as a source for electricity generation. The contract with Staatsbosbeheer, where waste wood was to be collected in forests in an area with a radius of 150–200 km,15 meant effectively securing some first-mover advantage. Competitors had to tap wood sources outside the Netherlands or other biomass sources from which it was more complicated to generate electricity. Another first-mover advantage was the experience Essent gained regarding the logistics and large-scale use of biomass. This paved the way for several follow-up projects in which biomass was utilised on a large scale (e.g. Essent 2002).

13 14 15

Megawatts of electric power. Telephone interview with Ing. R. Remmers, Essent Renewable Energy, Project Manager Cuijk Power Plant, November 2000. Telephone interview with Mr J. Vis, Consultant, Staatsbosbeheer (Forest Department), November 2000.

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Explaining momentum for green electricity In less than a decade a new product attracted one million customers in a sector previously characterised by stability and incremental change. The invention and launch of the concept of green electricity triggered a process of change in both producers and consumers in the electricity sector. Anticipation of the effects of liberalisation and responding to the increasing societal importance of climate change led initial producers’ efforts. One set of factors that explains how the company could escape lock-in to the fossil-based trajectory thus lies in the build-up of pressures on and tensions in the previously stable electricity sector, which challenged the fossil base and institutional organisation of the system. The change of organisational routines in anticipation of liberalisation (e.g. new planning mechanisms due to loss of captive consumers, new strategic orientation vis-à-vis future competitors, development of marketing competences) in combination with the acquired competences in renewable energy production due to policy pressure led to the conception of green electricity. The company perceived increasing societal attention on climate change as an opportunity to distinguish itself from its competitors by developing a green profile and exploiting the shifting preferences of open-minded users. Co-operation with an environmental organisation was entered into in order to increase the product’s legitimacy, which was also an illustration of the changed culture in the electricity distributor. This coalition of actors turned out to be able to successfully introduce the concept of green electricity. Momentum for the new product increased as competitors imitated the product and familiarity with the concept became widespread. Policy played a significant role in this process by introducing the regulatory energy tax and exempting green electricity from the tax. This greening of the tax system effectively led to a competitive price for green electricity compared to conventional electricity. It also implies that green electricity is to some extent vulnerable to policy changes, such as changes in the regulatory energy tax and exemption rates. This became clear in 2002 when a change of government occurred and a halving of the exemption rate for green electricity was proposed. To prevent loss of customers, the Dutch energy distributors responded publicly by asserting that this would not affect the price of green electricity. Although the changes did not come into effect due to the fall of the government in the same year, it was expected that such new measures would particularly harm the imports of green electricity as they were to be accompanied by supply-side measures to support domestic renewable-energy production. The success of the green electricity concept also facilitated the decision to construct the biomass-fired power plant. Other factors were the importance of the power plant for realising the goals of the environmental action plan, and the company’s strategy to be the front-runner in gaining experience with the logistics of large-scale biomass-based electricity generation. The company’s ability to build a network in which skills, know-how and experience regarding the logistics of the biomass resource were accumulated, and its relative power within policy networks, were crucial for the power plant to succeed. The case points up several aspects that are relevant to success in diverging from established paths: for example, in response to climate change. One is the important

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role of ‘prime movers’, such as in raising awareness, undertaking investment and providing legitimacy for new technologies or products (Jacobsson and Johnson 2000). Clearly there is risk involved in developing new products and technologies, and companies often tend to play a strategic game of wait-and-see, especially when new product or technology characteristics are more a reflection of policy pressure than of market demand. This case shows that if a company is able to read the latent demands of the market it may be able to gain some first-mover advantage. As prime movers may trigger wider transformation processes, as in our case through the acceleration of the greening of the tax system and further institutional change towards labelling of electricity flows, they are likely to be well placed to take advantage of the momentum that is generated. Second, the case has also shown that in order to be able to acquire first-mover advantages the company needed to build new networks that provided the competences and legitimacy it lacked individually. Other research has confirmed that the building or restructuring of networks is required to diverge from familiar paths and to establish new practices (Rycroft and Kash 2002). Third, the introduction of a new product or technology often needs to be accompanied by further institutional change in order to gain momentum and to change a technological system. Processes of standardisation, building legitimacy and adapting regulatory frameworks are examples of this. This case also shows that these processes need to be carefully monitored and if possible directed. While the case company invested in a new facility to supply green electricity, the attractive fiscal compensation increasingly led companies to offer green electricity that was not based on newly installed capacity. Moreover, the difficulty of developing new renewable-energy projects in the Netherlands resulted in a sharp increase in imported green electricity. Although there was considerable support for measures to constrain the import of green electricity or to cancel fiscal support for green electricity based on already installed capacity, these were difficult to implement as they would require either an elaborate verification system or would conflict with the intended level playing field in the European energy sector.

Conclusion While previous efforts in renewable energy were predominantly policy-driven, they became increasingly market-driven with the introduction of green electricity. The concept fitted well in the transformation of the case company, in anticipation of the liberalised energy market, towards a modern market-oriented enterprise that could be a front-runner with its green profile in the new, open energy market. Its association with an environmental NGO increased legitimacy of, and familiarity with, the new product for the consumers, and was effective in spreading the concept throughout the electricity sector. The success of green electricity led the company to develop an innovative facility for biomass combustion. The supplier network it built secured first-mover advantages in contracting biomass resources.

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Key to the success of both innovations were the networks that the company formed and the competences and legitimacy that were added to the company. The rapid emergence of green electricity in the Netherlands shows how alignment between different actors can create momentum for more environment-friendly concepts. Social networks are key elements in the stabilisation of existing technological paths and also in the creation of new ones. Whether these new paths are really able to change course, such as towards a carbon-free electricity system, depends largely on the direction and speed of further processes of institutional change.

References Dinica, V., and M.J. Arentsen (2001) Green Electricity in the Netherlands (Report for the EBL/NFR Project; Enschede, Netherlands: CSTM). ECN (1996) Energie Verslag Nederland 1995 (Energy Report Netherlands 1995) (Petten, Netherlands: ECN). —— (2001) Energie Verslag Nederland 2000 (Energy Report Netherlands 2000) (Petten, Netherlands: ECN). EnergieNed (1994) MAP II, Milieu Actie Plan van de Energiedistributiesector (Second Environmental Action Plan of the Energy Distribution Sector) (Arnhem, Netherlands: EnergieNed). Essent (2000) ‘Essent verstevigt toppositie in duurzame energiemarkt’ (‘Essent strengthens top position in renewable energy market’), press release, 11 October 2000. —— (2002) ‘Essent Energie wil productie duurzame energie bij Amercentrale uitbreiden’ (‘Essent Energy intends to expand the production of renewable energy at the Amer power plant’), press release, 25 January 2002. Glasbergen, P., and R. Groenenberg (2001) ‘Environmental Partnerships in Sustainable Energy’, European Environment 11: 1-13. Hartman, C.L., P.S. Hofman and E.R. Stafford (1999) ‘Partnerships: A Path to Sustainability’, Business Strategy and the Environment 8.5: 255-66. Hofman, P.S. (2001) Biomass Combustion for ‘Green’ Electricity Supply: A Case Study of Innovation at the Cuijk Biomass-Fired Power Plant (Dutch Case Study Report No. 5 for the Envinno Project; Enschede: CSTM). ——, and N.E. Marquart (2001) Electricity in Flux: Sociotechnical Change in the Electricity System 1970–2000 (Dutch National Research Programme on Global Air Pollution and Climate Change; Bilthoven, Netherlands: NOP). Hughes, T.P. (1983) Networks of Power (Baltimore, MD: Johns Hopkins University Press). —— (1987) ‘The Evolution of Large Technological Systems’, in W.E. Bijker, T.P. Hughes and T.J. Pinch (eds.), The Social Construction of Technological Systems (Cambridge, MA: The MIT Press): 51-82. IPCC (Intergovernmental Panel on Climate Change) (2001) Climate Change 2001: Mitigation (Contribution of Working Group III to the Third Assessment Report of the Intergovernmental Panel on Climate Change; Cambridge, UK: Cambridge University Press). Jacobsson, S., and A. Johnson (2000) ‘The Diffusion of Renewable Energy Technology: An Analytical Framework and Key Issues for Research’, Energy Policy 28: 625-40. Lampel, J. (2001) ‘Show-and-Tell: Product Demonstrations and Path Creation of Technological Change’, in R. Garud and P. Karnøe (eds.), Path Dependence and Creation (London: Lawrence Erlbaum Associates): 303-27. Martin, J.-M. (1996) ‘Energy Technologies: Systemic Aspects, Technological Trajectories, and Institutional Frameworks’, Technological Forecasting and Social Change 53: 81-95. Nelson, R.R., and S.G. Winter (1982) An Evolutionary Theory of Economic Change (Cambridge, MA: The Belknap Press of Harvard University Press).

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Quarles van Ufford, A. (2000) ‘Wereld Natuur Fonds maakt brede publiek ontvankelijk voor complex milieuprobleem’ (‘Dutch branch of WWF makes public at large receptive to complex environmental problem’), Arena 3 (May 2000): 12-13. Rycroft, R.W., and D.E. Kash (2002) ‘Path Dependence in the Innovation of Complex Technologies’, Technology Analysis and Strategic Management 14.1: 21-35. Unruh, G.C. (2000) ‘Understanding Carbon Lock-in’, Energy Policy 28: 817-30. Van de Wiel, H. (2001) ‘Puur natuur? Energie uit biomassa’ (‘Pure Nature? Energy from Biomass’), Milieudefensie 2001–2002: 14-16.

15 Corporate responses to climate change the case of fortum Hanne Siikavirta Helsinki University of Technology, Finland

Pekka Järvinen and Arto Heikkinen Enprima Ltd, Finland

Heikki Niininen Fortum Corporation, Finland

Description of Fortum1 Fortum is an integrated energy company, founded in 1998 in the merger of power company IVO Group and oil company Neste Group. Its business covers the entire energy chain, from the exploration of oil and gas, refining of fuels, production of power and heat to energy distribution and marketing, and to energy-related engineering2 and operation and maintenance. The net sales in 2001 were 410.4 billion and operating profit 40.9 billion.3 Fortum has a focused Nordic energy strategy. A key step in the implementation of the strategy was the acquisition of the remaining 50% of Swedish Birka Energi, which was finalised in February 2002. Currently Fortum is the largest company in 1

2

3

The chapter describes the situation in November 2002. Since then many changes have happened in the company’s external environment as well as within the company itself. The vision of the future development of climate issues is becoming reality, in some respects even faster than expected, thereby increasing the value of the early actions. Enprima Ltd was established in autumn 2002 when Fortum and Pohjolan Voima divested their engineering subsidiaries Fortum Engineering and Empower Engineering. Both Fortum and Pohjolan Voima have minority positions in the company: 40 % each. Fortum also sold its boiler business to Aker Kvaerner. The deal comprised Fortum Engineering Ltd’s entire boiler business. www.fortum.com

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district heat generation and supply and the second largest company in power generation, distribution and marketing in the Nordic countries measured by net sales. Its generation portfolio consists to a great extent of non-carbon assets. Fortum is also a strong niche player in oil refining and marketing with a high-quality asset base and high-quality and environmentally benign petroleum products. Fortum’s stakeholder relationships and environment, health and safety (EHS) activities are described in greater detail in ‘Fortum in Society’ reports.4

Fortum’s climate position and early actions Fortum’s greenhouse gas emissions Fortum’s greenhouse gas emissions between 1990 and 2001 are shown in Figure 15.1. In Finland, Fortum’s emissions from energy production and refining were 8 million tonnes in 2001, over 10% of Finland’s total emissions. The emissions outside Finland originate from shipping and power and heat production abroad. 14 Outside Finland Energy production Refining

12

Mt CO2e

10 8 6 4 2 0

1990

...

1994

1995

1996

1997

1998

1999

2000

2001

2002

The emissions include those from majority-owned emission sources. Before 1998, the emissions of Fortum were pro forma5 emissions of IVO Group and Neste Group (excluding former Neste Chemicals).

figure 15.1 Fortum’s greenhouse gas emissions There are large variations in Fortum’s annual greenhouse gas emissions from energy production in Finland, because they correlate with the need to operate the coal-fired condensing power plants owned by Fortum. This need depends mainly on the hydropower production in the Nordic countries. 4 5

www.fortum.com The term is Latin for ‘as a matter of form’ and is used to refer to information that is hypothetical, here meaning Fortum’s emissions before the company was founded. Pro forma information enables more relevant comparison year over year.

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The majority of Fortum’s power production and power shares are, however, noncarbon, and the acquisition of Birka Energy has further increased non-carbon share, as shown in Figure 15.2 (Niininen 2002).6 60 Carbon 50

Non-carbon

TWh

40 30 20 10 0 Fortum including 50% of Birka

Birka

Fortum + Birka

figure 15.2 Fortum’s, Birka’s and Fortum + Birka’s carbon and non-carbon power in 2000, pro forma calculation for own production and power shares

The greenhouse gas emissions from oil refining have been relatively stable. There are, however, possibilities that they may increase in the future, owing to increasing production of cleaner-burning automotive fuels. The emissions of Fortum outside Finland are likely to decrease in the future because of the divestment of power and heat assets outside the Nordic countries. These assets consist mainly of fossil fuel-fired power plants utilising natural gas, peat or oil-based fuels.

Fortum’s Climate Initiative In order to answer to the climate change challenge, Fortum has taken several proactive steps. The climate stance, formulated soon after the formation of Fortum, stated that the climate issue was taken seriously and preparations for the planning of concrete actions were initiated.7 The preparatory work included the collection of emission statistics for company installations (also minority-owned companies), analyses of the different business strategies, the creation of a company marginal cost curve of emission reduction measures, and competitor analyses. Fortum’s Climate Initiative was launched in 2000. It contained immediate actions, targets for 2005 and longer-term objectives. The actions, targets and objectives of

6 7

A pro forma estimate for 2000. Fortum’s bar includes, among other things, 50% share of Birka. Own power production and power shares are included. www.fortum.com

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the Climate Initiative and the evaluation of the situation in May 2002 are presented in Table 15.1. The initial investment in Fortum’s Climate Fund was about 41.7 million. Additional funds are provided according to analysed needs in connection with the annual budget rounds. The objective of the creation of the Climate Fund was to acquire reasonably priced emission reduction credits from Joint Implementation (JI) and Clean Development Mechanism (CDM) activities, to learn and raise the level of expertise in emission trading types of activity, and to build up the company image. The corporate EHS unit manages the fund, the activities are discussed in Fortum’s Climate Working Group, and Fortum’s Climate Steering Group acts as the board of the Fund. The first investment of the Climate Fund was US$5 million into the PCF (Prototype Carbon Fund) of the World Bank in June 2000. In June 2002 it was decided to invest an additional US$1 million into PCF. There have also been several bilateral JI and CDM project efforts, which have originated from Fortum’s engineering and energy business activities. Two projects, a small hydropower project in Russia and electricity production from rice husk in Thailand, were preliminarily accepted by the board of the Climate Fund. It turned out, however, that recognition of the projects as JI/CDM projects by the host governments will be uncertain for the time being, and so the Fund finally decided not to invest in the projects. At the moment some of the projects developed by Fortum have been proposed to other JI/CDM investors. In November 2000, Fortum gained experience in emissions trading by selling, in the first ever transatlantic sale to the Canadian EPCOR utilities, a reduction of 50,000 t CO2e (carbon dioxide equivalent), originating from a combustion technology modification, which made it possible to increase the share of biomass up to 50% (Niininen 2002). Fortum has also made several green certificate trades concerning renewable energy certificates from hydropower plants and biomass-fired combined heat and power (CHP) plants. Furthermore, Fortum has been actively involved in the development of the European renewable energy certificate system (RECS).8 The motivation behind the targets for 2005 and beyond is that it is expected that the use of fossil fuels will be increasingly regulated and that growth potential is provided by renewable energy. In the current business environment, however, many external and internal changes may happen and it is extremely difficult to set exact quantitative targets for the longer term. For example, Fortum has sold some of the plants that were included in the company’s marginal cost curve, which formed the basis of setting quantitative targets for the reduction of CO2 emissions by increasing the use of biofuels in power and heat production. However, the share of biofuels has increased, and the target has already been nearly achieved in the pro forma sense. Fortum launched bio-gasoline to markets in mid-September 2002. Ethanol manufactured from EU surplus wine is used as the biocomponent of 98-octane gasoline. The product contains a maximum of 5% of this biocomponent and it is targeted to motorists who use 98-octane gasoline. The bio-gasoline will be manufactured until the end of 2003. The idea of this large-scale experiment is to obtain informa8

K. Kankaanpää, Fortum, personal communication, 14 November 2002.

Immediate actions Creation of a company climate fund to facilitate early implementationof Kyoto flexibility mechanisms, Joint Implementation(JI) and Clean Development Mechanism (CDM) projects

Situation in May 2002 • Fund was created in early 2000 • Investment in the Prototype Carbon Fund

(PCF) of the World Bank • Several bilateral project efforts • Emission trade with EPCOR utilities

Climate assessment and CO 2 management plan for all investment projects

Climate issue is an essential part of every environmental, health and safety (EHS) statement

Focusing R&D on climate-benign concepts

Climate issue is the driving force behind most of the R&D efforts and a significantportionof R&D investment is directed to these efforts

Targets for 2005 Increaseduse of biofuels in heat and power production by 50% resultingin a reduction of Fortum’s annual CO 2 emission in Finland by up to 500,000 tonnes

There have been many changes in the ownership of plants included in the original action plan. The share of biofuels has, however, increasedand the original target has already been nearly achieved

Launching of a biocomponent for motor fuels and a liquid biofuel for heating

The production of a liquefied wood fuel produced by a proprietary fast pyrolysisprocess in pilot scale has begun in 2002, and commercialisation is expected to begin during 2003–2004 The bio-gasoline was launched in 2002

Tripling our wind power productionto 18 GWh

This item will be reconsidered

Continuous increase in the number of climatebenign products and services

Development is ongoing

Objectives for 2010 • Increase in CHP production • Favouring renewables and low-carbonsources • Continuing our presence in nuclear • Development and commercialisation of climate-benign technologies • Continuous improvement in the efficiency of own energy use • Increasing number of climate-benign products and services • Climate-benign investments: global emissions reduced thanks to Fortum’s actions • Optimal use of the Kyoto mechanisms

Not possible to evaluate the results yet. The structure of the power-generation capacity of the company has developed favourably.The number of climate-friendly products is also increasing gradually

table 15.1 Fortum’s Climate Initiative 2000 and situation in 2002

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tion on the use of ethanol as a gasoline component in Finnish climatic conditions. The price of the product is the same as that of conventional 98-octane gasoline. The extra costs incurred by the biocomponent are to a great extent compensated by a fixed-term fuel tax reduction awarded to the project. In the background of the manufacture and testing of bio-based gasoline is the biofuel directive currently under preparation in the EU. According to the directive the amount of bio-based traffic fuels sold in the EU area should be around 20 Mt per annum in 2010.9 The first pilot plant in the Nordic countries producing liquefied wood fuel for heating began production on 14 May 2002 at Fortum’s Porvoo refinery. The pilot plant is based on proprietary technology developed by Fortum and Vapo, a Finnish biofuel and biopower producer. Forestry residues and sawdust are converted into a liquid fuel to be used as heating fuel in large residential and public buildings and industry. The plant capacity is 2 bulk cubic metres of woodchips or sawdust per hour, producing 300 litres of Forestera™ liquefied wood fuel. The development work will continue during 2002 and 2003 at which time it is expected that scale-up to commercial sizes will be possible. In full commercial scope, about a million cubic metres of forestry residue can be processed into liquid Forestera™ fuel, which can replace roughly 5% of the Finnish heating oil market. The new technology could also offer competitive energy solutions for the international markets (Fortum 2002b). Wind electricity is a slightly more expensive pro-environmental brand produced and marketed mainly for households. The demand for wind electricity has been rather small. It is suspected that reasons for this are the price premium, consumers’ poor awareness of available alternatives and reluctance to change their electricity provider. Because of the low demand for wind electricity and the company’s decision to concentrate on biomass in connection with the strategy development for renewable energy, the wind power target in the Climate Initiative will be reconsidered. Norppa Electricity and Bra Miljöval are other pro-environmental electricity brands that are marketed mainly for business sectors in Finland and Sweden, respectively. They meet the requirements for the environmental label of the national Associations for Nature Conservation.10 It is expected that the implementation of the EU Directive on the promotion of electricity produced from renewable sources will have an impact on the future of environmentally labelled electricity products. New climate-benign products and services are under development. Fortum offers its customers analyses of their energy-saving possibilities and the effect of the savings on GHG and other emissions. The feasibility of acting as an ESCO (energy service company) was tested in a pilot project.11 Fortum has also decided to withdraw from some businesses that it has developed. For example, Fortum Engineering Ltd’s boiler business based on an own boiler technology for biomass and alternative fuels was sold to Aker Kvaerner (Fortum 2002c).

9 10 11

Fortum 2002a; M. Laurila, Fortum, personal communication, 5 November 2002. www.fortum.com www.fortum.com; P. Molander, Fortum, personal communication, 11 November 2002.

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Due to many changes in the internal and external environment of Fortum the role of the Climate Initiative and its potential updating are under discussion.

Experiences from early actions The recognition of climate change as an issue that has a profound effect on the company’s future is a starting point for the company’s actions. This recognition and the initiation of early actions directed at coping with the challenge have in Fortum been mainly the responsibility of parts of the company with a more strategic, longer-term view, such as corporate EHS and R&D. The formulation of the action plan and its implementation requires, however, commitment to and involvement in the general management and various business units of the company. After two years’ experience, it can be suggested that one of the main contributions of the Climate Initiative has been to direct company thinking towards climatebenign decisions in investments and acquisitions. It can be seen, for example, that Fortum’s electricity generation structure has been developed more in a non-carbon direction, as shown in Figure 15.2. The early actions have focused on learning more about the flexible mechanisms of the Kyoto Protocol and implementation of leastcost measures in the company’s marginal cost curve to reduce its own emissions. Progress has also been made in the development of and experimenting with selected climate-benign products, processes and services. Fortum’s activities to learn more about emissions trading and JI/CDM project development have taught many valuable lessons. The emissions trading experiment provided Fortum with knowledge about the agreements related to emissions trading as well as issues related to verification of emission reductions. The experience related to JI/CDM so far suggests that for the time being it is relatively difficult for a medium-sized company such as Fortum to develop projects on its own. Therefore participation in the PCF has been a sound decision and has provided Fortum with some unique knowledge assets related to JI/CDM activities as well as emerging carbon markets in general. The development of JI/CDM projects requires many skills and new expertise. Following up and learning from the experiences of pioneering organisations requires investment in resources and ideally also the possibility of applying this knowledge in the company’s own JI/CDM project development. The experience so far also highlights the difficulty of making statements about concrete actions and quantitative targets to reduce GHG emissions in the longer term. The investment decisions and climate-benign products and services must be profitable for companies. Profitability depends on the markets and issues that have an impact on the costs. So far it seems that the demand, on a voluntary basis, for climate-benign products and services especially with a price premium is relatively small. The market potential for most climate-benign products and services in the future is impossible to estimate. At this point Fortum is developing and experimenting with new climate-benign products, processes and services it believes have markets in the future and which fit its overall strategy.

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Future challenges At the moment, the development of climate change-related regulations is focused on achieving the rather modest emission reduction targets of the Kyoto Protocol. The emission reduction targets are transformed into measures and regulations at several levels (global, regional, national), which creates threats but also opportunities for companies. The measures and regulations define the game and its rules and determine critical parameters in the decision-making process, such as the price of CO2. For Fortum, the climate change-related decisions made at the EU level in Finland and Sweden are particularly important. The national target of Finland, for example, is challenging, and the role of the energy sector in complying with it is pivotal. The Finnish energy system is already relatively efficient and includes much non-carbon production. Many climate-benign technologies, which are being introduced in many other countries—for example, the wide utilisation of biofuels and CHP production—are already used extensively in Finland.12 Therefore it is important to avoid the situation in which the allocation of emission rights to production facilities punishes the companies that have already invested in energy-efficient or low-CO2emitting technology and rewards those that have not done this. If allocation of emission rights is made fairly and the markets work efficiently, emissions trading can improve the cost-efficiency of reducing GHG emissions. The JI and CDM projects could offer a possibility to utilise the technology know-how and to reduce the compliance costs, depending on the future price level of credits and their acceptance in the emissions trading system. It is still not clear how far the global emissions of greenhouse gases will need to be reduced in this century, if major climate change effects are to be prevented. Longer-term solutions require many types of innovations and are more costly. Their development and implementation are more risky compared with current activities. In order to achieve significant reductions in emissions, more information and certainty about the development of climate policies in the longer term is required.

Conclusions and discussion Fortum is relatively well positioned and prepared for the near-term challenges that climate change mitigation poses for the companies. This is, to a great extent, due to the early recognition of the issue and the company’s early actions. The vision of the future development of climate issues has provided guidance for investments and acquisitions, which have increased the share of non-carbon production capacity in 12

The gap between the business as usual and the Kyoto target in 2010 is estimated to be 14 Mt CO2e. The National Climate Change Strategy is based on domestic measures only. It is estimated that half of the gap will be closed by implementing the Energy Saving Programme and Renewables Programme. The other half requires measures in energy production. In June 2002 parliament voted for permission to build a new nuclear power plant.

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the company’s portfolio. The other actions so far include the implementation of least-cost measures to decrease the company’s own emissions, participation in pioneering activities related to flexible mechanisms of the Kyoto Protocol, and the development of selected climate-benign products and processes. Follow-up and active participation in climate processes as well as experimenting with and adopting new business opportunities forms the basis of Fortum’s climate activities in the future. The benefits of early actions as well as the future climate strategy and activities of Fortum will be affected by the development of regulations, the situation in relation to competitors, and the development of customer values and behaviour.

References Fortum (2002a) ‘Fortum to Start Distributing Bio-gasoline’, www.fortum.com, November 2002. —— (2002b) ‘Pilot Production of Liquefied Wood Fuel Began in Fortum’s Porvoo Refinery’, www.fortum.com, November 2002. —— (2002c) ‘Fortum Rearranges its Power Plant Engineering Businesses’, www.fortum.com, November 2002. Niininen, H. (2002) ‘CO2 Trading from the Integrated Energy Company’s Perspective’, in Eyeforenergy Emission Trading 2002, 19–21 February, Amsterdam, Netherlands.

16 The Emissions/Biodiversity Exchange a corporate sustainable development programme in new zealand Bob Frame, Richard Gordon and Ian Turney Landcare Research, New Zealand

New Zealand context New Zealand, with its ‘clean, green’ image and radical adoption of economic reforms in the 1980s, provides valuable case studies of a highly deregulated context in a developed country (Kelsey 1995). Its credentials are impressive. It has one of the highest rates of renewable energy supply in developed countries (30% of consumer energy, compared with 6% for Australia and the USA) with 63% of electricity generation from renewable sources in 2000. It is one of the few developed countries whose overall ecological footprint is smaller than its actual land area (Bicknell et al. 1998; Loh 2000). However, the total primary energy supply from all renewable sources (geothermal, hydro and other sources) has decreased from 34% in 1974. Total consumer energy is dominated by domestic transport (41% of total) and is unlikely to achieve further reductions from renewable energy sources in the near future. Indeed if energy consumption continues to increase at current rates and a ‘business as usual’ energy profile continues, it is likely that New Zealand will need to increase the share of energy production from non-renewable sources. Government has set an energy-efficiency target equivalent to a continual improvement rate of 2% per annum to 2012. This is an additional 1–1.5% (or 30 petajoules, 1015) improvement on an anticipated natural rate of improvement, which is at the upper end of what is internationally accepted as cost-efficiently achievable. Currently there is scepticism about its achievability. One of the biggest challenges will be to achieve widespread and ongoing participation from individuals and institutions. The target requires participation to move beyond the current relatively small number of active energy-efficiency players, and beyond the initial ‘easy gains’. Sustainable energy ‘ best practice’ has to become embedded into the culture of organisations. It also requires an increase of

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19–42% in the renewable energy supply, probably through a range of efficiency and production measures as well as improved institutional arrangements to enable prices to support sustainable development outcomes (EECA 2001, 2002). This will lead to a 4 megatonnes (Mt) per year reduction in CO2 emissions over the first Kyoto Protocol period (2008–2012) as part of the government’s policy package (New Zealand Climate Change Project 2002). This will be supplemented by a 1 Mt reduction from the New Zealand Waste Strategy and a further 21 Mt per year equivalent from sink credits generated. However, the ‘clean, green’ image of New Zealand has been under scrutiny in recent years from a broad environmental perspective (MfE 1997), bringing a focus on to corporate social responsibility in environmental performance (Henderson 2001; Milne et al. 2001, 2003).1 Given New Zealand’s ratification of the Kyoto Protocol (December 2002), there is great interest from business in the economic effects of the country’s greenhouse gas emissions (NZIER 2001) and in pursuing sustainable development (PCE 2002; MfE 2002a; DPMC 2003). There has been a reduction in methane emissions of 5% per annum between 1990 and 1999, presumably because of a decrease in the numbers of ruminant farm animals. Carbon dioxide has been rising at about 2% per annum since 1990 and N2O has increased by about 5% from 1990 to 1999 (MfE 2002b). Meeting Kyoto targets will mean a mix of energy reduction targets, increased renewable energy supply, and shifts in institutional arrangements, though these could be offset by greater emissions from increased agricultural production. Climate change may benefit the agriculture sector by increasing overall productivity and diversification in the short term before the trend and benefits are renewed. Support is gaining momentum as awareness of the issues and the complexity of adequate responses increases (Bebbington and Gray 2001). Of particular interest is the development of a mechanism for corporates that enables an acceptable approach to all sectors, and especially those in small and medium-sized enterprises, which form 80% of the national economy. One such approach is engagement in the restoration in perpetuity of indigenous New Zealand biodiversity in mitigation of greenhouse gas (GHG) emissions.

Emissions/Biodiversity Exchange Project: EBEX21® New Zealand’s biodiversity is more primitive in character than that of many other countries, with a limited representation of higher plants and animals but a high representation of older plants and animals, with many endemic species. It has been described as a stage of the evolution of plants and animals so distinctive that it is the closest scientists will get to studying life on another planet (DOC 2000). In only 700–800 years, humans and their accompanying animals have eliminated many 1

In the context of this chapter we define corporate social responsibility (CSR) as a generic term covering sustainable development, corporate social responsibility, corporate citizenship and overall corporate performance in its widest context including development of triple-bottomline (TBL) reporting.

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species, including, among many examples, 32% of the endemic land and freshwater birds (MfE 1997). As a result most of the New Zealand landscape is now ecologically hostile to many indigenous species. Although nearly 30% of the land area (8 million hectares) is protected as conservation land, most of this is steep and mountainous. There are also about 100,000 ha of habitat available for preservation on private land. The amount of land available for preservation and the potential cost of active restoration have, to date, prohibited large-scale programmes to reverse the decline in biodiversity and national heritage (DOC 2000). However, pilot projects (Wilson 1994) demonstrated that regeneration of farmland over 20 or more years could take place, including encroachment of woody species from existing gullies into ungrazed pasture. Hall (2001) proposed this as a means of mitigating corporate carbon emissions. Although very slow-growing (typically upwards of 150 years to maturity and 200–300 years to reach target biomass), indigenous forests contain a range of species and retain high levels of carbon biomass under a wide range of environmental conditions. This is preferable to plantations of fast-growing introduced monospecies such as Pinus radiata, which covers 90% of the 1.8 million hectares of planted production forest. These plantations make rapid carbon gains, but potentially achieve a lower biomass per unit area owing to clear-felling every 25 years or so. In addition, land suitable for large-scale new plantation forests is limited, partly because of economics and partly because of public resistance from an environmental perspective. Progress since 2001 in formulating and implementing a trial of such an integrated solution has been described in more detail elsewhere (Carswell et al. 2003) including a framework for integrating efforts by businesses and communities in both emissions reduction and biodiversity restoration. Indigenous forest regeneration therefore enables: • Low-cost, low-intensity regeneration of threatened indigenous biodiversity, especially on marginal hill land and scrub, lost from lowland New Zealand through agriculture • Appropriate minimum-intensity management regimes for protected areas • An economic mechanism for mitigation of corporate carbon emissions As a result the Emissions/Biodiversity Exchange (EBEX21®) Project was established by Landcare Research in 2000 to work in partnership with organisations to help them measure, manage and mitigate their greenhouse gas emissions.2 Organisations can develop a strategy to deliver incremental improvements in their net GHG 2

Landcare Research’s 1999 sustainability report was ranked 14th globally by the SustainAbility/UNEP Global Reporters Survey and its 2001 Annual Report was ranked 22nd globally in the SustainAbility/UNEP Survey 2002 (‘Trust Us’). Landcare Research is a government-owned research institute and its Sustainable Business and Government Group’s research spans ecological economics, corporate sustainability strategy and management of change, social and participatory research, environmental accounting and sustainability reporting. Annual reports and more information are available at www.landcareresearch.co.nz. More information on EBEX21 is available at www.ebex21.co.nz including access to carbon emission calculators for businesses, households and tourists based on New Zealand conditions.

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emissions footprint by participating in a carbon-offset programme, restoring indigenous forest in perpetuity. The programme has received support from government and communities and EBEX21 aims to support rather than duplicate the role of established and competent organisations working to restore biodiversity. Significant features of EBEX21 are that: • Carbon sequestration is audited and scientifically verified through field sampling. • Organisations’ emissions are offset in the short-term (10–20 years), not the long-term future. • Environmental, social and economic gains are achieved together. • Opportunities exist to involve organisations’ staff and customers. • Cost savings are achieved through resource-use efficiency and waste minimisation. • Opportunities exist for landowner revenue from marginal, commercially unproductive land. EBEX21 has produced CarboNZ® certificates that represent offset emissions and are a statement of value and confirmation of the mitigation value of the land annually (Figures 16.1 and 16.2). These certificates will meet international criteria through validation and represent additional carbon sinks, namely post-1990 ‘Kyoto forest’. At present these are valued at about US$4 per tonne CO2: that is, US$20/ha based on an annual yield of about 5 t/ha for indigenous forest regeneration. It is

figure 16.1 CarboNZ certificate (front)

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figure 16.2 CarboNZ certificate (back)

expected that, if the price increases to US$6 per tonne (i.e. US$30/ha), then this would be sufficient to cross the threshold and deliver a positive return on marginal hill land. This would lead to the certificates becoming commercial commodities in a carbon-constrained economy. Land maps of New Zealand are being prepared to chart the national CO2 resource. EBEX21 can act therefore as an interface for the climate change agenda between corporate institutions and landowners as shown in Figure 16.3. For it to operate successfully, the interface has to include effective validation through an audit process. At present this is voluntary, but a more formal legislative model is anticipated if the model achieves traction. EBEX21 could provide a minimum of 5 Mt CO2, dependent on the price of CO2, as this will influence uptake by landowners and the amount of marginal hill land to be returned as non-harvest forest sinks. Although this would be only a fraction of the amount of sink credits to be generated, it is the additional biodiversity and low-cost benefits that are of particular value.

Development of EBEX21® as an integrated solution What is the future of the EBEX21 solution in New Zealand’s highly deregulated market economy? If it is to be widely implemented, its critical success factors need to be analysed. The following drivers and inhibitors have been identified as of greatest influence.

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Landowner (Use of marginal-land income)

Land Revenue

EBEX21® (Model, audit and validate certificates for carbon and biodiversity gains, land area required for regenerating indigenous forest)

Certificates Revenue

Organisations (Emissions offset, long-term strategy)

figure 16.3 Non-harvested indigenous forest sinks

Market forces Ratification of the Kyoto Protocol by the European Union and Japan is driving major corporates to look for solutions globally (e.g. European Commission 2001), and New Zealand could provide potential solutions. Domestically note should be taken of the very long distance from New Zealand to its main markets in Europe, North America and Asia. For example, it is estimated to take more than 11 kg CO2 to airfreight 1 kg of fresh produce to market in Europe to take advantage of seasonal variation; and this excludes embodied energy from production and domestic transport. Alternatives to this, in a carbon-constrained economy, will either be highvalue, low-volume products (probably of a high-tech nature) or economic mitigation components. EBEX21 is well poised to enable New Zealand to adapt to these forces. However, each sector of the economy has a different set of drivers at play (as shown in Table 16.1) and these are likely to become more influential with ratification.

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Supporting

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Inhibiting

Primary production Availability of unused land (agriculture,fishing, forestry) Conservationlands

Industry pressures for exotic timber production.Ruminants provide 55% of GHG emissions (these are not only CO 2 but include CH 4 and N 2 0)

Manufacturing,construction

Convenience of use and ability to pass on cost to end-user

Economic pressure to move plant offshore to non-ratifying countries (cement industry)

Utilities

Offsets renewable energy targets

Total costs could be prohibitive in a carbon-constrained economy

Trade (wholesale and retail)

New Zealand’s ‘clean green’ image has significant export value

Distance from market major factor for exports (used as negative marketing in Europe)

Transport/communications

Marketable ‘bonus’ to stakeholders and customers

Distance from market major factor for exports

Service sector(including tourism)

Potential marketing niche for tourism

High-level emissionsof travel to New Zealand may prove too costly to offset

table 16.1 Drivers for uptake of EBEX21® by business sector

Legislation Delays in implementation of the Kyoto Protocol are slowing down uptake of many climate change issues in New Zealand. In particular, there is a lack of drivers for the huge number of New Zealand small and medium-sized enterprises to adapt to the agenda, resulting in a lack of voluntary environmental agreements. Legislation and broader governance issues were recognised as key issues by most companies working on redesigning resources over the last two years (Prain 2002). Ratification of the Kyoto Protocol took place following the passing of the Climate Change Response Bill in December 2002.

Human dimension Corporate governance and the factors that influence its response to climate change issues appear ill defined and open to interpretation. While there have been developments over the wider corporate social responsibility agenda, including increasing uptake of triple-bottom-line reporting, there has been little analysis of the reluctance to accept, and subsequently to respond to, the climate change issue. Indeed it is surprising how vociferous some of the criticism of the climate change agenda has remained, with some observers still unwilling to accept the prospect of global climate change. Our initial observations of this sector suggest that very userfriendly tools, soundbite-sized messages and de-stigmatising the issues (i.e. they

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are not green issues, they are business issues) are highly important, as is peer pressure. The role of champion is critical and it is crucial to separate the role of early adopters from the incentives for second movers to enter the market. We have already identified typical corporate responsibility activities in the sustainability journey (Frame et al. 2003a) and are aware that, although there is interest in New Zealand, the lead is coming from other countries, resulting in increased interest in clean goods and offsets. It is this last issue that is anticipated to be the most difficult to assess, quantify and overcome. There are also unlikely to be major developments until the New Zealand government resolves the ratification process. A key research area is to gain a better understanding of the motivational aspects of change required to achieve a tipping point through to sustainable development.

Corporate responses to EBEX21® What, then, are the responses at the corporate level? Although EBEX21 was first conceived as a forest sink mechanism, it soon became apparent from potential users that institutions required a complete and integrated solution. As a result the project provides a step change in the level of engagement in comparison with existing mechanisms. Building on over ten years of scientific research reviewed by Hall (2001), the project has developed three integrated components to enable business to address its GHG impact: • Measurement • Management • Mitigation

Measurement EBEX21 has developed a carbon emissions calculator available online to subscribers. This enables corporates and small and medium-sized enterprises to input a range of factors (e.g. their energy use from utility bills and travel data) and obtain a CO2 emission figure that can be translated into hectares of indigenous forest to be regenerated. Energy savings can be addressed and achieved. The New Zealand Business Council for Sustainable Development (NZBCSD) is a coalition of leading New Zealand companies aligned to the World Business Council for Sustainable Development. In conjunction with the Ministry for Economic Development, NZBCSD (2002) commissioned a report to examine the business opportunities that may arise from operating within a carbon-constrained economy. They also developed an industry guide to give businesses a user-friendly, step-bystep tool to develop, account and report GHG corporate emission inventories. This industry guide is based on the World Resources Institute’s Greenhouse Gas Protocol (WRI 2001), adapted to New Zealand conditions. It is clear from this report that the

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EBEX21 calculator provides a New Zealand-specific tool that is very user friendly and maintains contemporary emission factors.

Management Having identified and measured carbon emissions, there is then a need to manage them. Many organisations, while seeing the commercial advantages of implementing change, struggle with the paradigm shift in corporate governance. Work with many of these institutions has enabled identification of key factors: • Reduction of emissions through measure-to-manage programmes (combined with redesign where possible) • Vision: role of an internal champion, preferably the CEO and the board, to create an enabling environment • Values: corporate social responsibility becomes increasingly relevant to the organisation and driven from within • Stakeholder involvement within, and external to, the organisation • Establish feedback systems for continual improvement such as environment management systems (e.g. Enviro-mark® NZ or Green Globe21). For large companies there has been a sense of market advantage in being early adopters either nationally or internationally. However, some see the threats as outweighing the advantages, and statements are made about relocation to nonratifying neighbour, Australia. Given New Zealand’s reliance on small and mediumsized enterprises, these small companies, with their limited resources, have not had the natural environment high on their list of priorities, at least not beyond legal compliance (Gray and Milne 2002; Frame et al. 2003b). There also has been no legislative driver in the highly deregulated economy. This is changing with increasing interest in triple-bottom-line accounting, which appears to be a key component for change. It is also surprising that few voluntary environmental agreements are being adopted, as these have been successful elsewhere as change agents (ten Brink 2002). However, there is much still to be done in developing an understanding of the drivers and what will increase their power to the point at which mitigation becomes a desired outcome. There is also a close relationship with aspects of human behaviour and the broader topic of socioeconomic direction.

Mitigation Corporate responses to GHG mitigation in New Zealand have been slow to take off. Informal tree plantings, species recovery programmes and other restoration interventions by corporates through the Redesigning Resources Group (Prain 2002) and by others are not uncommon but there is little co-ordination of efforts. Over 30 organisations have signed up to EBEX21, including central and local government agencies, electricity providers, retailers and the tourism sector, within which there

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is significant commitment to GHG reduction. The production of carbon certificates has already commenced in the ‘grey’ market prior to the first commitment period. In October 2002 the government announced its policy package for reducing GHG emissions in response to climate change and ratified the Kyoto Protocol in December of the same year. The New Zealand government policy package (New Zealand Climate Change Project 2002) encourages the protection (non-harvest) of forest sinks as a useful addition to the general mechanism to encourage Kyoto forest sinks and these will be indigenous forests that have regenerated since 1990. Such forests contribute a wide range of benefits including: • Biodiversity enhancement • Water quality control • Erosion control • Alternative economic opportunity for marginal land owned by M¯ aori (indigenous New Zealanders) • Investment opportunities in potentially low-cost sink activities However, the incentive for non-harvest permanent forest sinks is different from that of forest production plantations. This is because net carbon sequestration in permanent/indigenous forests is long-term (300–400 years). From a commercial perspective, permanent forest sinks rely on returns generated from sink activities, whereas plantation sinks have additional income from timber harvest. The New Zealand government has recognised the significant potential of the EBEX21 approach and has adopted non-harvest forest sinks as a national policy response under Article 3.3 of the Kyoto Protocol. At the time of writing we are excited by the increasing possibilities of corporate take-up for EBEX21 and predict a promising future ahead for this kind of carbon mitigation process.

References Bebbington, J., and R. Gray (2001) ‘An Account of Sustainability: Failure, Success and a Reconceptualization’, Critical Perspectives on Accounting 12: 557-87. Bicknell, K.B., R.J. Ball, R. Cullen and H.R. Bigsby (1998) ‘New Methodology for the Ecological Footprint with an Application to the New Zealand Economy’, Ecological Economics 27: 149-60. Carswell, R., R. Frame, V. Martin and I. Turney (2003) ‘Exchanging Emissions for Biodiversity: In Pursuit of an Integrated Solution in New Zealand’, Ecological Management and Restoration 4.2: 85-93. DOC (Department of Conservation) (2000) The New Zealand Biodiversity Strategy (Wellington, New Zealand: DOC Publishing). DPMC (Department of the Prime Minister and Cabinet) (2003) Sustainable Development for New Zealand: Programme of Action (Wellington, New Zealand: DPMC). EECA (Energy Efficiency and Conservation Authority) (2001) National Energy Efficiency and Conservation Strategy (Wellington, New Zealand: EECA). —— (2002) Consultation Document on Renewable Energy (Wellington, New Zealand: EECA).

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European Commission (2001) Green Paper on Integrated Product Policy (Report COM [2001] 68-C50259/2001-2001/2117[COS]; Brussels: European Commission). Frame, B., R. Gordon and I. Whitehouse (2003a) ‘Corporate Responsibility in New Zealand: A Case Study’, in R. Shah, D. Murphy and M. McIntosh (eds.), Something To Believe In: Creating Trust in Organisations: Stories of Transparency, Accountability and Governance (Sheffield, UK: Greenleaf Publishing): 190-206. ——, W. McGuinness and R. Gordon (2003b) ‘Reinforcing a Clean Green Brand: An Overview of Sustainable Development Reporting in New Zealand’, AccountAbility Quarterly 21: 23-28. Gray, R., and M.J. Milne (2002) Sustainability Reporting: Who’s Kidding Whom? (Accounting and Business Law Working Paper Series; Dunedin, New Zealand: University of Otago). Hall, G.M.J. (2001) ‘Mitigating an Organization’s Future Net Carbon Emissions by Native Forest Restoration’, Ecological Applications 11: 1,622-33. Henderson, D. (2001) Misguided Virtue: False Notions of Corporate Social Responsibility (Wellington, New Zealand: New Zealand Business Roundtable). Kelsey, J. (1995) The New Zealand Experiment: A World Model for Structural Adjustment? (Auckland, New Zealand: Auckland University Press). Loh, J. (ed.) (2000) Living Planet Report (Gland, Switzerland: WWF). MfE (Ministry for the Environment) (1997) The State of New Zealand’s Environment (Wellington, New Zealand: MfE). —— (2002a) The Government’s Approach to Sustainable Development (Wellington, New Zealand: MfE). —— (2002b) Third National Communication under the Framework Convention on Climate Change (Wellington, New Zealand: MfE). Milne, M.J., D.L. Owen and C.A. Tilt (2001) ‘Corporate Environmental Reporting: Are New Zealand Companies Being Left Behind?’ University of Auckland Business Review 3: 25-35. ——, H. Tregida and S. Walton (2003) The Triple-Bottom-Line: Benchmarking New Zealand’s Early Reporters (Working Paper 01_02/03; Dunedin, New Zealand: University of Otago). New Zealand Climate Change Project (2002) The Government’s Preferred Policy Package: A Discussion Document (Wellington, New Zealand: New Zealand Government, www.climatechange. govt.nz). NZBCSD (New Zealand Business Council for Sustainable Development) (2002) Business Opportunities and Global Climate Change (Auckland, New Zealand: NZBCSD). NZIER (New Zealand Institute of Economic Research) (2001) The Economic Effects of Greenhouse Gas Emission Policies: A Quantitative Evaluation (Wellington, New Zealand: NZIER). PCE (Parliamentary Commissioner for the Environment) (2002) Creating our Future: Sustainable Development in New Zealand (Wellington, New Zealand: PCE, www.pce.govt.nz). Prain, M. (2002) The Redesigning Resources Story: Eight Companies Creating New Value (Christchurch, New Zealand: Redesigning Resources Group). Ten Brink, P. (ed.) (2002) Voluntary Environmental Agreements: Practice, Process and Future Use (Sheffield, UK: Greenleaf Publishing). Wilson, H.D. (1994) ‘Regeneration of Native Forest on Hinewai Reserve, Banks Peninsula’, New Zealand Journal Ecology 32: 373-83. WRI (World Resources Institute) (2001) The Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard (Boston, MA: WRI).

17 Rent sharing in the Clean Development Mechanism the case of the tahumanu hydroelectric project in bolivia Christophe de Gouvello Centre International de Recherche en Environnement et Développement, France

Pierre Mollon EDF-E7, France

Sandrine Mathy Centre International de Recherche en Environnement et Développement, France

In 1997 in Kyoto, at the fourth ‘Conference of the Parties’, the industrialised countries, also known as the Annex B countries, made quantified commitments to reduce their national greenhouse gas emissions within the framework of the Kyoto Protocol. To honour their commitments, the signatory countries will set up national mechanisms for restrictions and incentives acting on the emitting agents. To minimise and distribute the reduction costs for all Annex B countries, the Kyoto Protocol adopted flexible mechanisms, including establishing the market for tradable emission permits (trading), the Joint Implementation (JI) and the Clean Development Mechanism (CDM). Annex B countries and their emitting agents will be able to use these mechanisms to achieve or acquire emission reductions in other countries more cheaply than would be possible in their own. Developing countries themselves have refused to commit themselves to reducing their own emissions, because they considered that such commitments would generate additional constraints on their future development, and because the historical responsibility for climate risk falls on industrialised countries. However, experts anticipate that within a few decades the emissions of developing countries, taken as a whole, will reach a level equivalent to that of Annex B countries. Controlling the emissions of developing countries is therefore a major challenge if the objectives of the Climate Convention are to be met.

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For industrialised countries the main interest of the Clean Development Mechanism is to provide a large potential for emission reductions at a lower cost. Consequently, whereas the ‘flexibility’ dimension is explicit, the ‘developmental’ dimension remains unclear. The definition of the mechanism itself includes the statement that ‘the purpose of the Clean Development Mechanism shall be to assist Parties not included in Annex I in achieving sustainable development’, but one of the most obvious risks is to divert the use of this instrument towards projects that would lead only to emission reductions and to few or no benefits in terms of development. The CDM could then be accused of creating new economic enclaves, like the ancient mining exploitations, which generate few positive externalities in development. At the Kyoto Conference the developing countries opposed the principle of pure flexible mechanisms offering no guaranteed contribution to their development needs. As a consequence, the CDM emerged as a late compromise in response to these concerns. The CDM should contribute to reducing the costs of the commitments made by industrialised countries, and also avoid the legitimate growth of developing countries cancelling out those efforts. Its effectiveness therefore depends on the capacity of the economic and political players to adopt an approach that continuously associates the development needs of the developing countries and the control of greenhouse gas emissions.

Faster progress along a less polluting development path Motivated by the Certificates of Emission Reductions (CERs) that foreign investors can obtain from CDM projects to meet their own Annex B commitments, or by the income that they anticipate from these CERs, investment will focus more on the nonAnnex B countries. At the same time official assistance has fallen significantly since the beginning of the 1980s.1 Seen from these countries, the main assistance for projects that the CDM will generate will thus be to attract more private-sector investment for funding. The stakes in terms of sustainable development are twofold: • To stimulate the transfer of technologies to developing countries, resulting in access to more effective and less polluting technologies, and ultimately a switch to a development path less intensive in greenhouse gas (GHG) emissions. In addition to contributing to the mitigation of climate change, most of the clean technologies promoted by the CDM will also contribute to reducing local pollution.

1

Despite an apparently near-stationary level in absolute value, at above $50 billion per year, official development aid (ODA) fell considerably during the 1990s in terms of the effort made by the donor countries, decreasing from 0.33% to 0.22% of GDP, equivalent to a shortfall of $21 billion in 1998 (OECD Official Development Assistance Figures 2000, www.oecd.org).

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• To remove funding restrictions, insofar as access to capital is easier and the cost of capital is lower for the investors from Annex B countries, and thus facilitate faster progress along a ‘cleaner’ development path than would have been possible in the absence of the CDM (Mathy et al. 2001). The CDM will lead to a win–win result if the non-Annex B countries make faster progress towards their development objectives, while emitting less CO2 than if they had progressed alone on the present development path. This is illustrated in Figure 17.1. CO2 emissions Business-as-usual development path

Clean development path CO2 emissions at t1 without CDM CO2 emissions at t1 with CDM CO2 emissions at t0

GNP GNP at t0 GNP at t1 with CDM GNP at t1 without CDM CDM = Clean Development Mechanism; CO2 = carbon dioxide; GNP = gross national product

figure 17.1 Possible effect of CDM on the development path of Annex B countries

Environmental rent, commercial rent and social rent associated with CDM projects To clarify the incentive effect that CDM may have on private economic players in Annex B countries, it is important to assess their view of it realistically. A limited appreciation consisting of considering that the only motivation of a CDM investor would be restricted to generating low-cost emissions reductions is inappropriate. This motivation is, nevertheless, real and natural. For example, it applies to a project of modernisation of a cement factory leading to a reduction in the previously observed greenhouse gas emissions, and this at a unit cost below the marginal abatement cost in the country of the investor, or on the tradable emission

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permits (TEP) market.2 Such investors act according to a cost-efficiency logic. They decide to invest if their analysis shows that the unit cost of the reductions will be lower than the costs they would have to face in their own country to attain the quantitative reduction goals for which they are responsible. Alternatively, they will try to generate reductions whose unit cost is below the usual prices on the TEP market so as to profit from the difference. The range of projects eligible for CDM is in fact much wider because it is open to all foreign investment opportunities in every sector, whenever there is a technical alternative enabling avoidance of greenhouse gas emissions. Therefore, an appropriate perspective is required to anticipate the variety of possible projects. For most industrial investment projects, the decision is mainly guided by analysis of the cost–benefit type: an investment project is implemented only if the cost–benefit analysis is conclusive for the investor whose main revenues will come from the marketing of products and services resulting from the main targeted activity, i.e. from the commercial rent. The value of emission reduction certificates expected on the emission permit market is in this case added to the conventional commercial income, and can therefore possibly make the difference when comparing the business plan for the ‘clean’ project and that for a ‘dirty’ project, taken as a reference project. The certificates issued in the framework of CDM consequently appear as an additional environmental rent in the analysis of the variants of investment projects.3 Many so-called development projects in developing countries have mixed public– private financing structures. This type of financial set-up is found in public commercial services, frequently leading to delegated management contracts: the financial structure may consist partly of private investment provided by the concessionaire, which is limited by the expectation that revenues will be insufficient to remunerate the entire investment, and partly of public funds. This is usually the case for urban transport (buses and metros), rubbish collection, rural electrification, certain road infrastructures and other similar types of project. Direct financing of a part of the investment costs by public authorities, without receiving commercial revenues, is justified by the expected benefits for the community. When the activity is not profit-making and cannot be spontaneously developed by simple market forces, official or parapublic funding is necessary to attract private capital.4 2 3

4

Although this theoretical situation seems quite simple, emission reductions will most probably not be the unique motivation for modernising a cement factory. Of course the creation of investors’ funds such as the Prototype Carbon Fund implemented by the Word Bank is plausible. Such funds would invest only in the ‘additional’ project or ‘dual’ project as far as it can be identified. Such a ‘dual’ project would consist of isolating the difference of cost between two projects (the ‘clean’ project and the reference project) and rating it according to the certified emission reduction. Of course such ‘dual’ investors would then only be interested in projects whose emission reduction unit cost, calculated in this way, would be below the market price of emission permits. For projects whose reduction unit cost is higher or incalculable, the main investor might not find any additional investor, but he could still valorise the CERs he could claim by selling at the market price. This would generate an additional rent. For the least developed countries, only official development aid (ODA) enables them to finance the non-profit-making part of these activities, and this is of course independent of any consideration of climate change. It is therefore important not to confuse the legitimate refusal

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There are thus several facets to CDM projects: (i) mitigation of the greenhouse effect, (ii) incentives for private investors, and (iii) development. These facets can be considered in the light of the three types of rents expected, the sharing of which requires a consensus between the investor and the host country. • The classical commercial rent for a private investment, from which it is necessary to deduct standard transaction costs associated with direct foreign investments, and which depends among other things on the characteristics of the host country • The environmental rent derived from the volume of emission reduction certificates (CERs) and from the mechanisms by which their value is enhanced, and from which specific transaction costs associated with the CDM procedures must be deducted. Revenues can be generated from the sale of CERs, thus improving the attractiveness and competitiveness of investments in developing countries. This can also help the financial structuring of investment projects by attracting new financial partners keen to participate in the investment to obtain CERs granted to the projects by the CDM. • The social or ‘developmental’ rent which is the increase in the supply of products and services necessary for the economic and social development of the country, or the production of positive externalities—versus reduction of negative externalities—for the host country Finally, it is from the combination of these three rents, whose relative proportions differ between projects, and not only from the environmental rent, that the collective decision to implement a CDM project will arise. This decision will depend not only on the total value but also, possibly more importantly, on the negotiated sharing of these rents, case by case, between the various protagonists of the project.

The prospects of CDM projects in the electricity sector Many observers agree that the main potential for reducing emissions in developing countries is in the electricity sector. This is partly due to volume considerations, in view of the expected development of the supply, and partly due to questions of feasibility, as this sector offers many opportunities requiring only a small number of projects and industrial agents. It is important too that, as the electrical power sector meets the needs of a local market and not of an international one, the CDM projects in this sector do not

of any recycling of ODA to finance the buying of emission reduction in the developing countries by Annex B countries, and the needs of ODA to make the non-profit-making part of developing projects viable, whether or not the projects are ‘clean’. This would seriously penalise the least developed countries as compared to other developing countries, which do not need ODA to cover such non-profitable costs.

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involve relocating Northern activities to the South but increasing and improving the energy supply in the South.5

CDM in the conventional electricity sector This sector comprises generation, transmission and interconnection, and distribution. The power generation technologies currently used in developing countries are generally very polluting (coal, oil). Thus large GHG emission reductions are possible when large international energy companies invest in non-Annex B countries which open this sector to foreign investors. Emissions reduction is possible at several stages of the energy chain. At the production level, substitution of primary energy sources and of technologies is the most obvious type of action (see Bosi 2000). At the transmission level, the emission reduction potential mainly lies in the possibilities for interconnection of different systems (regional integration in southern Africa, for instance) with large hydroelectric plants. On a smaller scale, the interconnection between small and low-efficiency isolated systems based on diesel, with a national system supplied by modern thermal power plants, can also promote reduction of GHG emissions. The management of distribution grids also offers a large potential through loss reduction, thereby reducing the primary energy consumption and thus GHG emissions for a given demand.

CDM and demand-side management Programmes of energy conservation and demand-side management (DSM) in the industrial, tertiary and domestic sectors may equally lead to GHG emission reductions. Energy conservation projects often show a positive theoretical profitability. Does it mean that these projects will not be eligible for CDM although they are consistent with sustainable development objectives and are not spontaneously generated by the market forces? The existence of various barriers blocking the exploitation of energy conservation potentials has been well documented (see Jaffe and Stavins 1994; Ostertag 2002). Several of these barriers appear in the list issued for public comment by the CDM Executive Board during the summer of 2002,6 and energy conservation projects have been considered eligible by the COP 6.5 at Bonn.7

5

6 7

In other sectors, certain relocation projects motivated mainly by cheap workforce may try to take profit from high emission level baselines observed in the host country to get CERs from the CDM, although they only transfer emissions from the North to the South. Such ‘free-rider’ projects must be avoided. See Appendix A of the Annex B of ‘Recommendations for simplified modalities and procedures for small scale CDM project activities’ (unfccc.int/cdm/Panels/ssc/annexb.pdf). See paragraph 6(c) of Decision 15/CP.7: ‘Principles, nature and scope of the mechanisms pursuant to Articles 6, 12 and 17 of the Kyoto Protocol’ (unfccc.int/cdm/rules/modproced. html).

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CDM and rural electrification8 In many developing countries, electric power sector reforms and privatisations have been accompanied by a reduction, even by near-disappearance, of the obligation to electrify rural areas. Furthermore, most developing countries are in debt and the local state cannot ensure universal access to the service. At the same time new techniques for decentralised rural electrification are developing, mainly supported by individual renewable energy-based electricity generation systems, chiefly individual photovoltaic systems, but also hydropower micro-plants, small windmills and hybrid systems associating existing diesel groups with local production of new and renewable energy (NRE). These small systems are flexible enough to adapt to small electricity volumes required by rural households. New institutional structures such as ‘delegated management’ have been created to make decentralised electrification programmes viable, bringing together private investment and public subsidies. Indeed, rural electrification is, in almost all countries of the world, a nonprofit-making activity, which requires official aid or cross-subsidies between consumer groups. The contribution of NREs to GHG emission mitigation makes the use of renewable energies in these countries eligible for the financing mechanisms arising from the international negotiations on climate, i.e. the Global Environment Facility (GEF) and Clean Development Mechanism (CDM). Because the CDM has development objectives, rural electrification projects correspond perfectly to this mechanism. NRE projects smaller than 15 MW of installed power have already been proposed as being eligible in the category of ‘type I small-scale CDM projects’ (renewable energy projects) in the recommendations of the CDM Executive Board at the COP 8 in November 2002 in New Delhi.9

Example: the Tahumanu hydroelectric project in Bolivia The small towns of Cobija, Porvenir and Villa Busch in the Pando province in the north of Bolivia, near the Brazilian border, have an insufficient power supply that is both temporary and of poor quality. Many users are presently supplied by isolated mini-grids energised by small diesel generators, some of which are very old. About two-thirds of the cost of fuel used by those diesel groups is paid for by central government via a system of specific subsidised prices. Studies of the evolution of residential and industrial local demand forecast an increase in rationing of the service in the coming years. The installation of a new, more powerful and more efficient diesel group (2 × 640 kVA—400 V) on the main site (Cobija) is being studied as a means of improving the situation. An MV (medium voltage) transmission line linking Cobija 8 9

For a detailed discussion of this issue, see de Gouvello and Maigne 2002. Annex B of the ‘Recommendations by the Executive Board to the Conference of the Parties on draft simplified modalities and procedures for small-scale CDM project activities (2002)’ (unfccc.int/cdm/ebmeetings/eb005/eb5ressc.pdf).

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to Porvenir and Villa Busch is also being constructed. However, predicted demand forecast from the growth rates over the last ten years, and the growth of industrial activities nearby,10 indicate that rationing will be required again only four years after installation of the new generators. The alternative studied by the E7 Fund11 and submitted to potential private partners consists of building a collapsible dam from inflatable tubing, equipped with three Kaplan turbines of 1,980 kW each, coupled to three alternators (3 × 2,200 kVA—600 V). An integrated company would be created (encompassing generation, transmission and distribution) to operate the system. The E7 Fund would own 51% of the shares.12 The other shareholders would be a Bolivian operator13 and possibly other financial partners if the operator did not wish to hold all the remaining shares. The environmental impact assessment (EIA) that has been carried out in partnership with the local university and a local environmental NGO predicts a very limited impact on the local environment. This technical alternative could eliminate, on a long-term basis, the constraint that limits the electricity supply with the associated problems for all the small towns and local industries. It would also terminate consumption of fuel oil, which is both heavily subsidised and emits greenhouse gases. As such, the project may be eligible for the Clean Development Mechanism. The common decision of the E7 companies and the Bolivian authorities to plan this project under the CDM is the result of the production and the division of the triple rent that it will generate.

Social or ‘developmental’ rent The social or developmental rent associated with the project has several components: • The increase in (i) the benefits associated with the use of electricity due to improved access to the service—lengthening of the service to 24 hours per day, the possibility of coverage for homes in the periphery of small towns, (ii) the quantity of electricity consumed and (iii) the quality of the service—end of rationing and power cuts due to failures

10

11

12 13

In particular, industrial production of Brazil nuts, and sawmills. The duty-free areas of Cobija (Bolivian side) and Brasiléia (Brazilian side), which could be connected, are stimulating the economic development of the region. Infrastructure development projects to open up the area are in progress, especially the building of a 75 km motorway to Peru. E7 is an entity created by seven large electricity companies of the G7 countries to promote longterm development in the electricity sector, particularly in developing countries and in economies in transition (EITs). The E7 has created the E7 Fund for sustainable energy development, which promotes projects aimed at the learning about mechanisms established under the Rio Convention and the Kyoto Protocol. The E7 Fund enjoys a special NGO status granted by the ECOSOC of the United Nations. The capital of the company to be created would be about $8 million: that is, about one-third of the necessary investment. The potential operators are Electrogaz, whose main shareholder is Iberdrola; Cobee, the shareholders of which are American or Swedish; and CRE, a large Bolivian electricity cooperative.

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• The benefits associated with the use of electricity include access to goodquality lighting, the use of basic domestic appliances (refrigerator, iron, etc.) and audiovisual equipment, the improvement of community services (health, education) and the development of productive use of electricity, which contribute to local economic and social development. • The reduction of the collective national cost, arising from the two-thirds subsidy (the special fuel tariff) for isolated systems • New fiscal revenues, resulting from tax profits generated by the new activity

Commercial rent The commercial rent generated by the sale of electricity at the statutory tariff should provide an internal rate of return around 10.7% on the capital invested by the consortium; for example: one-third in the form of a contribution by E7, which is not seeking traditional private investor profitability, but nevertheless wants to recover its investment;14 one-third in the form of a 15-year bank loan at 6% with a grace period of 5 years;15 and one-third in the form of capital contribution by a private investor, remunerated at a rate of 18% per year.

Environmental rent Environmental rent results from the lower CO2 emissions than those in the reference scenario with diesel generators and would be shared between the E7’s private partners and the Bolivian government. Studies indicate that annual production will be 38 GWh, corresponding to avoiding the emission of 30,400 tonnes of CO2 a year. In the case of the Tahumanu project, the allocation of the environmental rent is one of the issues that has not yet been decided by the partners, for two reasons: first, because the practical modalities of the CDM have not been completely defined;16 and, second, the value of this rent can for the moment only be the subject of speculation concerning future market prices of carbon, unless it is internalised to the project on the basis of a repurchase agreement between shareholders. The progress of the Tahumanu project allows elaboration of two pre-simulations to anticipate the future impact of CDM on the structuring of the clean energy generation project. First, note that the reference scenario—the building of the initially planned diesel group—would lead to a production cost of US$174.00/MWh,17 corresponding

14 15 16 17

For the purposes of the calculations below, we express this contribution in the form of following exploratory hypothesis: one-third loan by E7 at 0% repayable in 25 years. This type of preferential financing condition can be obtained from a development bank. The CDM Executive Board in June 2002 nominated a ten-member Expert Panel to develop recommendations on guidelines for methodologies for baselines and monitoring plans. Calculated on the basis of an investment of US$910/kW and of an IRR (internal rate of return) equal to the standard discount rate of 10%.

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to US$81.60/MWh after subsidies granted by the Bolivian government to fuels for electricity generation in isolated systems.18 Depending on the share of the production that will be sold, the financial outline above leads to a production cost of between $81.60/MWh and $69.0/MWh,19 not taking into account the R&D costs. In order to avoid a large number of figures, we limit the analysis to the second case ($69.0/MWh). We have examined two alternatives for the use of the carbon rent.

Recycling of the carbon rent in rebates on electricity prices The first alternative for assignment of the carbon rent leaves the financing modality unchanged and recycles the carbon rent as rebates on electricity selling prices. In this case the local state and the users are both winners, because in addition to the developmental rent described above, they also benefit from lower tariffs and eliminating subsidies on fuel. But the project is not reproducible for it depends on a financing at a rate of 0% for one-third of the initial investment cost. The incidence of the carbon income on the price of electricity availability is explained in Table 17.1, assuming US$25 per ton of CO2.20 The full recycling of the carbon rent as tariff rebates makes it possible to lower electricity prices from US$69.0/MWh to US$49.0/MWh: that is, by 29%. Hypothetical international price ($US) of the avoided CO2 tonne 25

Assessment of the total international rent ($US million) 0.76

Rebate on electricity selling price ($/MWh)

−20

table 17.1 Recycling of the environmental rent as rebates on electricity selling prices

18 19

20

The subsidised price is B$1.05/L whereas the real cost is B$3.05/L. Subsidy is about two-thirds. In the second case, the totality of the production can be marketed, because the Cobija– Brasiléia connection is completed from the start. In the first case, we have adopted a more pessimistic scenario where the connection will only be completed in year 4. This estimated price, which corresponds to a plausible value at the moment when the exercise was performed using business plan simulation tools (that is, before the withdrawal of the US from the Kyoto Protocol), may appear high today, mainly because of the uncertainty regarding the management of hot air of the economies in transition (EITs), including Russia. However, the position as the dominating monopoly of the EITs may lead them to try to maximise their carbon rent. Now the marginal emissions reduction costs observed in other Annex B countries are high. Thus it is plausible that market prices will increase. In a recent pre-simulation exercise, the broker Natsource uses a price of $23/t CO2 in 2010 (Natsource, July 2002). Hourcade and Ghersi indicate a price range varying from $15 to $100/t C from pre-simulations with 12 different price models (Hourcade and Ghersi 2002).

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Recycling the carbon rent to attract a private investor The second alternative recycles the carbon rent as an additional income every year, to ensure attaining sufficient remuneration for a more classical financial structure. The function of this recycling is to provide evidence that the environmental rent from the CDM would make reproducing such projects possible. As a result, the non-profit-making financing by E7 is substituted by a classical capital contribution by a private investor, to be remunerated at an attractive level. It means that the share of financing ensured through classical private financing increases from one-third to two-thirds. Table 17.2 presents the IRR evolution according to the same carbon valuation. A price of $25.00/tonne CO2 allows a remuneration that, although not very high, remains acceptable for a conventional private investor in the electricity generating sector. International price of avoided CO2 (US$ per tonne)

Return on equity (%)

25

15.0

0

10.6

table 17.2 Viabilisation of private investment by CDM carbon rent

The Bolivian government still benefits, as previously, from a CDM rent by the elimination of fuel subsidies, allowing funding of other programmes. If carbon prices on the international market are lower, an attractive level of capital remuneration could be ensured by (i) increasing the financing share under favourable conditions by development banks, or (ii) obtaining financial participation from the Bolivian authorities: for instance, by recycling a part of the saved subsidy.

Conclusion In conclusion, the objective of this chapter was to present the context in which conventional investors in the electricity sector could be placed when making decisions regarding future opportunities of eligible projects for the Clean Development Mechanism. Although certain modalities of the CDM remain to be detailed by the CDM Executive Board, it is already possible to investigate projects, both in terms of contributions to development and to reductions of greenhouse gas emissions. Such investigations can initiate a learning process regarding the future influence of the CDM on investment decisions and on its capacity to promote the use of cleaner technologies in developing countries. The Tahumanu project initiated by E7 is a response to this need to learn. It allows exploration of the formula for sharing the additional carbon rent coming from CDM

17. rent sharing in the clean development mechanism de Gouvello et al.

253

between the host country and the private investor, and the viability of such investments for conventional investors in the electricity sector. Non-Annex B host countries have insisted on the benefits that such projects should bring in terms of development. But it is also clear that governments in developing countries will have to make choices between maximising the direct carbon income by retaining a high share of CERs, and maximising the capacity to attract additional foreign investment, by leaving the carbon rent to private project developers.

References Bosi, M. (2000) An Initial View on Methodologies for Emissions Baselines: Electricity Generation Case Study (IEA Information Paper, www.iea.org/envissu/cdm.htm). De Gouvello, C., and Y. Maigne (2002) ‘Decentralised Rural Electrification in the Context of Negotiations on Climate Change’, in Fondation Energie pour le Monde, ADEME, EDF and CNRS (eds.), Decentralised Rural Electrification: An Opportunity for Mankind, Techniques for the Planet (Paris: Systèmes Solaires). Hourcade, J.C., and F. Ghersi (2002) ‘The Economics of a Lost Deal: Kyoto–The Hague–Marrakech’, The Energy Journal 23.3: 1-26. Jaffe, A.B., and R.N. Stavins (1994) ‘The Energy Paradox and the Diffusion of Conservation Technology’, Resource and Energy Economics 16: 91-122. Mathy, S., J.C. Hourcade, and C. de Gouvello (2001) ‘Clean Development Mechanism: A Leverage for Development’, Climate Policy 1.2 (June 2001): 251-68. Natsource, LLC and GCSI (2002) Assessment of Private Sector Anticipatory Response to Greenhouse Gas Market Development (study conducted for Environment Canada, www.natsource.com). Ostertag, K. (2002) No-regret Potentials in Energy Conservation: An Analysis of their Relevance, Size and Determinants (Technology, Innovation and Policy Series of the Fraunhofer ISI; Heidelberg: Physica).

18 An early corporate response to climate change a review of a us electric companysponsored joint implementation pilot project Naoko Kubo* Global Reporting Initiative, The Netherlands

In the decade since the United Nations Framework Convention on Climate Change (UNFCCC) was opened for signature in 1992, climate change has become one of the most critical environmental issues for both the public and private sectors. Corporations in industrialised countries have been seeking measures to meet the potential emissions reduction requirements, anticipating the ratification of the 1997 Kyoto Protocol—the first binding treaty for national greenhouse gas (GHG) emissions. The Kyoto Protocol requires industrialised countries to reduce their emissions to at least 5% below 1990 levels in the first commitment period of 2008–12 (Kyoto Protocol (1997). This chapter raises some of the practical issues regarding Joint Implementation (JI), a strategy allowing two or more parties from different countries to jointly reduce GHG emissions. The concept of JI is based on the fact that GHG emissions have no direct environmental effect on a local level, and their effect on climate is uniform on a global level regardless of where they are emitted; therefore, reduction or offset measures could take place away from sources of emissions (Dixon 1997). If mandated in the future, those who invested in such measures could earn emissions reduction credits towards their national quota. The JI strategy could substantially lower the overall cost of efforts to reduce GHG emissions, because the cost of GHG emissions reduction (e.g. introducing solar power generation to replace coal power generation) or sequestration (e.g. planting trees to enhance carbon uptake) measures vary among different countries (Dixon 1997; Harvey and Bush 1997). The JI *

The author would like to thank Dr David Angel and Dr Dianne Rocheleau at Clark University and to all who have provided valuable inputs to the research leading to this chapter. The views expressed in this chapter are those of the author and do not necessarily reflect those of the Global Reporting Initiative.

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strategy, however, has also been a subject of controversy; some analysts question its practicality and effectiveness in reducing GHGs and criticise it as a means for industrialised countries to ‘abdicate responsibility’ for reducing their domestic GHG emissions (Harvey and Bush 1997: 39). The chapter reviews a case study of a JI project aimed at reducing carbon dioxide (CO2) emissions using enhanced management of tropical forests in Southeast Asia. The project, which began in 1992, is known as the reduced impact logging pilot project. The chapter illustrates some of the outcomes of the pilot project, raises some questions specific to the case study and concludes with a more general analysis of the potentials and pitfalls of JI.

Background The original JI strategy introduced under the UNFCCC was to allow industrialised countries (included in Annex I of the UNFCCC) to take joint actions to achieve the GHG emissions reduction goals set forth by the UNFCCC in a timely and cost-effective manner (UNFCCC 1992). JI was intended to take place among industrialised countries and had to result in GHG emissions reductions that would not have taken place without such initiatives. However, in a five-year JI pilot programme established in 1995 by the Conference of Parties (COP, a supreme body responsible for the implementation of the UNFCCC), known as ‘Activities Implemented Jointly’ (AIJ), the focus shifted to partnerships between industrialised and industrialising countries, allowing voluntary participation of industrialising countries (COP 1995). JI advocates, particularly the United States, supported such a JI strategy as the general consensus was that any measures to reduce GHG emissions would be more cost-effective to implement in industrialising countries than in industrialised countries. For example, the replacement of existing facilities with less-GHG-emitting facilities in industrialised countries is slow, compared with the direct installation of highly efficient technologies in industrialising countries where infrastructure is less developed (Harvey and Bush 1997: 16). JI advocates argued that it would be an excellent opportunity for industrialised countries to engage in technology transfer and to promote sustainable development (Dixon 1997). Likewise, the use of tropical forests to create or enhance carbon sinks will store larger amounts of CO2 with less cost in industrialising countries, where abundant forests and lower resource input costs are potentially available. One example is to plant trees in the form of reforestation, since young, fast-growing trees actively sequester CO2 from the atmosphere through the course of photosynthesis (Faeth et al. 1994: 1; Moura Costa 1996: 279). Another example is to reduce CO2 emissions by preventing clear-cutting of existing forests because mature forests contain carbon (approximately 50% of plant/woody tissues by dry weight is carbon) until they are cut or decay (Moura Costa 1996: 279; Pinard and Putz 1996: 282). However, aside from CO2 emissions from combustion of fossil fuels (which account for about threequarters of the world total), tropical forest loss and degradation have accounted for about a quarter of the world’s total CO2 emissions in the past two decades (IPCC

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2001: 7). Therefore, industrialised countries have argued that there is a need to reduce CO2 emissions from tropical forests and, because industrialising countries generally lack the financial resources to better manage their forests, industrialised countries could take the initiative to reduce such emissions through JI projects. Although no credits were to be given to participating parties during the pilot phase and initiatives had to be supplemental to domestic emissions reduction actions, over 150 AIJ projects have been reported to the UNFCCC, of which roughly half took place in industrialising countries (COP 1995; UNFCCC 2002). As a result, JI increasingly came to be understood primarily as projects implemented in industrialising countries sponsored by industrialised country parties. The 1997 Kyoto Protocol defined such projects as the ‘Clean Development Mechanism’ (CDM), which aims to assist sustainable development of industrialising countries through implementation of GHG emissions reduction projects, and allows investing industrialised country parties to obtain credits from those projects which could be counted towards fulfilling their national emissions reduction commitments (Article 12). Emissions reductions must be ‘additional to any that would occur’ without the CDM activities, and although details of the terms and conditions await final approval by the COP, credits accrued starting from 2000 could be used to comply with reduction targets in the first commitment period (Article 12). However, since the Kyoto Protocol had not yet entered into force at the time of writing, the term ‘JI’ will be used in this chapter. In what follows, JI refers to an arrangement in which multiple parties, either states, private-sector companies or both, ‘agree to jointly meet their environmental protection objectives in the most economically efficient manner’ (King 1997: 62). Here, the presumption is that these arrangements take place between industrialised countries (sponsor) and industrialising countries (host).

Major incentives and controversies Since the early 1990s, many private-sector companies have participated in JI projects through AIJ or other initiatives. Major incentives for early participation included: to be ahead of the game in complying with potential national emissions reduction requirements; to influence the development of JI beyond the pilot phase as well as domestic GHG emissions regulations; and to earn a ‘green’ reputation at an international level (Wiser 1997: 753, 758). Another incentive, for example in the United States, was to allow companies to publicly record their voluntary emissions reduction measures through programmes such as the Voluntary Reporting of Greenhouse Gases Program under Section 1605(b) of the Energy Policy Act of 1992 (Wiser 1997: 753; US DOE/EIA 2002). It has been widely considered that GHG emissions reductions that resulted from taking early actions could be credited towards future regulations, such as carbon taxes (Faeth et al. 1994: 2; Pinard et al. 1995: 41; Moura Costa 1996: 280). The US government also established the United States Initiative for Joint Implementation (USIJI) in 1993, to create JI guidelines and to facilitate private-sector participation. Over 30 pilot projects have been approved as USIJI projects (USIJI 1998b).

18. an early corporate response to climate change Kubo 257

These incentives, however, were weakened by the fact that no credits were given during the AIJ pilot phase and a viable crediting system was not yet in place (Wiser 1997: 755). Therefore, contrary to initial expectations, private-sector participation in the AIJ pilot phase remained rather limited, and project developers struggled to secure sponsoring parties to carry out the proposed projects (Conaty 1998: 373; Hamway 1998: 82). The lack of private-sector participation will most likely be solved once credits are generated through a formal JI agreement. However, it is not yet known how the formal system would function, since the AIJ pilot phase is considered not to be ‘a valid indication of what might occur’ (Conaty 1998: 374). There are also a number of issues that have been the subjects of controversy, questioning the practicality and effectiveness of JI. Many have also criticised JI as a way for industrialised countries to shift responsibilities for their problem to industrialising countries (Walker and Wirl 1994; Agarwal and Narain 1998). One of the major issues is that the JI strategy is essentially based on assumptions and estimates. For example, JI projects must result in emissions reductions additional to what would have happened without such projects. Therefore, if a piece of deforested land were to be reforested as a JI project, it must be ‘proven’ that the forest would otherwise have remained deforested. However, since predictions of the future are made based on past and present conditions which may differ from the future, the accuracy of ‘additionality’ and ‘baselines’ becomes an issue (Vine et al. 2001: 209). Determining the baseline is especially difficult because industrialising countries are not subject to any emissions reduction requirements and their GHG emissions will continue to increase (Harvey and Bush 1997: 18). Technical uncertainties in measuring and monitoring GHG emissions also remain problematic. In addition, some analysts have pointed out that participating parties on both sides could have incentives to inflate the outcome, so that the actual reduction may be less than the reported result (Walker and Wirl 1994: 16). Another issue is the stability of JI projects. Although credits from JI projects may seem redeemable in a short period of time, credits are fully accrued only at the end of the project lifetime (e.g. during the AIJ pilot phase, project lifetime of forestry projects averaged 35 years and fuel switching projects averaged 15 years), since reductions take place incrementally over the years. It is yet to be proved how strongly JI agreements can stand against external forces that may hinder the continuation of the projects (e.g. forces to clear-cut preserved forests caused by a lack of fuelwood, halfway through a 40-year JI project). The following case study highlights some of these issues.

Case study The reduced-impact logging pilot project is one example of projects conducted at an early stage of the development of JI, initiated even before the establishment of AIJ. The first pilot project began in 1992 as a collaboration between a US electric utility company, New England Power (NEP, the power generation subsidiary of New England Electric System [NEES], then based in Massachusetts), and a Malaysian logging

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company, Innoprise Corporation Sendirian Berhad (Sabah, Malaysia). The purpose of the project was to offset NEP’s CO2 emissions in the United States. NEES had set a goal in 1991 to stabilise its GHG emissions at 20% or more below 1990 levels by 2000, and chose to achieve this goal in part by adopting offset measures using enhanced management of tropical forests (Sullivan and Spooner 1996). The pilot project is widely known as an innovative project, because it was the first JI project to offset CO2 emissions through the improvement of tropical logging practices. Current logging practices in the tropics are often unsustainable owing to a lack of strong law enforcement and resources to monitor sustainable forest management (Pinard et al. 1995). In Malaysia, harvesting of 10–15 trees per hectare (ha) damages about 50% of the residual stand, disturbs about 40% of soils and releases as much as 300–350 tons of CO2 per ha (USIJI 1998a: 13).1 Therefore, NEP funded Innoprise Corporation to implement a set of reduced-impact logging guidelines (essentially a set of improved forest management practices) on a 1,400 ha plot of forested land in Sabah, Malaysia. The plot was located within a 99-year, 1 million ha forest concession, with annual logging of about 20,000 ha (Pinard et al. 1995: 41; Pinard and Putz 1996: 280). Under the JI strategy, the baseline of this project is the forest logged using the conventional logging method. By investing in the improved logging method, NEP can claim the amount of CO2 that would have otherwise been released into the atmosphere as credits to offset their CO2 emissions from their coal-based electricity power generation plants (Pinard and Putz 1996: 280; Sullivan and Spooner 1996). Although there are no current regulations in the United States to reduce GHG emissions, as noted earlier, US companies are allowed to publicly record their voluntary GHG offset activities under the Energy Policy Act of 1992. Thus, depending on how the future policy development unfolds, NEP could potentially use its credits towards possible GHG emissions regulations (Faeth et al. 1994: 2; Pinard et al. 1995: 41). Innoprise Corporation, on the other hand, could train its workers and adopt otherwise too costly enhanced forest management practices. The reduced-impact logging guidelines incorporated best management practices recommended by the Queensland Forest Service (Australia) and the Smartwood certification programme of the Rainforest Alliance (an international conservation organisation, based in New York), and ‘pre-harvest planning, vine cutting, felling, skidding, and post-harvest site closure’ are main features of the guidelines (Pinard et al. 1995: 42). Benefits associated with better logging practices include: increased carbon retention; less damage to residual tree stands which increases future timber productivity; reduced open canopies and vine loads residual which reduce susceptibility to forest fire; and less impact on soil and hydrological systems (Putz and Pinard 1993: 755; Pinard and Putz 1996: 279). In order to quantify the result of the pilot project, researchers from the University of Florida and the Center for International Forestry Research (CIFOR, based in Bogor, Indonesia) compared forest stand structure and composition before and after logging to calculate the difference between conventional and reduced-impact logging methods. Some of the findings were as follows: the skid-trail area averaged 1

Data on the pilot project, such as cost and carbon content of forests, differs among publications.

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3.4% compared with 12% of the conventionally logged area; the skid trail with subsoil exposure area averaged 38% compared with 87% of the conventionally logged area; and the skid trails with intact root mats and litter layers averaged 12% compared with 1.6% in the conventionally logged area (Pinard et al. 1995: 43). The results from the first 450 ha plot showed that the pilot project succeeded in reducing soil and residual damage by 50% (Pinard et al. 1995: 44). NEP also established a third-party auditing and verification system: site inspections were conducted twice a year by the Environmental Audit Committee, consisting of appointees from the Rainforest Alliance, the Forest Research Institute of Malaysia and CIFOR (Sullivan and Spooner 1996). The pilot project will offset 580,000 tons of CO2 over the 40-year project lifetime (Sullivan and Spooner 1996). The total cost of the project was US$700,000, of which the cost of implementation was US$460,000 and the cost of monitoring and measuring of CO2 benefits was US$240,000 (Spaeth 1995). Use of tropical forests has been considered a viable option to reduce the cost of offsetting CO2 emissions. The pilot project in particular, is thought to be one of the most cost-effective measures among other forestry projects: offsetting cost per ton of CO2 has been calculated as US$1.20–1.45 (Spaeth 1995; Sullivan and Spooner 1996). Parties involved in the pilot project argued that it has several advantages compared with other forestry projects (such as monoculture tree plantations for carbon sequestration): it preserves biodiversity, decreases deforestation rate, reduces outbreak of disease or fire, and lowers the offsetting cost (Putz and Pinard 1993: 755). Such improvements can also reduce the risk of unproductive and degraded forests being converted to other land uses, which could result in losses of carbon sinks (Pinard and Putz 1996: 279). Therefore, they concluded that this pilot project fulfilled the needs of both the US utility to offset its CO2 emissions and the Malaysian logging company to improve its forest management. The scientific success of NEP’s first pilot project led to the expansion of the project. In 1995, NEP contracted with Innoprise ‘for a potential expansion’ of reduced-impact logging implementation up to 9,000 ha between 1996 and 1998 (1,500 ha in 1996; 2,500 in 1997; and 5,000 in 1998), which would offset up to 3.4 million tons of CO2 emissions (Sullivan and Spooner 1996). In May 1996, NEP signed a contract with the UtiliTree Carbon Company (a non-profit corporation initiated by Edison Electric Institute and comprising 40 US utility companies, based in Washington, DC) to implement reduced-impact logging on 1,000 ha of rainforest in Sabah, Malaysia, which is estimated to offset 378,000 tons of CO2 (NEES 1996; Sullivan and Spooner 1996). In 1997, however, as part of a nationwide utility industry restructuring, NEP left the power generating business.2 NEP sold its electricity generating facilities and reduced-impact logging projects to US Generating Company Inc. (generation subsidiary of PG&E Corporation, headquartered in Maryland); therefore, US Generating Company is overseeing the second phase of the project (Makundi et al. 1998: 6). Reduced-impact logging harvesting activity ended in 1998.3

2 3

T. Sullivan, personal communication, 1997. J. Kinsman, personal communication, 1999.

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Discussion What can we learn from this case study? First of all, it is important to note that the original sponsor, NEP, was already in the process of developing the pilot project prior to the opening of the UNFCCC for signature in 1992. This is encouraging for those concerned about climate change, because it indicates the energy utility company’s awareness of its part in contributing to GHG emissions (energy utilities in the United States account for about 35% of the annual US CO2 emissions), and that the company had a concrete goal to reduce its CO2 emissions (Sullivan and Spooner 1996). It is also important to note that the result of the project was quantifiable; the pilot project is one of the few JI projects that has been widely publicised, as an improved forestry management system as well as a carbon offset measure. However, there are a few issues that have not been raised. One is the issue of replicating or expanding this project to a much larger concession level JI project. Because of the success of the initial pilot project, a few more projects were proposed in Indonesia in the mid-1990s. One is a project in East Kalimantan, Indonesia, approved by the USIJI and reported to the UNFCCC as an AIJ project. This project (on a total of 600 ha) will offset 134,379 tons of CO2 over a 40-year project lifetime (USIJI 1998b: 22). This project, however, is an example of AIJ projects for which project developers had not been able to secure funding.4 Another project also under way in East Kalimantan is a CIFOR project, which was initially intended to be a fullconcession-level JI project as a US electric power company was interested in funding the project earlier in 1996. However, for various reasons, it became a scientific research project. According to the project developer involved in these projects, COPEC (an environmental consulting firm based in California), some of the difficulties in expanding such projects are that it takes time to train workers and to secure locations that are politically and economically stable and are supportive of the project, although the benefits are likely to be long-term for the locals.5 The absence of a valid international crediting system, as well as the US government’s lack of interest in climate change, seem to be the other factors limiting private-sector involvement in funding reduced-impact logging projects. The case study raises questions about the stability of a JI project on two counts. One is that NEP left the power generation business in the middle of the second pilot phase. Although the project continued under another company, this example indicates a need for a legal framework in case sponsoring parties lose interest in funding. The other concern is the long project lifetime, since it would take 40 years to complete the reduced-impact logging pilot project. Would it be able to stand against potential threats such as conversion into other land uses or natural hazards? For example, Indonesian forests were threatened by a massive forest fire in 1997, which destroyed about 2 million ha of forests and non-forest land (WWF 1997). Such an event also raises concerns about JI projects in the forestry sector in general: how safe is it to depend on forests to reduce carbon emissions, when fire could not only

4 5

USIJI 2000; D.J. Jones, personal communication, 2002.

D.J. Jones, personal communication, 2002.

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destroy the project itself, but also emit much more CO2 into the atmosphere than could be or had been sequestered? Reliable GHG reductions may be a challenge once projects expand beyond pilot projects. It is likely that monitoring will not be as careful and close as that carried out during the pilot phase, which may affect the accuracy of measuring emissions and reductions of GHGs. There are also concerns over what are commonly referred to as the ‘baseline issues’. What if, in the case of the pilot project, the level of CO2 emissions using the conventional logging method (baseline) is reported to be higher than it really is? If the participating parties had incentives to ‘misreport’, it would be very difficult for the general public to tell whether the outcome of the project had in fact resulted in actual emissions reductions (Walker and Wirl 1994: 16).

Conclusion Although JI projects could potentially be beneficial to the host countries and locals, they will always create unintended consequences that may have impacts beyond the project site (Vine et al. 2001). Thus, national and corporate entities must carefully determine the types of technology to be transferred or projects to be implemented. Moreover, a thorough investigation and comprehensive dialogue among major stakeholders, particularly those who will be directly affected by the projects, is crucial to ensure that such technology transfer projects do not merely reflect the interest of a few in the investing parties and host governments. There is a need for solid scientific monitoring and verification of JI projects and a firm legal framework at international, national and regional levels to protect the objective of actual GHG emissions reduction and the interests of both investing and hosting parties (Conaty 1998). Some adjustments in environmental policies or training programmes may be required at different levels in host countries to ensure effective implementation in order to achieve actual emissions reductions; however, these adjustments would themselves require time and financial resources. Adoption of market mechanisms for mitigating climate change is considered to be most economical, but unintended adverse effects as well as such efforts to create successful JI projects may not prove to be so cost-effective. In conclusion, it is necessary to look beyond what is being justified in the name of sustainable development and global environmental problems. The JI strategy creates incentives for GHG emitters not to take immediate actions at the source, by claiming their overall reductions elsewhere. Although the reduced-impact logging method itself would be a valid management system for the environment and its application to JI projects helps companies to reduce their cost in GHG emissions reductions, the primary focus should be placed on GHG reductions at the source of emissions in order to prevent or mitigate adverse effects of climate change. The current JI strategy has the potential to undermine the actual reduction of GHGs, the very issue which corporations are attempting to tackle.

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References Agarwal, A. and S. Narain (1998) ‘The Greenhouse Gas Trade’, UNESCO Courier, October 1998: 1013. Conaty, S. (1998) ‘The Potential Utility of Joint Implementation Mechanism of the Kyoto Protocol’, Asia Pacific Journal of Environmental Law 3.4: 363-75. Conference of the Parties (COP), First Session (1995) Report of the Conference of the Parties on its First Session, Berlin, 28 March–7 April 1995 (Addendum FCCC/CP/1995/7/Add.1, www.unfccc.int/ resource/docs/cop1/07a01.htm). Dixon, R. (1997) ‘The US Initiative on Joint Implementation’, International Journal of Environment and Pollution 8.1–2: 1-17. Faeth, P., C. Cort and R. Livernash (1994) Evaluating the Carbon Sequestration Benefits of Forestry Projects in Developing Countries (Washington, DC: World Resources Institute). Hamway, R.M. (1998) ‘A Sustainable Framework for Joint Implementation’, International Environmental Affairs 10.2: 79-97. Harvey, L.D.D., and E.J. Bush (1997) ‘Joint Implementation: An Effective Strategy for Combating Global Warming?’, Environment 39.8: 14-20, 36-44. IPCC (International Panel on Climate Change) (2001) ‘Summary for Policymakers: A Report of Working Group I to the Third Assessment Reporting of the Intergovernmental Panel on Climate Change’, in J.T. Houghton, Y. Ding, D.J. Griggs, M. Noguer, P.J. van der Linden, X. Dai, K. Maskell and C.A. Johnson (eds.), Climate Change 2001: The Scientific Basis. Contribution of Working Group I to the Third Assessment Reporting of the Intergovernmental Panel on Climate Change (Cambridge, UK: Cambridge University Press). King, R.J. (1997) ‘The Law and Practice of Joint Implementation’, Review of European Community and International Environmental Law 6.1: 62-67. Kyoto Protocol (1997) Kyoto Protocol to the United Nations Framework Convention on Climate Change (Kyoto Protocol) (1997) Article 3.1, www.unfccc.int/resource/docs/convkp/kpeng.pdf. Makundi, W., W. Razali, D.J. Jones and C. Pinso (1998) ‘Tropical Forests in the Kyoto Protocol’, Tropical Forest Update 8: 5-8. Moura Costa, P. (1996) ‘Tropical Forestry Practices for Carbon Sequestration: A Review and Case study from Southeast Asia’, Ambio 25.4: 279-83. NEES (New England Electric System) (1996) ‘Malaysian Rainforest Project Emissions Reduction to Continue Under New Contract’, www.nees.com/news/051496a.htm, 22 June 1997. Pinard, M.A., and F.E. Putz (1996) ‘Retaining Forest Biomass by Reducing Logging Damage’, Biotropica 28.3: 278-95. ——, ——, J. Tay and T.E. Sullivan (1995) ‘Creating Timber Harvest Guidelines for a ReducedImpact Logging Project in Malaysia’, Journal of Forestry 93.10: 41-45. Putz, F.E., and M.A. Pinard (1993) ‘Reduced-Impact Logging as a Carbon-Offset Method’, Conservation Biology 7.4: 755-57. Spaeth, A. (1995) ‘Angels in the Rain Forest’, Time, 3 April. Sullivan, T.E., and B.H. Spooner (1996) ‘Forest Based Offsets: New England Power’s Joint Implementation Strategy’, Corporate Environmental Strategy: The Journal of Environmental Leadership 3.4. UNFCCC (United Nations Framework Convention on Climate Change) (1992) Article 4.2, unfccc.int/ resource/docs/convkp/conveng.pdf. —— (2002) ‘Activities Implemented Jointly (AIJ): UNFCCC-CC:INFO/AIJ-List of AIJ Projects’, unfccc. int/program/coop/aij/aijproj.html. US DOE/EIA (United States Department of Energy, Energy Information Administration) (2002) Voluntary Reporting of Greenhouse Gases 2000: Executive Summary (report no. DOE/EIA-0608; Washington, DC: DOE/EIA, www.eia.doe.gov/oiaf/1605/vrrpt/executive_summary.html).

18. an early corporate response to climate change Kubo 263 USIJI (United States Initiative on Joint Implementation) (1998a) ‘Project Documents: Indonesia-

Reduced Impact Logging for Carbon Sequestration in East Kalimantan’, in Activities Implemented Jointly: Third Report to the Secretariat of the United Nations Framework Convention on Climate Change (Washington, DC: USIJI). —— (1998b) USIJI Project: Fact Sheet (Washington, DC: USIJI). —— (2000) ‘Project Documents: Indonesia—Reduced Impact Logging for Carbon Sequestration in East Kalimantan’, in Activities Implemented Jointly: Fifth Report to the Secretariat of the United Nations Framework Convention on Climate Change (Washington, DC: USIJI, www.usiji.com/ report5/Indonesia.pdf). Vine, E.L., J.A. Sathaye and W.R. Makundi (2001) ‘An Overview of Guidelines and Issues for the Monitoring, Evaluation, Reporting, Verification, and Certification of Forestry Projects for Climate Change Mitigation’, Global Environmental Change 11.3: 203-16. Walker, I.O., and F. Wirl (1994) ‘How Effective Would Joint Implementation be in Stabilizing CO2 Emissions?’, OPEC Bulletin 25.10: 16-19, 63. Wiser, G. (1997) ‘Joint Implementation: Incentives for Private Sector Mitigation of Global Climate Change’, The Georgetown International Environmental Law Review 9.3: 747-67. WWF (1997) The Year the World Caught Fire (Gland, Switzerland: WWF).

biographies

Katie Begg joined the Institute for Energy and Sustainable Development (IESD) at De Montfort University, UK, in May 2003 as a principal lecturer from the Centre for Environmental Strategy at University of Surrey. Her main interests are climate and energy policy development, corporate involvement in climate change, sustainability assessment and decision-making. Her recent research programmes include ‘Encouraging CDM Projects for Poverty Alleviation’ for DFID, advice to the UK Department of Trade and Industry on ‘Project Entry for the UKETS’ and procedures for accounting for energy projects (PROBASE) under the EU. She is on the UNFCCC list of experts for JI and the CDM, was an official reviewer for TAR WGIII and was co-editor and author of Flexibility in Climate Policy: Making the Kyoto Mechanisms Work (Earthscan Publications, 2001). Previously she has been a UK delegate to two UNECE groups of experts, was awarded the Bone Wheeler medal for research and was an official reviewer for the USNAPAP programme. [email protected] Sven Bode studied industrial engineering and management at the Hamburg University and Technical University Hamburg-Harburg (TUHH). After some time as research fellow at TUHH he joined HWWA in 2000. [email protected] Christopher Boyd, senior vice-president of the French multinational corporation Lafarge, is responsible for environment and public affairs. The company, which is presently the world’s largest single producer of cement, has chosen a proactive approach to environmental issues, including climate change. It is one of the founding members of WWF’s Conservation Partnership Programme. [email protected] Jorund Buen is a Senior Partner and Director of Point Carbon, responsible for activities toward the Clean Development Mechanism (CDM) and Joint Implementation. His main research areas include climate policy, technological change and innovation, and new renewable energy. He has published papers in a range of international, peer-reviewed journals, and is the lead author of numerous research reports, conference publications and carbon market analyses. Mr Buen has a large contact base among actors involved with the project-based Kyoto mechanisms, especially the CDM. He is an expert on the CDM and the development of the CDM market. Mr Buen holds a degree in political science. [email protected] Sonja Butzengeiger has been a research fellow at the HWWA, Research Programme on International Climate Policy, since 2000. She studied environmental sciences with a focus on environmental economics and law. [email protected]

biographies 265 Atle Chr. Christiansen is a Senior Partner and Director of Point Carbon, with responsibility for activities towards the EU emissions trading scheme. His main research areas include climate policy, emissions trading, mathematical modelling, numerical and statistical methods, technological change and innovation, new renewable energy, and energy policy. He has published papers in a range of international, peer-reviewed journals, and is the lead author of numerous research reports, conference publications and carbon market analyses. Mr Christiansen has a large contact base in European environmental and emissions trading circles. He holds a PhD in Chemical Engineering. Christophe de Gouvello PhD was formerly a senior research fellow at CIRED, France. He has also been a member of the French Delegation for International Negotiations on Climate Change, in charge of technology transfer and CDM issues (COP 6–8). He now works at the World Bank on energy projects. He is also a member of the Panel on Methodologies for Baselines for the Clean Development Mechanism (MethPanel). [email protected] Dr Andrew Dlugolecki is a visiting research fellow at the Climate Research Unit, University of East Anglia, UK. In 2000 he retired from senior management in the Aviva insurance group. He was lead author of the insurance chapter for IPCC (Intergovernmental Panel on Climate Change) in 1995, and chaired or contributed to many other such studies. He is an Advisory Board Member, Carbon Disclosure Project and Tyndall Centre for Climate Research. Dlugolecki was formerly chairman of the UN Insurance Industry Initiative. [email protected] Seth Dunn is a Senior Fellow at Worldwatch Institute. He is author of over 50 book chapters and articles on energy and climate strategy and policy. He gained his BA from Yale College; he is currently an MBA candidate at Yale School of Management. [email protected] Bob Frame is a senior consultant conducting research and implementing sustainable development strategy in New Zealand for businesses and local government agencies and in Asia for bilateral and multilateral donors. [email protected] Richard Gordon leads the sustainable business and government research programme at Landcare Research, which develops practical solutions for organisations adopting new strategies and managing change towards a more sustainable future. [email protected] Arto Heikkinen works as a consultant for Enprima Ltd. His expertise is related to life-cycle assessment. He has studied system and operations research combined with studies in energy economics. [email protected] Peter Hofman has been a research associate at CSTM since 1994 and has been carrying out research and education on environmental management and environmental policy. His recent research and publications include the analysis of innovation processes of a more incremental and radical nature and the role of governance. He currently holds a post-doctoral position, funded by the Dutch Scientific Council, in which he is involved in analysis of socio-technical change related to the energy system and the development of socio-technical scenarios. [email protected]

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Tim Jackson is Professor of Sustainable Development at the University of Surrey, UK. He has 17 years’ professional experience in energy, environment and sustainable development. His current research interests include climate policy, renewable energy and consumer behaviour. [email protected] Pekka Järvinen works for Enprima Ltd. He has been responsible for research related to environmental and social aspects of energy consumption and production and is managing several research projects related to climate change. [email protected] After a triple major at Princeton University, Mojdeh Keykhah took a doctorate in risk, uncertainty and reinsurance underwriting of catastrophe risk from Oxford University, where she was an Association of British Insurers PhD Fellow. Thereafter she was a research fellow in the Global Environmental Assessment project at Harvard University. She served as a reviewer of the chapter on financial services and climate change for the IPCC Third Assessment Report. [email protected] Howard Klee is programme manager for WBCSD’s sector study the Cement Sustainability Initiative, which began in 1999 at the request of several leading cement companies. The programme combined extensive research with the views of a large number of stakeholders, defining the specific challenges, barriers and opportunities facing the industry in its drive toward greater sustainability. WBCSD itself is a coalition of 160 international companies united by a shared commitment to sustainable development via the three pillars of economic growth, ecological balance and social progress. [email protected] Ans Kolk is professor of sustainable management and research director of the Amsterdam Graduate Business School, University of Amsterdam, The Netherlands. Her areas of research and publication are environmental management and corporate social responsibility, particularly in relation to multinational corporations’ strategies, and international environmental policy. [email protected] Naoko Kubo is currently project manager at the Global Reporting Initiative (GRI), Amsterdam, The Netherlands. She was formerly with the GRI Interim Secretariat in Boston, Massachusetts. She holds a MA in international development and social change and BA in geography (high honours), both from Clark University, Massachusetts. [email protected] David Levy holds a DBA from Harvard Business School and is currently Professor of Management at the University of Massachusetts, Boston. His research examines the intersection of business strategy, technology and politics in the international arena. In the last few years, he has studied the engagement of US and European multinationals with the international regime to control greenhouse gases. Dr Levy has published in leading business journals and has undertaken research projects in co-operation with the OECD, the UN Centre for Transnational Corporations and the US EPA. He is currently researching the potential of the renewable energy business cluster in Massachusetts. [email protected]

biographies 267 Sandrine Mathy is a PhD student of environment economics. She focuses on the integration of greenhouse gas emissions reduction in developing countries, looking for a way to harmonise it with development priorities. She gained valuable experience by studying India, with particular reference to the transport sector. [email protected] Axel Michaelowa is the head of the International Climate Policy Programme at Hamburg Institute and an economist with a ten-year background in analysis of climate policy instruments. He has authored over 50 publications on the Kyoto Mechanisms. He is a member of the UNFCCC roster of experts on baseline methodologies and an expert on national incentives for Kyoto mechanisms investment in industrialised countries. [email protected] Pierre Mollon of Electricité de France (EDF) is an engineer by training, He is a member of the Management Committee of the E7 Trust Fund for Sustainable Energy Development, and co-ordinator of the Tahumanu Project Feasibility Studies. [email protected] Heikki Niininen is Fortum’s vice-president of climate and emissions trading issues. He is a member of numerous national and international committees and working groups. He is presently the chairman of EURELECTRIC’s Working Group on Environmental Management and Economics, as well as the Task Force on Emissions Trading of Baltrel (The Baltic Ring Electricity Co-operation Committee). [email protected] Joakim Nordqvist is a PhD candidate at Environmental and Energy Systems Studies, Lund University, Sweden, engaged in a project called ‘Technology Transfer and Sustainable Industrial Development: The Case of China’. The overall objective of this project, sponsored by the Swedish International Development Co-operation Agency, is to address the need for better understanding of the mechanisms of technology transfer as a means for enhancement of energy efficiency and reductions of greenhouse gas emissions in industrial development. [email protected] Sonal Pandya is Senior Manager of Conservation International’s Climate Change Program, working to design ‘Conservation Carbon’ projects, which will offset carbon dioxide emissions through the restoration and protection of threatened forest ecosystems. The projects deliver multiple benefits by protecting endangered species, conserving habitats that deliver critical ecosystem services such as soil conservation and water purification, and providing economic alternatives to local communities through project employment and carbon service revenues. [email protected] Simone Pulver is a PhD Candidate in Sociology at the University of California, Berkeley, and holds an MA from UC Berkeley’s Energy and Resources Group and a BA in Physics from Princeton University. Her dissertation examines the climate policies of four oil companies and was supported by the International Dissertation Field Research Fellowship and Corporation as a Social Institution programmes of the Social Science Research Council. [email protected]

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Frauke Roeser is a consultant at WSP Environmental, specialising in climate change-related issues. Her work focuses on climate change policy research, carbon management and emissions trading strategies for the corporate and public sector. [email protected] Hanne Siikavirta is a PhD student at the Department of Industrial Engineering and Management of Helsinki University of Technology. Her research interests include system innovations and corporate climate strategies. Prior to joining Helsinki University of Technology she worked for Fortum and Enprima specialising in issues related to climate change mitigation technologies and JI and CDM projects. [email protected] Anders Skogen is an Analyst at Point Carbon. He is responsible for Point Carbon’s CDM Forecaster™ model, and is central in producing the company’s in-depth monthly analyses as well as the design and development of its comprehensive project and transaction databases. Mr Skogen has an MSc in Industrial Economics and Technology Management. John M. Sullivan is a Principal Engineer with Alcan Engineering, Brisbane, Australia. He holds an honours degree in mechanical engineering (University of Limerick, Ireland) and is currently completing a Master of Engineering (Chemical) at the University of Queensland. Over the past 14 years, John has held a wide variety of engineering roles in the mining, minerals, pharmaceutical, food and telecommunication industries. He has worked in Australia, Ireland, India and New Zealand, and is presently the lead engineer for an $1.6 billion alumina refinery expansion project. [email protected] Dr Rory Sullivan is Director, Investor Responsibility with Insight Investment, the asset management arm of HBOS plc. He has 15 years’ experience in the areas of environmental management, public environmental policy and development, and has worked in the UK, Australia, New Zealand, Southeast Asia and Africa on these issues. He is the author (with Hugh Wyndham) of Effective Environmental Management: Principles and Case Studies (Allen & Unwin, 2001); and the editor of Business and Human Rights: Dilemmas and Solutions (Greenleaf Publishing, 2003) and Putting Partnerships to Work (with Michael Warner) (Greenleaf Publishing, 2004). He has written over 100 articles, book chapters and papers on environmental policy issues. [email protected] Kristian Tangen is CEO of Point Carbon. He is a specialist on the political and market aspects of the Kyoto Protocol. He has followed the Kyoto process closely from its starting phase. Mr Tangen has published numerous papers and analyses on a variety of political and corporate issues concerning emissions trading, climate change, the Kyoto Protocol, and other environmental issues. He has an extensive knowledge of both the supply and demand side of carbon markets globally, and has a comprehensive network, especially in Russia, Japan, China and Northern Europe. Mr Tangen holds a Master of Science, Chemical Engineering. Michael Totten is Senior Director for Climate and Water, within Conservation International’s Center for Environmental Leadership in Business. He directs the project on converging solutions for biodiversity, climate protection and community sustainable development. Totten previously served as the Co-Director of the World Resources Institute’s Management Institute for Environment and Business. He has three decades of professional work in promoting ecologically sustainable economic development at the local, national and international levels. [email protected]

biographies 269 Ian Turney is responsible for EBEX21® strategy and business opportunities around the Kyoto Protocol, energy and biodiversity policies in New Zealand. He previously managed sustainable development and nationally important nature reserves for the City of London for 16 years. [email protected] Jesse Uzzell is originally from the USA but has spent most of the last decade living in Scandinavia. He received his BS from Texas A&M University and a MS in environmental engineering from the Royal Institute of Technology, Stockholm. Since 1998 he has worked at DNV and has been involved in developing consulting and certification services related to climate change and the flexible mechanisms of the Kyoto Protocol. In this capacity he has participated in related forums such as the UNFCCC negotiations, and WBCSD and IETA initiatives. He is currently a doctoral candidate at the Centre for Sustainable Development and Management at Erasmus University, Rotterdam. [email protected] From 1980–84 Frans van der Woerd was Policy Advisor at the Dutch Ministry of Transport, and from 1985 onward Senior Researcher at the Institute for Environmental Studies, Vrije Universiteit Amsterdam. In 1985 he completed his master’s in environmental sciences, and in 1997 his PhD on ‘Self-Regulation in Corporate Environmental Management: Changing Interactions between Companies and Authorities’. His fields of interest include: the meso-economic aspects of environmental policy; economic aspects of environmental policy for provinces and municipalities; costs and business economic consequences of environmental policy; business environmental management; and changing interactions between environmental authorities and companies. He has published widely on these subjects and was the editor of the Environmental Management Manual (Handboek integrale milieuzorg; Kluwer). [email protected]

abbreviations

AAU ABI ACEA AGO AIJ API ART BCSD BDI BINGO BU C&C CAA CAFE CAN CARB CCWG CCX CDCF CDM CD-ROM CEO CER CERUPT CFC CH4 CHP CIFOR CO2 CO2e COP CSR CUTE DEFRA DSM EAU EBEX21®

Assigned Amount Unit Association of British Insurers Association des Constructeurs Européens d’Automobiles (European Automobile Manufacturers’ Association) Australian Greenhouse Office Activities Implemented Jointly American Petroleum Institute alternative risk transfer Business Council for Sustainable Development Bundesverband der deutschen Industrie (German Industry Association) business and industry association business unit Contraction and Convergence Climate Change Agreement corporate average fuel economy Climate Action Network California Air Review Board Climate Change Working Group (UNEPFI) Chicago Climate Exchange Community Development Carbon Fund Clean Development Mechanism compact disc–read-only memory chief executive officer Certified Emission Reduction Certified Emission Reduction Unit Procurement Tender chlorofluorocarbon methane combined heat and power Center for International Forestry Research carbon dioxide carbon dioxide equivalent Conference of the Parties corporate social responsibility Clean Urban Transport for Europe Department for Environment, Food and Rural Affairs, UK demand-side management EU Allowance Unit Emissions/Biodiversity Exchange

abbreviations 271 EBITDA ECOSOC EETA EHS EIA EIT EMS ERU ERUPT ESB ESCO ETS EU FMCG FoE FTSE GB GCC GCM GDP GEF GETS GHG GtC HEW HFC HSE HWWA ICC ICCP ICR IETA IGBCE INEDIS IPCC IPIECA IPPC IRR ISO JI KfW lCER LULUCF MAC MNE

earnings before interest, taxes, depreciation and amortisation Economic and Social Council (UN) Professional Network for Engineering Economic Technology Analysis environment, health and safety environmental impact assessment economy in transition environmental management system Emission Reduction Unit Emission Reduction Purchase Tender Energy Smart Business programme (SEDA) energy service company emissions trading scheme European Union fast-moving consumer goods Friends of the Earth Financial Times Stock Exchange Greenpeace Business Global Climate Coalition general circulation model gross domestic product Global Environment Facility Greenhouse and Electricity Trading Simulation greenhouse gas gigatonnes of carbon Hamburgische Elektrizitäts-Werke AG hydrofluorocarbon health, safety and environment Hamburgisches Welt–Wirtschaft–Archiv (Hamburg Institute of International Economics) International Chamber of Commerce International Climate Change Partnership International Cement Review International Emissions Trading Association Industriegewerkschaft Bergbau–Chemie–Energie (German Mining, Chemicals and Energy trade union) International Network for Energy Demand Analysis in the Industrial Sector Intergovernmental Panel on Climate Change International Petroleum Industry Environmental Conservation Association Integrated Pollution Prevention and Control internal rate of return International Organisation for Standardisation Joint Implementation Kreditanstalt für Wiederaufbau long-term CER land-use change and forestry marginal abatement cost multinational enterprise

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MoU mpg MV MWe N2O NAP NEES NEP NGO NOx NRDC NRE NSW ETS NZBCSD ODA OECD OGJ PACIA PCA PCF PFC PNEM PNGV ppm PR PSM R&D RECS RMS RPI SEDA SF6 Sida SO2 SOx SRI SUV TBL tCER TEP TQM TVE UN UNCED UNEP UNEPFI UNFCCC

memorandum of understanding miles per gallon medium voltage megawatts of electric power nitrous oxide National Allocation Plan New England Electric System New England Power non-governmental organisation nitrogen oxides Natural Resources Defense Council (USA) new and renewable energy New South Wales emissions trading scheme New Zealand Business Council for Sustainable Development official development aid Organisation for Economic Co-operation and Development Oil and Gas Journal Plastics and Chemicals Industry Association Partnership for Climate Action Prototype Carbon Fund (World Bank) perfluorocarbon Provinciale Noord-Brabantse Energie Maatschappij Partnership for a New Generation of Vehicles parts per million public relations Partner Support Manager (SEDA) research and development renewable energy certificate system Risk Management Solutions Risk Prediction Initiative Sustainable Energy Development Authority (New South Wales) sulphur hexafluoride Swedish International Development Co-operation Agency sulphur dioxide sulphur oxides socially responsible investment sport utility vehicle triple bottom line temporary CER tradable emission permit total quality management township or village enterprise United Nations UN Conference on Environment and Development UN Environment Programme UNEP Finance Initiatives UN Framework Convention on Climate Change

abbreviations 273 UNICE US EPA USIJI VP WBCSD WICE WSSD WTO XL

Union of Industrial and Employers’ Confederations of Europe US Environmental Protection Agency

United States Initiative for Joint Implementation vice-president World Business Council for Sustainable Development World Industry Council for the Environment World Summit on Sustainable Development World Trade Organisation excess-of-loss

index

AAUs

see Assigned Amount Units ABI

see Association of British Insurers ACEA (European Automobile Industry

Association) 203, 205 Acid rain 36 Agriculture 232 AIG 43 AIJ (Activities Implemented Jointly) 31, 39 see also Joint Implementation Air pollution controls, US 36, 199-200 AIR Worldwide Corporation 155 Aker Kvaerner 222, 227 Alcan 38, 90, 94, 97 Alliance of Automobile Manufacturers 205 American Petroleum Institute (API) 167, 206 American Portland Cement Alliance 170 Angel, David 254 Anglo American 83 ART (alternative risk transfer) 156 Asda Stores Ltd 38 Assigned Amount Units (AAUs) 29 Association of British Insurers (ABI) 151 Associations, business see Business/industry associations Auguste, Georges 66 Australia 35, 118 energy supply structure 118, 128 Greenhouse Challenge 117-29 and environmental management systems 118-22 requirements of 119-20 National Cleaner Production Demonstration 125 Automobile industry 42, 197-206 European companies 200, 203 hybrid electric–gasoline vehicles 42, 205 low-emission technologies 42, 199-200, 202, 203-205 Partnership for a New Generation of Vehicles (PNGV) 203

US-based companies

42, 199-200, 202, 203204, 205 see also DaimlerChrysler; Ford Motors; General Motors; Multinational enterprises; Rolls Royce; Toyota; Volkswagen Automobile Industry Association, European see ACEA BAE Systems

83 Bank of America 43 Barclays Bank plc 37, 38, 85, 86 BASF AG 190-95 Battelle Institute 170 Battle McCarthy Carbon Club 38 Bayer AG 190-95 BCSD

see Business Council for Sustainable Development Bermuda Biological Station for Research 156 BG Group 83 BHP Billiton plc 83 BINGOs see Business/industry associations Bio-gasoline 225-27 Biodiversity 19, 61-71, 232-40 EBEX21® project, New Zealand 232-40 and Kyoto Protocol 68-70 and LULUCF activities/opportunities 62-64, 68 protection, business benefits of 70-71 species extinction rates 62 see also Forests/forestry Biofuels 68, 138, 216-17, 225-27 bio-gasoline 225-27 Biomass power plants 215-17, 218 and emissions trading 225 Birka Energi 222, 224 Blue Circle Cement 38, 138 Bolivia, hydroelectric project 248-53 Boone, Corinne 36 Boyd, Christopher 183 BP plc 54-55, 58, 69-70, 167-69, 180

index 275 emissions, total 83, 86, 168 emissions reduction 37, 44, 66, 179 emissions trading 38, 110, 112, 167 Energy and Climate Programme 169, 183 and Global Climate Coalition 48, 50, 54-55, 56, 57, 58 and Kyoto Protocol 31, 69-70 leadership role of 44-45 Partnership for Climate Action 38, 90, 94, 97 public image of 201 and renewable energy 42 see also Global Climate Coalition; Multinational enterprises; Oil and gas industry Bra Miljöval electricity 227 Brent Spar incident 176, 201, 205 British Airways 38, 86 British Sugar plc 38 Browne, John 44, 54, 66, 69-70, 180, 205 Budweiser Stag Brewing Company 38 Bukit Timah Nature Reserve, Singapore 69 Bulgaria 39 Bush, George W. 65, 173, 174, 178-79 Business Consultative Mechanism proposal 59 Business Council for Sustainable Development (BCSD) 51, 182 Business Councils for Sustainable Energy 35 Business/industry associations (BINGOs) 3436, 48-49 ‘anti-politics’ function of 48, 55-58 of business/environmental NGOs, comparison 47-59 and climate negotiations, role in 50-58 and UN Climate Change Secretariat 48-49, 50, 51-52, 54, 58 see also Global Climate Coalition; World Business Council for Sustainable Development CAFE (corporate average fuel economy)

204 Calculators, carbon emissions

199,

233, 238-39

CAN

see Climate Action Network Canada 35-36 Cantor Fitzgerald 36-37 Cap-and-trade systems 77-78 Carbon credits and Joint Implementation 257 value of 13, 22, 25-26, 40, 112 regional variations 42 United Kingdom 27, 37, 78, 79 see also Carbon market; Certificates of Emission Reductions; Emissions trading schemes Carbon Dioxide Accounting Protocol 137 Carbon dioxide (CO2 ) emissions calculators for 233, 238-39 cement production 133, 135-36, 138, 171

chemicals industry 191 countries, top ten 133 electricity generation 211 New Zealand 232 oil supermajors 168 reduction, and new technologies 33 reduction, United Kingdom 76, 79 tropical forests 63-64, 255-56, 259 see also Carbon credits; Carbon market; Carbonoffset programmes; Emissions trading schemes; Greenhouse gas emissions Carbon Disclosure Project 17, 43, 159 Carbon market, global early-mover advantages 65-66 price trends 40-41 value of 13, 22, 24, 30 see also Carbon credits; Clean Development Mechanism; Emissions trading schemes; Joint Implementation Carbon Market 2003, State and Trends of the 28 Carbon mitigation see Carbon-offset programmes Carbon-offset programmes and biodiversity protection 62-64 case studies Emissions/Biodiversity Exchange Project (EBEX21®) 232-40 reduced-impact logging 257-61 forest restoration 69, 234-35 investment portfolio approach 66-68 see also Carbon credits; Carbon market; Clean Development Mechanism; Emissions trading schemes; Joint Implementation Carbon rent see Clean Development Mechanism Carbon taxes 33, 37, 106 and ‘green’ electricity 214, 218 US policies on 174 CarboNZ® certificates 234-35 Catalytic converters 199, 200 Catastrophe bonds 156, 160 Catastrophe reinsurance 154-56 CDCF

see Community Development Carbon Fund CDM

see Clean Development Mechanism Cembureau 170 Cement industry 133-34, 169-72, 180-87 Carbon Dioxide Accounting Protocol 137 carbon dioxide emissions 133, 135-36, 169-72 Cement Sustainability Initiative 16, 17, 132, 135-37, 182-83 Agenda for Action 132, 134, 135, 136, 139, 170, 172 in China 143 outcomes of 139-40 Working Group Cement 135, 139-40, 143, 170

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in China 16, 142-46, 170 and Clean Development Mechanism 141, 14445 in developing countries 141-46 and oil and gas industry, comparison 166-87 sales/production volumes 134, 142 see also Lafarge Corporation Cemex cement company 135, 141, 171 Centre for International Forestry Research (CIFOR) 258-59 Centrica 83 Certificates of Emission Reductions (CERs) 141, 243 CarboNZ® certificates 234-35 temporary/long-term 23 CFCs 17-18, 189, 193 Chartered Insurance Institute 151 Chase Manhattan 43 Chemicals industry 189-95 Australia 126 greenhouse gas emissions 191 and HFCs 189, 191, 193, 195 industry associations 195 and Kyoto Protocol 17-18, 191, 193, 195 and US–Europe divide 17, 190, 193-95 ChevronTexaco 42, 54, 57, 167-69 Energy and Climate Programme 169, 183 and public relations 205 see also Global Climate Coalition; Multinational enterprises; Oil and gas industry Chicago Climate Exchange (CCX) 38-39 China 162 cement production in 142-46, 170 China Council for International Co-operation on Environment and Development 143 Chlorofluorocarbons see CFCs CHP (combined heat and power) plants 225 CIFOR

see Centre for International Forestry Research Cimpor cement company 135, 171, 182-83 Clean Development Mechanism (CDM) 19, 23, 242-53, 256 and cement industry 141, 144-45 Community Development Carbon Fund (CDCF) 39 and Fortum Corporation 225 hydroelectric project case study 248-53 rents from 244-46, 249-52 traded volumes, estimating 22, 28-30 Clean Urban Transport for Europe (CUTE) project 113 Climate Action Network (CAN) 47, 49, 51 consensus efforts of 52-53 and emissions trading 53 political approach of 55, 57, 58 see also NGOs Climate change, corporate response to case study, Fortum 222-30

leadership in 44-45 overview of 31-45 sectoral/regional differentiation in 41-44 see also Automobile industry; Business/industry associations; Chemicals industry; Environmental management systems; Insurance industry; Multinational enterprises; Oil and gas industry; United States/Europe, comparisons Climate Change, UN Conferences on access to 50 anti-political functions in 48, 55-58 business engagement with 34-36 business associations (BINGOs), role of 50-58 business/industry NGOs, roles of 49-59 Conference of Parties (COP) 255 COP 3, Kyoto 1997 52 COP 4, Buenos Aires 1998 50 COP 6, The Hague 2000 49, 50-51, 53 COP 7, Marrakech 2001 11, 50, 157, 161, 179 COP 8, New Delhi 2002 50, 53 COP 9, Milan 2003 23 COP 10, Buenos Aries 2004 23 consensus efforts 52-55 see also Business/industry associations; Kyoto Protocol; United Nations → UNFCCC; United States/Europe, comparisons Climate Change Agreements (CAA) 27 Climate Change Levy 78, 79, 88 Climate Change Secretariat 48, 50, 51-52, 54, 58 Climate Initiative, Fortum Corporation 22428 Climate Savers Programme 38 Climate Wise Program 193 CO2 see Carbon dioxide CO2e.com 36-37 Coca-Cola Corporation 35 Collins, John 173, 177 Commonwealth Bank of Australia 39 Community Advisory Panels 195 Community Development Carbon Fund (CDCF) 39 Conference of Parties (COP) 255 See also Climate Change, UN Conferences on; Kyoto Protocol; United Nations → UNFCCC

‘Contraction and convergence’ (C&C) 161-62 Control measures 36-41 see also Emissions; Environmental management systems; ISO 14001 standard Corporate leadership 44-45 Corus Group 83, 84 Costa Rica 39 Credit Lyonnais 38

index 277 Credit-rating agencies 43 Credit Suisse 43 Credits, carbon see Carbon credits CRH cement company 170 Cuijk power plant 215-17 CUTE

see Clean Urban Transport for Europe DaimlerChrysler 203, 204, 205 see also Automobile industry; Multinational enterprises Dalkia plc 38 Dana UK Holdings Ltd 38 Denmark, emissions trading 22, 25, 27, 37 Deutsche Bank 43 Deutsche Telekom 35 Developing countries 39, 242-46 cement industry in 141-46 see also Clean Development Mechanism DNV, Norway 166 Dow Chemical 190-95 DuPont climate strategies of 189-95 corporate leadership of 44 and HFCs 189, 193 and Kyoto Protocol 31 Partnership for Climate Action 38, 90, 94, 97 E-mission 55 35 E7 Fund 249, 250 Earth Summit, Rio de Janeiro 1992 173, 174, 182 EAUs see EU Allowance Units EBEX21® see Emissions/Biodiversity Exchange Project Eco-Innovation Compass 192 ECO newsletter 52, 54 Economics, of climate change 33-34 Edison Electric Institute 259 EDL 113 EGNI (Wales) Ltd 38 Electric power 42-43 and Clean Development Mechanism 43, 24648 case study 248-53 demand-side management 247 environmental labelling 227 generation Australia 118, 128 Germany 105 United Kingdom 83, 84, 86 ‘green’ biomass power plants 215-17, 218, 225 case studies 210-20, 248-53 investment risks 67-68 legitimacy of 213-14 marketing of 212-16 tax exemptions 214, 218

rural supply 248 Tahumanu hydroelectric project, Bolivia 24853 see also Energy; New England Power Elsam, Denmark 37 Emissions management programme 90-103 accountability 100-102 baseline for 93 measurement 94-97 mitigation actions 97-100 target setting 91-94 reduction ‘Contraction and convergence’ (C&C) 161-62 costs and benefits of 33-34 low cost/no cost 34, 66, 69, 126 zero net, goal of 69 trading see Emissions trading schemes UK industry profiles 82-87 see also Carbon dioxide; Carbon-offset programmes; Emissions trading schemes; Greenhouse gas emissions; Sulphur emissions trading Emissions/Biodiversity Exchange Project (EBEX21®) 232-40 corporate responses to 238-40 drivers for uptake of 237 Emissions Market Development Group 38 Emissions permits, tradable (TEPs) 242, 24445 Emissions trading schemes (ETSs) 36-41 cap-and-trade systems 77-78 and Climate Action Network 53 credit-based regimes 77-78 Denmark 22, 25, 27 early-mover advantages 65-66 EU emissions trading directive 22, 24-26, 29, 110 EU Allowance Units (EAUs) 22, 25-26 and UK scheme 78 Germany 15-16, 110-12 PCA guidance for 100 permits, tradable 242, 244-45 sulphur dioxide 36, 40, 53 United Kingdom 15, 37-38, 76-88 carbon market 22, 25, 27, 79-80 company/sector emissions profiles 8287 and EU emissions trading directive 78 incentive auction 77-78, 79 indirect emissions 87 participating companies 38 reporting standards 81-82 see also Carbon credits; Carbon market; Carbon-offset programmes; Certificates of Emission Reductions; Clean Development Mechanism; Joint Implementation

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EMS

see Environmental management systems Energy consumption, New Zealand 231 efficiency and chemicals industry 191 European industry 108 investment returns 69, 125-26 and new technologies 32-33 ‘green,’ investment risks 67-68 renewable 42 US policies on 169, 199-200, 206 supply structure, Australia 118, 128 see also Biofuels; Electric power; Fortum Corporation; Fuel cell technology; Hydropower; Oil and gas industry; Taxes; Wind power Energy and Climate Programme 57, 169, 183 Energy Smart Business programme (ESB) 127 Enprima Ltd 222 Entergy 38, 90, 94, 97 Enterprise Oil 83 Enterprises pour l’Environnement 138 Environmental Burden System 191 Environmental Defense 15, 38, 53, 57, 90 see also Partnership for Climate Action Environmental management systems (EMSs) 16, 117-29 commitment to 125 ‘continual improvement,’ concept of 124 economic efficiency of 125-27 and Greenhouse Challenge, links 118-22 see also ISO 14001 standard EON 169 ESB

see Energy Smart Business programme Essent Renewable Energy 214, 215-16 Esso 42, 179 see also ExxonMobil Ethanol fuel 225-27 ETSs see Emissions trading schemes EU Allowance Units (EAUs) 22, 25-26 EU–Japan Business Dialogue 35 Europe/United States, comparisons chemicals industry 17, 190, 193-95 multinational enterprises 18, 35-36, 196-97, 199-202 oil and gas industry 18, 48, 54-55, 56, 169, 196-206 see also Global Climate Coalition European Automobile Industry Association (ACEA) 203, 205 European Union bio-fuel directive 227 Climate Change Programme 34 emissions trading directive 22, 24-26, 29, 37, 110 EU Allowance Units (EAUs) 22, 25-26 and UK scheme 37, 78

ExxonMobil (Esso) 54-55, 56, 167-69, 197, 199 public image of 42, 169, 179, 180, 201 ‘StopEsso’ campaign 42, 179 see also Global Climate Coalition; Multinational enterprises; Oil and gas industry Financial services sector 43 see also Insurance industry Finland see Fortum Corporation First Hydro 38 Flexibility mechanisms 36-41 see also Carbon credits; Carbon market; Emissions trading schemes Flood insurance 151-52 Ford Motors 35, 38, 201-204 and low-emission technologies 42, 200, 202 see also Automobile industry; Multinational enterprises Forest Research Institute, Malaysia 259 Forestera™ fuel 226, 227 Forests/forestry biomass fuel production 216-17 deforestation 62, 63-64, 67, 68 investment risks 67 long-term considerations 260-61 regeneration, New Zealand 233 restoration, carbon-offset projects 69, 234-35 tropical 63-64, 255-56, 258 reduced-impact logging pilot project, Malaysia 255-61 see also Biodiversity; Carbon-offset programmes; Emissions/Biodiversity Exchange Project; LULUCF activities/opportunities; Wood fuels Fortum Corporation 18-19, 222-30 Climate Initiative 224-28 greenhouse gas emissions 223-24 Fortune Global 500 list 189 Forum for the Future 195 Friends of the Earth 186 see also Climate Action Network; NGOs Fuel cell technology 42, 112-13, 202, 203, 204, 205 Fuels bio-gasoline 225-27 biomass 68, 138, 216-17, 225-27, 226 waste-derived 138 Fussler, Claude 191, 192 GCC

see Global Climate Coalition General Domestic Appliances Ltd 38 General Electric 169 General Motors 31, 200, 204 see also Automobile industry; Multinational enterprises Geneva, Switzerland 182-83 Geneva Association 155, 159

index 279 Gerling Group 35 Germanwatch 113 Germany 104-14 climate policies past 105-107 today 108-109 emissions trading schemes 15-16, 110-12 greenhouse gas emissions reduction costs 108, 109, 113-14 trading schemes 110-12 trends in 104, 108, 109 industry energy efficiency of 108 structure of 104-105 and Kyoto Protocol 106, 111 see also Heidelberg Cement GETS2 see Greenhouse and Electricity Trading Simulation GKN (UK) plc 38 Global carbon market see Carbon credits; Carbon market; Emissions trading schemes Global Climate Coalition (GCC) 35, 201, 204, 205 and climate negotiations 47, 48, 50, 51, 53-54, 56 and oil and gas industry 48, 50, 53-54, 55-58, 167, 199 Grameen Bank 158 Greenhouse and Electricity Trading Simulation (GETS2) 113 Greenhouse Challenge, Australia 117-29 and investment criteria 126-27 outcomes of 122 requirements of 119-20 Greenhouse gas emissions in Australia 118, 122 of cement industry 133, 135-36, 138, 171 of chemicals industry 191 ‘Contraction and Convergence’ (C&C) 161-62 of energy production 223-24 in Germany 104, 108, 109 from hydrodams 68 and LULUCF activities 63 management programme 90-103 accountability 100-102 baseline for 93 measurement 94-97 mitigation actions 97-100 target setting 91-94 in New Zealand 232 of oil companies 167-69 reduction, and new technologies 32-33 in United Kingdom company/sector profiles 82-87 FTSE 100 companies 82, 86 reporting standards 81-82 see also Carbon credits; Emissions/Biodiversity Exchange Project; Emissions trading schemes; Joint Implementation

Greenpeace 106, 176-79, 186 see also Climate Action Network; NGOs Greenpeace Business 172, 176-78, 180 Hanson 83 Harris, Scotland 183, 186 Harvard Business Review 45 Hazell, Dick 149 Heidelberg Cement 135, 171, 172 HEW (Hamburg Electricity Utility) 112-13 HFCs 91, 189, 191, 193, 195 Hoffman, Andrew 166-67 Holcim cement company 135, 171, 172, 182 Holderbank 182 Holliday, Chad 191 Honda 205 Honeywell 189-95 Hurricanes 148, 153-55, 156 Hydrofluorocarbons see HFCs Hydrogen technology 112-13 Hydropower greenhouse gas emissions 68 investment risks 67-68, 225 Tahumanu hydroelectric project 248-53 ICC

see International Chamber of Commerce ICCP

see International Climate Change Partnership ICI 83, 189-95 IETA

see International Emissions Trading Association Imerys Minerals Ltd 38 India 162 Indonesia 260 Ineos Fluor Ltd 38 ING 43 Innogy 83 Innoprise Corporation, Malaysia 258 Innovest Strategic Advisors 35 Institutional theory 17, 166-67, 178, 185 Insurance industry 16-17, 147-62 alternative risk transfer (ART) 156 catastrophe models 154-56 future of 158-62 internal/regional differences 43 and Kyoto Protocol 157, 161 reinsurers 35, 154-56 Risk Prediction Initiative (RPI) 156 UNEP Insurance Industry Initiative 150 United Kingdom 151-52 United States 152-53 weather-related losses/claims 35, 148-49, 15152, 153-55, 156 Integrated Pollution Prevention and Control (IPPC) Regulations 78-79 Intergovernmental Panel on Climate Change (IPCC) 32, 63, 69, 152

280

the business of climate change

International Cement Review 172, 180-82 International Chamber of Commerce (ICC) 197, 198, 205 and climate negotiations 47, 50, 51, 53, 54, 57, 58 International Climate Change Partnership (ICCP) 50 International Emissions Trading Association (IETA) 47, 50, 53, 183 Community Development Carbon Fund (CDCF) 39 International Organisation for Standardisation see ISO 14001 standard International Petroleum Industry Environmental Conservation Association (IPIECA) 47, 50, 51, 57, 206 International Power 83 Investment in biodiversity protection, benefits of 70-71 energy/environmental 69, 125-27, 225, 245 portfolio approach to 66-68, 71 IPIECA

see International Petroleum Industry Environmental Conservation Association

Klee, Howard 182 Knott, David 178 ‘Kyoto forest’ 234, 240 Kyoto Protocol 23-24 Annex B commitments 242-44 and biodiversity 68-70 and chemicals industry 17-18, 191, 193, 195 emissions reductions targets 68-69, 161, 229, 254 entry into force, rules for 61 and Germany 106, 111 going beyond 68-70 and insurance industry 157, 161 and multinational enterprises (MNEs) 196, 199 negotiations on see Climate Change, UN Conferences on New Zealand 232, 237, 240 and oil and gas industry 42, 175, 178-79 and Russia 13, 23, 61 and United Kingdom 76 and United States 35-36, 41-44, 65, 162, 196 see also Clean Development Mechanism; Climate Change, UN Conferences on; Emissions trading schemes; Joint Implementation; United States/Europe, comparisons

IPCC

see Intergovernmental Panel on Climate Change IPPC Regulations see Integrated Pollution Prevention and Control ISO 14001 standard ‘continual improvement,’ concept of 124 and Greenhouse Challenge 117, 118, 121, 122, 124 Italcementi cement company 135, 171 IVO Group 222 Japan 35-36, 42, 172, 181-82 see also Taiheiyo Cement Jeanrenaud, Jean-Paul 183 JI

see Joint Implementation Johnson & Johnson 38 Joint Implementation, United States Initiative for (USIJI) 256 Joint Implementation (JI) 19, 22, 39 case study 254-61 criticisms of 257 and Fortum Corporation 225 incentives for 256-57 trading volumes, estimating 28-29 see also Carbon credits; Carbon market; Emissions trading schemes Kaericher, Michael 201 Kankaanpää, K. 225 Kaufman, H.R. 149 Kirklees Metropolitan Council

38

Lafarge Corporation 31, 137-39 and Cement Sustainability Initiative 132, 135, 141, 143, 182-83 greenhouse gas emissions 171-72 and WWF International 138-39, 183, 186 see also Cement industry Land Securities plc 38, 86 Land-use change 62 Landcare Research 233 Lattice Group 83 Leadership, corporate 44-45 Lend Lease Real Estate Investment Services Ltd 38 Liedtke, Patrick 155 Lloyd’s of London 43, 149, 151, 153 LULUCF activities/opportunities 62-64, 68 Malaysia, Joint Implementation project 257-61 Marks & Spencer plc 38, 85, 86 Merrill Lynch 43 Metatextual organisations 185-86 Micro-insurance 160 Mitsubishi Corporation UK plc 38 MNEs see Multinational enterprises Mobil see ExxonMobil Molander, P. 227 Morrin, Noel 183 Motorola GTSS 38 Multinational enterprises (MNEs) 18, 196-206 convergence by 205-206 firm-level differences in 202-203

index 281 home-country factors in 199-202 institutional environments of 197-99 US/Europe-based, comparison of 196-97, 199-202 see also Automobile industry; Oil and gas industry Munich Re 35, 43, 154 National Grid UK 83 Natsource 36, 40-41 Natural History Museum 38 Natural Resources Defense Council (NRDC) 57 Negotiations, climate change see Climate Change, UN Conferences on NEP

see New England Power Neste Group 222 Netherlands CDM/JI initiatives 28, 29, 39 electricity supply case study 210-20 energy efficiency of 108 ‘Network champions’ 185-86 New England Power (NEP) reduced-impact logging pilot project 257-61 New South Wales Sustainable Energy Development Authority (SEDA) 127 New Zealand 35-36, 231-40 biodiversity of 232-33 Emissions/Biodiversity Exchange Project (EBEX21®) 19, 232-40 carbon emissions calculators 233, 23839 corporate responses to 238-40 drivers for uptake of 237 web address 233 energy use/emissions 231-32 Kyoto Protocol 232, 237, 240 see also Landcare Research New Zealand Business Council for Sustainable Development (NZBCSD) 238 NGOs business and industry, roles of 49-59 changing role of 49, 186, 213 North–South conflicts 53 see also Climate Action Network; Greenpeace; WWF

Nicholson, Charles 179 Nike 38 ‘No regrets’ measures 33, 118, 126 Norppa Electricity 227 Norwegian Research Council 166 NRDC

see Natural Resources Defense Council Oil and gas industry 167-69, 173-80 and cement industry, comparison 166-87 emissions, ‘supermajors’ 167-69 and Global Climate Coalition 48, 50, 53-54, 55-58, 199

and Kyoto Protocol 42, 175, 178-79 recruitment/retention in 185 and renewable energy 42 US/Europe, comparison 18, 48, 54-55, 169, 196-206 see also Bio-gasoline; BP; ChevronTexaco; ExxonMobil; Global Climate Coalition; Multinational enterprises; Royal Dutch/Shell; TotalFinaElf Oil and Gas Journal 172-75, 181 Ontario Power Generation 37, 38, 90, 94, 97 Partnership for a New Generation of Vehicles (PNGV) 203 Partnership for Climate Action (PCA) 15, 38, 90-103 management programmes 90-103 accountability 100-102 baseline for 93 emissions measurement 94-97 mitigation actions 97-100 target setting 91-94 PCF

see Prototype Carbon Fund Pechiney 38, 90, 94, 97 Petroleum Industry Guidelines for Reporting Greenhouse Gas Emissions 179 Pew Center on Global Climate Change 35, 38, 47, 57, 58, 195 and climate negotiations, access to 50, 51 Pistorio, Pasquale 66 Planning policy guidelines 151 PNEM 211-17 PNGV

see Partnership for a New Generation of Vehicles Poland 39 Pollution, air 36, 199-200 Pollution halo effect 140, 143, 146 Portugal 183 Powergen 83 Production, cleaner 125 Prototype Carbon Fund (PCF) investment in 28, 36, 225, 245 participants in 40, 193 Public–private partnerships 158 Putin, Vladimir 23 Quantum Gas Management 38 Queensland Forest Service 258 Rainforest Alliance 258-59 Recruitment/retention 185 Regional differentiation 41-44 see also United States/Europe, comparisons Reinsurance industry 35, 43, 154-56 Reporting Partnership for Climate Action 101 standards of, UK 81-82 Responsible Care Initiative 191

282

the business of climate change

Rhodia Organique Fine Ltd 38 Rio Earth Summit, 1992 173, 174, 182 Rio Tinto 83 Rio+10 Conference 11 Risk Management Solutions 155 Risk Prediction Initiative (RPI) 156 RMC Group 135, 171, 183 Rocheleau, Dianne 254 Rolls Royce plc 37, 38, 42, 83, 86 Romania 39 Rosenzweig, P.M. 197 Royal Dutch/Shell 54-55, 167-69, 173-74, 185 emissions, total 83, 86, 168 emissions reduction 37, 179 emissions trading by 37, 38, 110, 112 Energy and Climate Programme 169, 183 and Global Climate Coalition 48, 50, 54, 56, 57, 58, 199 and Greenpeace 176-78, 179, 201, 205 leadership role of 44-45 Partnership for Climate Action 38, 90, 94, 97 public image of 176-78, 201, 205 see also Multinational enterprises; Oil and gas industry Royal Ordnance plc 38 RPI

see Risk Prediction Initiative Ruhrgas project 112 Russia, and Kyoto Protocol 13, 23, 61 RWE 112 Sandor, Richard 39 Sawyer, Steve 179 Schlumberger 169 Schmidheiny, Stephan 182 Schmidheiny, Thomas 182 Schröder, Gerhard 110, 111 Scottish & Southern Energy 83 Scottish Power 83 Secil, Portugal 140 Sectoral/regional differentiation 41-44 see also Automobile industry; Cement industry; Chemicals industry; Insurance industry; Oil and gas industry; United States/Europe, comparisons SEDA (New South Wales Sustainable Energy Development Authority) 127 Semiconductors 65-66 Severn Trent 83 Shell see Royal Dutch/Shell Siam Cement Company 135, 141, 171 Siemens 217 Singapore 69 Singh, J.V. 197 Social Venture Network 35 Somerfield Stores Ltd 38 Species extinction rates 62 Staatsbosbeheer agency 216-17

Stanford University 33, 42, 169 State and Trends of the Carbon Market 2003 28 Statoil 51 Steel production 84, 111 Stigson, Björn 31, 143 STMicroelectronics 65-66, 69 ‘StopEsso’ campaign 179 Strong, Maurice 182 Sulphur emissions trading 36, 40, 53 Suncor Energy 38, 90, 94, 97 Sustainable development New Zealand 231-40 see also Clean Development Mechanism; Developing countries; Joint Implementation Sustainable Development Commission 80 Sustainable Development Summit, Johannesburg 2002 31, 170, 179 Sweden 222, 227, 229 see also Fortum Corporation Swiss Re 38, 39, 43, 149 Tahumanu hydroelectric project 248-53 Taiheiyo Cement, Japan 135, 171, 172, 183 Taxes, environmental 33, 37, 106 and ‘green’ electricity 214, 215, 218 US policies on 174 Technologies, new automobile industry 42, 200, 202 and emissions reduction 32-34, 50-51 Tesco Stores Ltd 38 Texaco see ChevronTexaco; Oil and gas industry Thailand see Siam Cement Titan cement company 140, 170 TotalFinaElf 42, 58, 167-69, 183 Toyota 204, 205 Tradable emissions permits (TEPs) 242, 24445 see also Carbon credits; Emissions trading schemes Trade associations see Business/industry associations Trans-Atlantic Business Dialogue 197 TransAlta 39, 113 Transatlantic divide 35-36 Transport, public 113 Tropical forests see Forests/forestry UBS 43 UK Coal Mining Ltd

38 Uniland, Spain 140 Union of Industrial and Employers’ Confederations of Europe (UNICE) United Kingdom carbon credits, value of 27, 37, 78, 79 Carbon Disclosure Project 17, 43, 159

50

index 283 emissions trading scheme 15, 37-38, 76-88 carbon market 22, 25, 27, 79-80 company/sector emissions profiles 8287 and EU emissions trading directive 37, 78 incentive auction 77-78, 79 indirect emissions 87 participating companies 38 reporting standards 81-82 greenhouse gas emissions company/sector profiles 82-87 FTSE 100 companies 82, 86 reduction targets 76, 79 reporting standards 81-82 insurance industry 17, 151-52 and Kyoto Protocol 76 United Nations Climate Change Secretariat 48, 50, 51-52, 54, 58 Conference on Environment and Development 1992 173, 174, 182 UNEP (UN Environment Programme) 43 Finance Initiatives (UNEPFI) 150, 160, 161 Insurance Industry Initiative 17, 150 UNFCCC (UN Framework Convention on Climate Change) 11, 63, 119, 254, 255, 256 see also Climate Change, UN Conferences on; Kyoto Protocol United States air quality controls 36, 199-200 automobile industry in 42, 199-200, 202, 203-204, 205 business–government relations in 201 CAFE (corporate average fuel economy) 199, 204 chemicals industry 17, 190, 193-95 Chicago Climate Exchange 38-39 Energy Policy Act 1992 256, 258 environmental regulation in 199-200 and global warming, policies on 34, 174-75, 178-79 and Kyoto Protocol 35-36, 41-44, 65, 162, 196 multinational enterprises (MNEs) 196-97, 199-202 oil and gas industry 48, 54-55, 167-69, 196206 and renewable energy, policies on 169, 199200, 206 sulphur dioxide emissions trading programme 36, 53 voluntary emissions reduction 38-39, 193, 256-57, 258 see also New England Power; United States/Europe, comparisons United States Council for International Business 35

United States/Europe, comparisons chemicals industry 17, 190, 193-95 multinational enterprises 18, 35-36, 196-97, 199-202 oil and gas industry 18, 48, 54-55, 56, 169, 196-206 see also Global Climate Coalition United States Initiative for Joint Implementation (USIJI) 256 United Utilities 83 University of Florida 258 US Generating Company Inc. 37, 259 USIJI

see United States Initiative for Joint Implementation UtiliTree Carbon Company 259 Vattenfall Europe 112, 113 Volkswagen 197 see also Automobile industry; Multinational enterprises Voluntary approach 16, 37, 127-28, 193 United States 38-39, 193, 256-57, 258 see also Greenhouse Challenge Voluntary Reporting of Greenhouse Gases Program 256 Volvo Cars 35 Votorantim Cement 135, 141, 171 Waste, as fuel 138-39 Wates Group 38 WBCSD

see World Business Council for Sustainable Development Weather, and insurance industry 35, 148-49, 151-52, 153-55, 156 Weather derivatives 160 Weyant, John 33 WICE

see World Industry Council for the Environment Wind power 227 Windstorms 152, 156 Wine, EU surplus 225 Wood fuels 216-17, 227 World Bank 36, 153 Community Development Carbon Fund (CDCF) 39 see also Prototype Carbon Fund World Business Council for Sustainable Development (WBCSD) 38, 143, 179 Cement Sustainability Initiative 17, 132, 135, 137, 138, 170, 182-83 and chemicals industry 195 and climate negotiations 47, 50, 51, 53, 57 Energy and Climate Programme 57, 169, 183 formation of 47, 182-83 and Kyoto Protocol 31 New Zealand 238

284

the business of climate change

World Economic Forum, Davos 2000 45 World Industry Council for the Environment (WICE) 51, 182 World Resources Institute 35, 38, 137, 204 World Summit for Sustainable Development, Johannesburg 2002 (WSSD) 31, 170, 179 World Trade Organisation (WTO) 23 WWF

Climate Savers Programme 38 Conservation Partnership Programme 13839, 183, 186 and green electricity 213, 214-16 see also Climate Action Network; NGOs

Zero net carbon emissions ZKG International 143

69

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Tomorrow’s History: Selected Writings of Simon Zadek 1993–2003 Simon Zadek ISBN 1 874719 86 1 (hardback) ISBN 1 874719 85 3 (paperback) Teaching Business Sustainability: From Theory to Practice Edited by Chris Galea ISBN 1 874719 54 3 (hardback) Corporate Social Opportunity! Seven Steps to Make Corporate Social Responsibility Work for your Business David Grayson and Adrian Hodges ISBN 1 874719 84 5 (hardback) ISBN 1 874719 83 7 (paperback) Learning to Talk: Corporate Citizenship and the Development of the UN Global Compact Edited by Malcolm McIntosh, Sandra Waddock and Georg Kell; with a Foreword by Kofi Annan ISBN 1 874719 75 6 (hardback)

Putting Partnerships to Work: Strategic Alliances for Development between Government, the Private Sector and Civil Society Edited by Michael Warner and Rory Sullivan ISBN 1 874719 72 1 (hardback)

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IN RECENT YEARS climate change has become a leading issue on both the business and political agenda. With the Kyoto Protocol to the UN Framework Convention on Climate Change now ratified, business is bracing itself for the reality of serious regulation on the reduction of greenhouse gas emissions. The Business of Climate Change presents a state-of-the-art analysis of corporate responses to the climate change issue. The book describes and assesses a number of recent business approaches that will help to identify effective strategies and promote the dissemination of proactive corporate practices on climate change worldwide.By identifying the factors that cause companies to pursue low-carbon strategies and support the Kyoto process, the book will also be helpful to governments in formulating policy. Business and industry have a crucial role to play in the implementation of the Kyoto Protocol. They are major emitters of greenhouse gases, and pressure is mounting for them to engage in a range of mitigation strategies, from emission inventorying and trading schemes to investments in low-carbon technologies. Behind the scenes a number of companies have started to develop strategies to curtail greenhouse gas emissions. These strategies can be very diverse in nature. At a political level, companies try to influence policy implementation and, more specifically, to test ideas in anticipation of possible regulation on the climate change issue. At a more practical level, there are a burgeoning number of initiatives to conserve energy use in production, transportation and buildings, to develop renewable sources of energy, to measure carbon emissions and sequestration at a detailed level, and to develop various markets for trading carbon credits among companies and countries.Some technologies,such as hybrid cars and compact fluorescent lighting, are now market realities. Common to all of these initiatives is that they operate in an environment of high complexity and uncertainty.The political implementation of the Kyoto Protocol remains uncertain and many details remain unspecified. Economic instruments such as emissions trading are favoured, but their mechanisms are still hotly debated and the future price of credits is unknown. New markets for low-emission products and technologies are beginning to appear, but there are currently few regulatory drivers to assist their development. The impact of potential regulation on business will vary tremendously between companies and sectors.The fossil fuel and energy sectors fear the economics of action, while sectors such as insurance and agriculture fear the economics of inaction. Combined with the remaining uncertainties about what form climate change may take, corporate responses to reduce risks have to differentiate between sectors and have to be flexible. For individual companies, these big uncertainties demand new thinking and contingency planning. The Business of Climate Change is split into four sections:‘Introduction and overview’ presents a broad perspective on business and climate policies.‘Policy instruments’ outlines early experiences with different types of policy instruments to curb greenhouse gas emissions, ranging from emission trading to voluntary agreements. ‘Sector analysis’ assesses developments within sectors of industry that are likely to play an important role in future climate policies: oil, cement, chemical, automotive and insurance. Finally, ‘Case studies’ discusses bottom-up initiatives to combat climate change in five different organisations. This book will be essential reading for policy-makers searching for instruments that have proven business support; academics and researchers analysing the complexity of how business is responding to the challenge of climate change; and businesses wishing to learn about best practice in the sectors most likely to be seriously affected.

{ Corporate Responses to Climate Change provides valuable and insightful guidance concerning real-world experience in response to the emerging risks of climate change. It will undoubtedly prove to be a helpful companion for those attempting to chart a fiscally and environmentally responsible course through the unexplored territory of the evolving climate regime.| Irving Mintzer, Amber Leonard

Greenleaf Publishing Aizlewood Business Centre, Aizlewood’s Mill Nursery Street, Sheffield S3 8GG, UK Tel: +44 (0)114 282 3475 Fax: +44 (0)114 282 3476 E-mail: [email protected]

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Raising the Bar: Creating Value with the UN Global Compact Edited by Claude Fussler, Aron Cramer and Sebastian van der Vegt ISBN 1 874719 82 9 (paperback)

CLIMATE CHANGE

155 mm

From 1980–84 Frans van der Woerd was Policy Advisor at the Dutch Ministry of Transport, and from 1985 onward Senior Researcher at the Institute for Environmental Studies, Vrije Universiteit Amsterdam. He has published widely on matters of environmental policy and was the editor of the Environmental Management Manual (Handboek integrale milieuzorg; Kluwer).

THE BUSINESS OF

C L I M AT E C H A NG E C O R P O R AT E R E S P O N S E S TO K YOTO

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Katie Begg joined the Institute for Energy and Sustainable Development (IESD) at De Montfort University, UK, in May 2003 as a principal lecturer from the Centre for Environmental Strategy at University of Surrey. Her recent research programmes include ‘Encouraging CDM Projects for Poverty Alleviation’ for DFID, advice to the UK Department of Trade and Industry on ‘Project Entry for the UKETS’ and procedures for accounting for energy projects (PROBASE) under the EU. She is on the UNFCCC list of experts for JI and the CDM.

THE BUSINESS OF

Implementing Codes of Conduct: How Businesses Manage Social Performance in Global Supply Chains Ivanka Mamic ISBN 1 874719 89 6 (hardback)

THE BUSINESS OF

CLIMATE CHANGE

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KATHRYN BEGG, FRANS VAN DER WOERD and DAVID LEVY

David Levy is currently Professor of Management at the University of Massachusetts, Boston. His research examines the intersection of business strategy, technology and politics in the international arena. In the last few years, he has studied the engagement of US and European multinationals with the international regime to control greenhouse gases. Dr Levy is currently researching the potential of the renewable energy business cluster in Massachusetts.