02/08/07
Filed under:
The Green Wave
Posted by:
Brian Kuehl @ 5:24 am
By Truman Semans, Director for Markets and Business Strategy, Pew Center on Global Climate Change
A Wall Street Journal reporter asked me last week whether climate change was spurring a fundamental change in environmentalism. He was referring to the surge of corporations getting involved in climate protection, such as those investing in projects to prevent Brazilian rainforest deforestation to capture potential “carbon credits. I answered, yes, the scope of the climate problem is so broad that it is drawing all kinds of groups and perspectives into the environmental effort – not just companies and pension funds, but also cities, religious groups, and labor unions.
On reflection, I may have framed the answer too narrowly. It’s not just environmentalism that’s changing. The flip side is that business is changing dramatically too. I’d suggest that the climate challenge is forcing society as a whole to alter the way we manage both our economy and our natural assets – even assets as hard to grasp as the systems that regulate rain, wind, and temperatures around the globe. This change is still in its infancy, but we already can see the signs, and we can begin to see where these changes may eventually take us.
A prime example is the January 22 debut of the U.S. Climate Action Partnership (USCAP). Ten large corporations teamed with the Pew Center and three other leading non-governmental organizations (NGOs) to publicly announce joint recommendations for Congress on mandatory, economy-wide U.S. climate policies. These policies include a “cap and trade” system for large emitters and additional measures to cut emissions and boost clean technologies in transportation, buildings, and coal-based energy. Although there have been past NGO-business collaborations on environmental and social issues, few have brought such wide ranging interests together to offer lawmakers such concrete guidance on legislation.
Consider the scope and diversity of USCAP’s initial membership: Alcoa, BP America, Caterpillar Inc., Duke Energy, DuPont, Environmental Defense, FPL Group, General Electric, Lehman Brothers, Natural Resources Defense Council, Pew Center on Global Climate Change, PG&E Corporation, PNM Resources, and World Resources Institute. This group includes some of the largest corporations in the United States in a number of important industries as well as major supplier relationships with other climate-relevant industries including automobile and aircraft manufacturing, building construction, and coal mining.
And USCAP is just a subset of companies actively engaged in developing progressive climate solutions. The Pew Center’s Business Environmental Leadership Council (BELC) comprises 42 companies worth a combined $2.4 trillion that employ more than 3.3 million people across almost every state in the U.S. and most of the countries around the globe. The BELC is a microcosm of the global economy. Since we formed the BELC in 1998, our members have been working with us to advance sound policy as they prepare for a carbon constrained world by addressing their own direct and indirect GHG emissions.
Reasons for Change
The reasons why companies are engaging in the BELC, USCAP, and related entities are almost as significant as USCAP’s recommendations themselves – and these reasons may provide a useful start for the Turning the Ship discussion.
From my own experience working with the business community, leading the BELC, developing USCAP, and working with Dr. Andy Hoffman from the University of Michigan on the Pew Center’s recent report, Getting Ahead of the Curve: Corporate Strategies that Address Climate Change, I have found that:
- At the simplest level, companies engage on climate because they find it in their strategic business interest to do so. While good corporate citizenship is one rationale for many companies, the main motivator for almost all is the desire to manage climate-related risk, capture opportunity, and maximize profits. These companies expect a major transformation in markets as the world comes to grips with the climate problem. Rather than react to changes as they occur, USCAP and BELC companies are among those that prefer to understand potential future scenarios, plan forward, and try to influence the way the market changes. An example of this is Shell’s use of scenario planning to think through challenges and identify risks and opportunities brought forward by changing political, economic and technological conditions. Scenario planning has led Shell to conclude that the world (and companies) will face a price for carbon due to growing concerns over climate change. This has led the company to focus on increasing natural gas production, wind, solar, bio-fuels, coal gasification and experimentation with hydrogen delivery systems.
- Companies believe that the most effective and efficient way to address climate change is for the market to accurately reflect the true cost of GHG emissions as well as the true value of reducing emissions or sequestering carbon dioxide. The invisible hand can only allocate capital and labor in the most efficient, welfare-maximizing way if the invisible man can see what it’s doing – and the way the market “sees” is by perceiving prices. As the CEOs of Ford, British Airways, HP, Duke Energy, and many other companies wrote in a June 2005 statement to the G8 Governments before the Gleneagles Summit, “Market based solutions to climate change will work best when there is an informed base of consumers who understand the implications of their consumption and buying choices – and when they are given the right price signals.”
While a few companies prefer carbon taxes to correct prices, most recognize that regulatory limits on GHG emissions are the most politically practical core tool within a system that ultimately covers the entire economy. The USCAP considers a cap and trade system with tradable permits and real, verifiable offsets to be the “cornerstone” of a climate policy framework because it “will ensure emission reduction targets will be met while simultaneously generating a price signal resulting in market incentives that stimulate investment and innovation” in low- and no-carbon technologies.
- Companies deeply involved in analyzing policy solutions realize the need for additional incentives and mandatory measures to supplement a cap and trade. For example, USCAP and the Pew Center’s Agenda for Climate Action developed with BELC input call for policies to accelerate reductions and technology research, development, and deployment in sectors where initial carbon prices alone will not suffice – including for transportation vehicles and fuels, buildings and efficiency, and coal-based energy. Pew has developed several reports on elements of this combined approach with input from BELC companies.
- Regardless of what approach they prefer, companies clearly expect regulations soon. In our fall 2006 Corporate Strategies survey of large corporations, we found that 67% expect GHG regulations to take effect between 2010 and 2015. A further 17% expect this before 2010. This implies an expectation that climate regulations will pass Congress even sooner.
Corporate Strategies
So, how are companies pursuing strategies to address climate change? I encourage those interested in the details to read our Corporate Strategies Report, as well as our compendium of climate programs BELC companies have undertaken. The report serves as a “how to” guide with steps for strategy-making based on collaboration with BELC member companies, six in-depth case studies with Alcoa, Cinergy/Duke Energy, DuPont, Shell, Swiss RE, and Whirlpool, and the Strategies survey of 31 large corporations. The report finds:
- The main rationales for pursuing climate strategies among early actors have been, in rank order, energy efficiency (internal, and in products), operational improvements, and cost savings.
- However, early actors have increasingly built on these bottom-line strategies with top-line initiatives as they learn more about how markets will change under carbon constraints and how they can position themselves favorably relative to competitors. As Linda Fisher, DuPont’s Vice President and Chief Sustainability Officer, said in interviews for our Strategies Report, “We need to understand, measure, and assess market opportunities. How do you know and communicate which products will be successful in a greenhouse gas constrained world? The company that answers these questions successfully will be the winner.”
- To earn a seat at the policymaking table, companies need to demonstrate significant progress toward voluntary reduction measures. They also need to have a consistent message on climate policy from the CEO level to the environmental and marketing managers to the lobbyists.
- Firms that incorporate climate change into their core business strategies will be best positioned to manage a more holistic range of risk, perceive market signals better, take advantage of emerging opportunities, and marshal all its functional strengths to gain competitive advantage.
- Finally, the ultimate achievement related to climate is a game-changing strategy that allows a company to jump ahead of competitors by creating new markets or reshaping the rules of existing markets in their favor. This requires concerted effort in many areas — R&D, product development, marketing and communications, value chain, and deep policy engagement. Whirlpool and HP have been doing this with regard to energy efficient products for years. DuPont, BP, and GE are emerging as some of the major innovators in climate friendly technologies that could dominate key markets. And companies like UTC are investing in major dialogues to overhaul buildings sector voluntary approaches, codes, and standards in a way that could give an enduring boost to its products.
Companies that take action now will be best positioned to thrive in future carbon-constrained markets, which will be transformed by the demand for energy efficiency and no- or low-carbon technologies. As worldwide efforts to combat climate change intensify, the development of an integrated global carbon market with countless suppliers of emissions reductions appears increasingly likely. A global carbon market would also create thousands of new investment opportunities that new players – down to individual households — could involve themselves in, either directly or indirectly. With the correct price signals in place, technological innovation would flourish and hasten the development of the “iPod for energy,” to borrow a line from David Hone, Group Climate Change Adviser at Shell.
So to go back to the question from the Journal reporter: there is no doubt that climate change is spurring a fundamental change in environmentalism. But that’s just part of the story. Climate change is altering the way companies do business, from the products they offer today to the strategies they put in place to prepare for the future. Climate change is an issue that will affect virtually all aspects of society. The consequences of these changes will be most severe for those who do nothing to prepare for them today. The companies that the Pew Center works with in the BELC and USCAP recognize this, and their proactive stance on the issue is the only intelligent choice left in dealing with climate change.
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Truman Semans serves as Director for Markets and Business Strategy for the Pew Center on Global Climate Change
Leave a Reply
February 9th, 2007 at 11:45 am Mr. Keuhl, Thanks so much for your great essay! I want to take a moment and say this is a great idea for educating and creating discussion about environmental sustainability in the business world. I really look forward to reading the future essays and resulting discussion. My comment is on the corporate strategies that you outlined. It seems that there is a missing component that may have a large impact on achieving success: education. Are businesses thinking about the education side as one of their strageties? It seems that educating the public and getting involved with MBA programs would create a long-term stream of people who are more open to changing the way business is done. Thanks! KS
February 10th, 2007 at 9:51 pm Companies believe that the most effective and efficient way to address climate change is for the market to accurately reflect the true cost of GHG emissions as well as the true value of reducing emissions or sequestering carbon dioxide. The invisible hand can only allocate capital and labor in the most efficient, welfare-maximizing way if the invisible man can see what it’s doing – and the way the market “sees” is by perceiving prices. All well and good, but this is classical economic theory– meaning it’s based on a model of selfish, independent agents acting in a perfect market. I am wondering if facing the complexities of climate change might create the conditions for thinking more broadly about economics. Specifically, might we start considering other variables that would make classical economics a more realistic theory, such as including social dimensions, power relations, and other motivations besides selfishness? This is the 21st-century, interconnected, globalized world. Can we begin to think differently? I submit that it was our narrow thinking that got us into the climate change troubles we have now. It may be that only broader, deeper, and more realistic thinking can get us out. Has anyone seen a trend in this direction?
February 12th, 2007 at 2:10 pm Climate change empowers and motivates this unique company to create a target of 25% of all US rooftops with solar photovoltaics within 25 years or less. Here’s a snip from an article recently written about them. Is the Sun finally rising on Solar Power? In 1931, Thomas Edison had a conversation with Henry Ford and Harvey Firestone. He said, “I’d put my money on the sun and solar energy. What a source of power! I hope we don’t have to wait until oil and coal run out before we tackle that.” We have waited 76 years, but an innovative company may have finally found a solution. The sun supplies enough energy to earth in one hour to supply all of our energy needs for an entire year. But currently solar power produces less than ½ of 1% of our residential energy needs. Why? In the past, solar power has been too expensive and too complicated. To switch to solar, people had to invest their children’s college fund or sell their second car. The average consumer pays $40,000 to convert their home to solar—plus you are responsible for the installation, maintaining the equipment, getting permits—who has the time (or the money)? A company called Citizenre has a bold plan to remove all of the traditional barriers to solar power. They offer: No system purchase. No installation cost. No maintenance. No permit hassles. No performance worries. No rate increases. No way!? When we first heard about this from one of our readers, we were so intrigued that we contacted the company. It seemed almost too good to be true. Like most innovations, their model is so simple it makes you wonder why no one thought of it before. You simply pay Citizenre the same rate per kilowatt for power that you used to pay your utility company—but it gets even better. Citizenre will guarantee that your rate per kilowatt will not go up for 25 years. With ever increasing electricity rates, this gives consumers peace of mind and can add up to significant savings. They even have a solar calculator on their website that shows exactly how much you will save over 1, 5, and 25 years. I saved over $13,000 and by using clean energy, it was the equivalent of taking 24 cars off the road or planting 400 trees. Nice. In the past, “going green” usually implied sacrifice. You get to feel good about saving the planet but most “green” products are more expensive than their “dirty” counterparts. With Citizenre, going green can actually save you money. This is all made possible by net metering laws that require the utility companies to allow renewable energy to flow into the grid and then allow the consumer to pull that same amount of energy off of the grid at no cost to the consumer. Basically the grid becomes a huge battery. The meter spins backwards during the day when the sun is shining and forwards at night when the consumer pulls that power back off the grid. These laws were passed because residential energy production was the number one cause of pollution in the US last year, but there are still 9 states that have not joined the party. If you live in Alaska, Tennessee, South Carolina, Mississippi, Alabama, Missouri, Kansas, Nebraska, or South Dakota, the Citizenre Solution is not an option for you yet. Learn more about it at http://www.jointhesolution.com/KeithJ-SunPower
February 14th, 2007 at 8:49 am A critical point about defining the problem too narrowly. Sometimes tough to remember when we are hunkered down meeting the daily panics. And most corporate reward systems are biased toward linera thinking, direct cause and effect, and immediate results. John Sterman at MIT has used a simple exercise of charting the water level in filling a bathtub to show that people are inherently challenged by dynamic problems with delays and feedback. Education in systems thinking is a critical competency for sustainability.