Carbon accounting: The new bottom line
Legislation combined with pressure from investors and consumers means companies not yet addressing their carbon emissions are risking their long-term futures
Carbon footprinting is increasingly being used as a tool to monitor those emissions. The carbon footprint of any person, organisation or product is the amount of carbon in the CO2 (or other greenhouse gas) released to the atmosphere as a consequence of everyday activities such as energy use, transport, sourcing of materials etc.
In this way, every human activity has a carbon cost. Even breathing releases carbon when it converts O2 to CO2. Every object also has a carbon content. This is based upon the carbon expended in its production, transportation, operation and disposal.
Carbon footprinting can help businesses make the necessary transition to a carbon-constrained future economy. As a management tool, standardised carbon footprint models can also promote operational efficiency, from strategic decision-making to plant selection, as well as improving investor confidence.
Legislation is one of the key forces leading businesses to adopt carbon footprinting programmes. The European Union Emissions Trading Scheme (ETS) targets the biggest polluting industries in terms of CO2 emissions. It is a cap and trade scheme, and is one of the key mechanisms the EU is using to meet its Kyoto emissions targets.
By placing a value on carbon emissions, the scheme allows industry and energy users to reduce their footprint in the way most suitable to them. This usually means at the least cost. Each installation covered by the scheme can choose either to buy carbon credits or sell them.
By reducing emissions, installations generate credits to sell by reducing the number it needs to buy. Alternatively, an installation may choose to buy additional permits and continue to emit. The strategy adopted by each installation will vary depending on the costs of abatement technology compared to the EU carbon price.
At present, the EU ETS applies to energy intensive industries including iron and steel, cement, lime and refineries. Across Europe it covers some 11,000 installations, almost 1,000 of which are in the UK. These are responsible for roughly half of all UK CO2 emissions.
The next phase of the scheme does not extend the coverage of the type of installations. But, in the Climate Change Bill issued in November 2007, the government seeks to introduce mechanisms that could allow domestic carbon-trading schemes.
The main focus of the bill is to put the UK at the forefront of climate change and energy policy by extending the commitment made in Kyoto beyond the 2012 horizon.
It puts medium- and long-term emission targets into statute, with the introduction of successive five-year carbon budgets starting in 2008. The bill proposes the budgets are set three periods (15 years) in advance to give industry the longer-term stability needed to make investments. A committee on climate change will advise the government on how to set the limits for carbon budgeting in order to meet the 2050 targets.
The targets set for carbon emissions are a reduction of 60% (against the 1990 baseline) by 2050, with an interim target of 26-32% by 2020.
Investing in the future
Investor pressure is another reason why enterprises are seeing a need to look seriously into assessing their carbon footprints. Launched in December 2000, the Carbon Disclosure Project (CDP) represents global investment institutions with a combined asset value of £20 trillion. It seeks to gain information on the business risks and opportunities presented by climate change and GHG emissions.
The CDP relies largely on voluntary data supplied by the companies it questions, and its yearly reports are given much media attention. The project shows that the issues of climate change are high on the corporate agenda. Its 2006 report showed an increase in the awareness of the issues surrounding climate change and the adoption of best practice in mitigating risk.
Pension investment companies and fund managers seeking long-term investment returns recognise climate change as a business risk. The insurance industry faces the possibility of huge claims in the decades to come as the number of weather-related disasters increase. Swiss RE now ask for questionnaires to be completed as a prerequisite for investment. They see their management may be vulnerable against future claims if they are not seen to be doing everything they can to facilitate control and mitigation.
Companies which continue to pollute and do little to constrain their GHG emissions may face lawsuits similar to those brought against the tobacco, pharmaceutical and asbestos industries.
Like investors, customers influence the importance businesses attach to addressing their carbon footprint. Companies not seen to be doing their bit are risking their public reputations. This is especially pertinent to businesses operating in the environmental sector and perceived to have a special role in protecting the environment.
There is increasing media attention given to the issues surrounding climate change. People are being encouraged to reduce their personal carbon footprints through a combination of educational initiatives and financial rewards.
The government recognises the role the public will play in meeting its GHG emission targets. It is trying to mobilise consumers through advertising campaigns, websites such as ActOnCO2, carbon footprint calculators and the forthcoming code of best practice for carbon offsetting.
The Carbon Trust, an independent company funded by the government, has recently introduced its carbon reduction label. It identifies the footprint for a particular product and ensures that participating companies demonstrate their commitment to reducing carbon. In the coming months, the trust is hoping to develop a common methodology with its key supply chain partners.
Water is a key raw ingredient in many industries, including the food industry, where the carbon-labelling scheme has been introduced. As such, there may be a demand for increasing confidence in the figures used to determine the footprint of water production and supply. Since companies adopting the label will be committed to carbon reduction programmes, water companies may be expected to follow suit as members of the supply chain.
By calculating its carbon footprint, a business can ensure that it meets its corporate social responsibility targets. But the exercise can also be a powerful management tool when used as part of any cost-benefit analysis. The incorporation of carbon accounting within a business's strategic management will help prepare for more stringent regulation in the future.
Justin Strutt is a technical director for the Renewable Energy Group at Black & Veatch