The Sun Sets on the Era of Unbridled Emissions

Travis Miller


March 1, 2011


More and more countries are establishing nationwide ceilings for greenhouse gas emissions. Typically, such actions are the first step towards binding emission restrictions that inevitably target industry. At first, the laws will only affect the largest polluters. Power plants, chemical refineries and other large, industrial utilities will be forced to reduce their emissions, pay fines or worse, depending on the scope and teeth of the legislation. Down the road, however, many other companies will begin to come under the restriction umbrella.

Two Agreements That Are Driving Legislation

Two important international agreements, aimed at reducing the concentration of greenhouse gases in the atmosphere, have become the key driving forces behind the increase in greenhouse gas legislation. The first is the Kyoto Protocol. Currently, Kyoto has been ratified by 192 countries and the European Union. The protocol segregated countries by annexes and prescribed varied target levels of greenhouse gas reductions below the benchmark year of 1990 levels. The widespread acceptance of Kyoto led to the establishment of the first market-based emission trading schemes.

The agreement is set to expire in 2012 and to date has produced mixed results, with wide variations between the signatories' ability to meet their targets for emission reductions. Furthermore, since its passage, there has been a net global increase in both energy consumption and carbon emissions that is predominantly attributable to the increased financial and manufacturing capabilities of developing nations. Discussions related to the continuation of the Kyoto Protocol are ongoing and will likely define the future of greenhouse gas legislation.

Another important accord is the Montreal Protocol, which entered into force in early 1989 and has subsequently undergone numerous revisions to expand and refine its scope. To date, the protocol has been ratified by 196 member states and has resulted in large scale decreases in ozone depleting substances, including chlorofluorocarbons, which are potent greenhouse gases. The Montreal Protocol has emerged as a force in greenhouse gas reduction legislation and recently prompted the United States, Canada and Mexico to propose a joint amendment to reduce the production and consumption of industrial hydrofluorocarbons.

Emerging Approaches to Greenhouse Gas Management

In January 2010, the SEC issued interpretive guidelines that apply to the practice of disclosing risks associated with climate change. While not mandatory, this guidance will likely produce the largest response by the private sector related to the evaluation and implementation of business process changes through greenhouse gas monitoring programs. Specifically, publicly traded companies that elect to follow the SEC guidance documents will need to offer detailed self assessments pertaining to the risks and opportunities posed by climate change in their 10K, 10Q, item 101, item 103, item 503c, item 303, and 20-F (foreign entity) disclosures.

In order to meet these requirements, publicly traded companies have to answer four key questions: Will greenhouse gas legislation materially impact your business? Will international accords or treaties materially impact your business? What are the legal, technological, political and scientific risks and opportunities that may affect your business? And how will the perceived physical changes to the global environment impact your business?

The responses to these inquiries then enter the public forum under the watchful eye of SEC regulators, where ambiguous or sugar-coated self assessments can have serious consequences. As such, an expert carbon exposure assessment or audit is likely the prudent course of action, which will in turn reveal organizational exposures related to the effects of climate change and greenhouse gas legislation.

The United Kingdom's CRC Energy Efficiency Scheme (formerly known as the Carbon Reduction Commitment) offers another glimpse into the future of market-driven greenhouse gas emission regulations. The cap and trade mandate focuses on large-scale emitters as defined by 2008 energy-usage statistics. Private and public organizations that fall within the program's scope will be those that use half-hour metering to record their electricity use and consumed over 6,000 megawatt hours of energy in 2008.

In layman's terms, the scheme is targeted at users who consume around ?1 million or more worth of energy annually. Once identified, these large-end users are pooled into the cap and trade scheme where emission permits will slowly be rationed to shift the cost of compliance from the public to the end user under a "polluter pays" legislative framework.

During the initial years, a baseline will be established via a performance-based model with shifting measurement criteria. The baseline data collected from this process will then be evaluated, measured and released to the public. The highest performers will be rewarded with scheme revenue while the poorest performers must pay the ongoing market rate for carbon credits.

Engaging Senior Management

Developing the framework for an effective greenhouse gas management system requires senior management commitment. This is because greenhouse gas policy has been directly linked to energy policy, which requires understanding the organizational structure, departmental energy consumption needs and supply chain. Fortunately, in practice, a pragmatic analysis of greenhouse gas emissions should save money through process improvements, energy consumption reductions and efficiency gains.

But to secure the greatest return on investment, management must engage in an operational evaluation that implements business practices to support the program. Step one in that endeavor would be drafting a written process for all operating groups that promotes operational efficiency and interdepartmental communications. Then the company must determine a way to collect emission data. In order to be practical and sustainable, the collection process should automate analysis and, ideally, provide scalable metrics to assess improvement.

In addition, documentation methods should be established to produce a stored record of energy consumption and energy use reductions resulting from sustainable process implementations. Key personnel also need to be trained to promote a streamlined roll-out and facilitate compliance with corporate initiatives and legislative mandates. Finally, regular progress assessments should be conducted to evaluate the effectiveness of implemented programs at reducing greenhouse gas emissions and promoting cost savings.

The combination of strong management support and a strategic process roll-out will produce the greatest likelihood of a high return on investment that will allow a company to adapt to emerging legislative requirements pertaining to greenhouse gas emission reductions.

Benchmarking to Prepare for Business Risks

The first critical stage in implementing an effective greenhouse gas management and reduction program lies in the process of benchmarking. Effective greenhouse gas benchmarking is a three-step process that can be repeated until the desired objectives are met and expanded to include the emission sources that must be monitored pursuant to new legislation.

The critical initial hurdle for establishing a greenhouse gas monitoring program is gathering data to create an inventory from which objectives can be set. Data gathering and management is the fundamental component to successful proactive planning for future regulatory requirements.

As illustrated by the UK's CRC Energy Efficiency Scheme, effective pre-planning is likely to be accounted for and evaluated during the initial phases of a mature greenhouse gas regulatory scheme. Thus, pre-legislative implementation will likely give a company a competitive advantage once legislation is enacted.

Managing Greenhouse Gas

In recent years, international climate change discussions have increasingly elevated the need to be cognizant of the global nature of environmental regulations and how it could impact greenhouse gas-emitting companies. Automated environmental management systems are one way to address the documentation and record-keeping challenges represented by climate change legislation.

Regardless of what system is used, however, certain key functions are important for organizations that are seeking to develop a flexible greenhouse gas management program that can help streamline their efforts to achieve compliance with current and future legislative initiatives around the world.

These important key functionalities include:

  • standardized data capture methods for evaluating carbon dioxide equivalents and specific targeted gases of high concern

  • a data storage element that will allow for the successful recall of information from past data inputs

  • an accounting system that can prorate the emissions generated from multiple direct emission sources at the facility level

  • the capacity to document the replacement or retirement of obsolete systems with "greener" energy efficient systems

  • the ability to evaluate conservation activities and the procurement of lower emission power sources that detract from the net greenhouse gas emissions of an organization (e.g., natural gas versus electricity versus on-site solar)

  • the flexibility to be expanded to include both down- and up-stream supplier emissions, in the event that supply chain emissions become required by future greenhouse gas legislation or customer requests

Centralizing reviewable emissions data in such a system not only allows organizations to monitor the efficiency of their facilities, operations and supply chains but perhaps just as importantly, makes it easier to stay ahead of the curve in a rapidly changing legislative environment.