GHG Emissions Management: An additional compliance cost item or an opportunity for competitive advantage?
It is a fact that whether you are in an Oil & Gas traditional operation or in a “clean” biofuels division, your company will be facing many risks associated with global warming and the associated regulations that are attempting to curb greenhouse gas (GHG) emissions. Independent of your company's (or even your own) views regarding the dangers of GHG emissions, it must be recognized that simply because many others are concerned, the issue does have significant implications.
Investors are already discounting share prices of companies that do not appear well positioned to compete in highly regulated industries.The Oil and Gas sector is already facing higher production costs (non-conventional sources are more expensive to produce) and as governments around the world enact policies placing costs on emissions, the drive to implement energy efficiency projects is increasing. More and more, end users are taking into consideration a company’s environmental record when making purchasing decisions. The markets in greenhouse gas and carbon emissions are also showing significant growth rates with annual trading in these assets in the order of tens of billions of dollars (especially in Europe where it is better established); it is only a matter of time before the market in North America overtakes the trading volumes already witnessed there. The Province of Alberta in Canada is currently establishing policies to encourage a domestic offset market for emissions and a Federal program is planned to be enacted by 2010 for Canada-wide emissions trading.
Companies that manage and exploit these new business opportunities in a new market environment will generate a competitive advantage over rivals. In this article we discuss some ways in which GHG regulations can affect your business and ideas for developing strategies that will help you manage the risks and pursue the opportunities.
It is clear by now that it will not be enough to just do something about it; you have to do it better –and faster – than your competitors. The publication in early 2008 of the Federal ‘Turning the Corner” document has provided some indication of where Canada is going with emissions regulations but much yet still needs to be clarified at the industrial sector level. Ignoring the financial and competitive consequences of GHG regulations could lead a company to formulate an inaccurate risk profile. Notice that the most important distinctions to be made when considering environmental impact evaluations aren’t between sectors but within sectors. The energy industry has been targeted for being a large emitter and it is within its own boundaries that a company’s climate-related risk mitigation and product strategies can create competitive advantage. A corporate focus on reducing greenhouse gases is a good business strategy: It has the potential to increase overall energy efficiency and help position a company to compete effectively in a carbon-constrained world. Any initiative to tackle the emissions opportunity will require strong commitment from top management and a significant amount of learning across the company.
The starting point is clearly a deep understanding of the sources and levels of the company’s own greenhouse gas emissions and the tracking of those emissions over time; the exercise of establishing an accurate inventory of emissions will have the secondary effect of increasing awareness across the company and expand the discussion of the strategic opportunities available. The emissions inventory should be carefully established and a comprehensive review of best practices in reporting the emissions information is also a must. The aim is not simply to comply with the information requirements established by governments but to identify and prioritize emission reduction opportunities and establish strategies for participating in greenhouse-gas-trading markets. Companies that accurately quantify their footprints send a strong signal that they recognize the importance of climate change as a business risk – and an opportunity. Emissions’ trading is one of the main policy tools currently in use for addressing climate change. It is essential that the framework for reporting and compliance in this new global market is built on trust. Clearly there are many parallels with financial reporting, where trust is at the heart of corporate transparency.
It is then imperative that the company’s efforts in determining the baseline inventories and the procedures used in the estimation of emissions reductions are built on a solid foundation; particularly for large multi-national organizations that face different regulatory requirements but that may be accessing a single global emissions trading market. The Greenhouse Gas Protocol (GHG Protocol) is the most widely used international accounting tool for government and business leaders to understand, quantify, and manage greenhouse gas emissions. Within the boundaries of these established protocols, the best possible science-based emissions estimation approaches should be pursued aggressively so as to enable a strong position of a company for demonstrating emissions reductions in a proactive manner. The analysis of risks and opportunities associated with GHG emissions will highlight those areas where the company has to develop action plans; these will range from obvious energy-efficiency improvements at operating facilities to potential strategic investments in low-carbon products and processes. The challenge then is not only to reducing exposure to climate related risks but on finding business opportunities within those risks, and to do it better than your competitors.
References
Lash, J.; Wellington, F. "Competitive advantage on a warming planet". Harvard Business Review. March 2007.
"Turning the Corner: Taking action to fight climate change"; Environment Canada, March 2008.
"Specified Gas Reporting Standard", Alberta Environment; March 2007.
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