High Quality Carbon Offset Credits Available Now At Bargain Prices—Is Now the Time to Buy?

Prices for voluntary carbon offset credits issued in the United States have declined considerably since the beginning of 2010. Diminishing prospects for the passage of climate change legislation in the US Senate is most often cited as the major reason for the price of Climate Reserve Tonnes (CRTs) dropping to around $6 per ton from approximately $10 at the beginning of the year. CRTs are issued by the Climate Action Reserve for carbon offset projects undertaken mainly in the United States and are viewed as “compliance grade” offsets under a future US federal cap-and-trade program.

Meanwhile California and other states and Canadian provinces continue to plan for the introduction of a regional cap-and-trade system within their jurisdictions by the start of 2012—now less than two years away. And in the United States the Environmental Protection Agency continues to develop an approach to regulating greenhouse gas emissions under existing authority granted to it by the Clean Air Act.

The consensus view among many climate change experts is that it is only a matter of time before real constraints are placed upon the emission in the United States of carbon dioxide and other greenhouse gases, and that some form of market mechanism will be used to help ease the transition to a low-carbon future. The success of the 1990s Acid Rain program in reducing emissions of sulfur dioxide is too compelling, market advocates say, for significant reductions in greenhouse gas emissions to be achieved across broad segments of the economy without taking advantage of emissions trading. Trading, they contend, provides needed price signals concerning the value of future carbon emission reductions and helps companies implement the most efficient abatement strategies.

Six dollars per ton is cheap compared with the cost of driving down emissions in America’s power plants, factories, and transportation networks. This can only mean that the price reflects skepticism about the political will of leaders in either the nation’s capital or in state capitals to cap greenhouse gas emissions. However, few voices among the many speakers at the Electric Utility Environmental Conference (EUEC) held in Phoenix earlier this month thought that no action was likely, if for no other reason than the industries most affected by greenhouse gas regulation would prefer the more flexible cap-and-trade mechanism to the blunt instrument that a command-and-control approach would take under existing provisions of the Clean Air Act.

Many speakers at the EUEC speculated that a billion tons of carbon offset credits will be needed to make a cap-and-trade program work at the federal level in the United States. This amount of voluntary emission reductions is enormous compared to the Climate Action Reserve’s current output in millions. In the face of political uncertainty about the timing of climate change legislation, the price of CRTs appears to be supported at current low levels by electric utilities—and others—hedging future carbon risks by taking “pre-compliance” positions in CRTs. It is estimated that such buying may have motivated as much as three quarters of the market in 2009.

At present prices, CRTs are trading at approximately one third the cost of Certified Emission Reductions (CERs) issued by the Clean Development Mechanism (CDM) under the Kyoto Protocol. Companies whose greenhouse gas emissions are currently capped under the European Union Emissions Trading System (EU ETS) are able to use CERs interchangeably with Assigned Amount Units when meeting their compliance obligations. CRTs trade at a discount to CERs because CRTs are not currently priced for use under a mandatory cap-and-trade system, though it is virtually certain that they will play a role similar to CERs under the Western Climate Initiative’s cap-and-trade program that begins in 2012.

Now is the time for companies with exposure to climate change risks to consider adding voluntary emission reductions to their investment portfolios. Since not all voluntary emission reductions are created equal, the present time provides an excellent opportunity to learn how to perform due diligence when conducting trades or financing emission reduction projects. Carbon traders may well look back to 2010 as the time when forward-thinking companies got a head start on their competition by building positions when CRTs were cheap.

© 2010, Futurepast: Inc.

Taking the Measure of Organizations’ Supply Chain Climate Risks and Opportunities: Reporting Upstream and Downstream Greenhouse Gas Emissions

An emerging focus of managing climate change risks centers on greening the supply chain. Organizations do this for a variety of reasons. They want to ensure the dependability of the raw or intermediate materials they source, and materials produced and transported in an environmentally sound manner have lower risk profiles. They take an interest in the readiness of their supply chain partners to meet new greenhouse gas regulatory requirements and to absorb potentially higher or more volatile energy costs. And they seek to protect their corporate reputations by dealing with supply chain partners that conduct their businesses sustainably and in compliance with legal requirements and ethical principles.

Greenhouse gas emissions from supply chain partners increasingly are analyzed to detect missed opportunities to increase energy efficiency and reduce emissions. This scrutiny may begin when an organization inventories its “Other Indirect” greenhouse gas emissions, also known as “scope 3” emissions. Other Indirect emissions are those that are influenced by a reporting organization, rather than emitted directly as combustion, process or fugitive emissions. Other Indirect emissions are also distinguished from “Energy Indirect” emissions, which result from the consumption of purchased electricity, steam or cooling. Other Indirect emissions from the production and transportation of raw or intermediate materials that occur outside the organizational boundary of the reporting organization are known as “upstream emissions.” Other Indirect emissions resulting from wholesale and retail distribution of products, and during the use and disposal phases of a product’s life cycle, may be called “downstream emissions.”

Other Indirect emissions can be more difficult for organizations to quantify and report than either Direct or Energy Indirect emissions. Often, the data needed to inventory these emissions reside outside the reporting organization in its supply chain, and are difficult to access. Complicating matters further are questions of allocation, which arise when a supplier furnishes a diverse set of products for multiple customers and then is asked to account for only the emissions associated with a subset of those. Practical questions include “how much to count,” and “how far upstream and downstream” the supply chain accounting should go.

Requests for business-to-business greenhouse gas emission information are becoming more common, and are likely only to increase. Business customers, particularly those with well-known brand names to protect, want assurance that suppliers are managing their risks, including those related to climate change. The concern does not stop with emissions accounting, as a broad examination of climate risks include physical risks from climate change, regulatory risks, and shifting consumer preferences. The first category of risks includes increased frequency of extreme weather conditions, flooding and sea level rise, and changing temperature and rainfall patterns. Resource scarcity is a corollary impact from climate change, which may be triggered by decreasing biodiversity, higher rates of disease, or an increase in desertification. Regulatory risks include the potential imposition of cap-and-trade programs, carbon taxes, or requirements for installation of Best Available Control Technology (BACT). Changes in consumer preferences can impact organizations by shifting consumption from one product category to another, enhancing or harming reputations, and creating markets for new products and services.

Business drivers for taking action now are gaining board room attention. According to PriceWaterhouseCoopers analysts who interviewed more than one thousand CEOs from the world’s leading companies for the Carbon Disclosure Project, “48% of CEOs were already making changes in their supply chain in response to climate change or would start in the next 12 months. 66% of these CEOs were already making a return on this investment or expected to do so within the next 12 months. We have seen a number of examples delivering real cost reductions as a result of using carbon as the value driver within the supply chain. For example, one major clothing retailer recently reduced their supply chain operating costs by 17% and saved over 4,500 tonnes of carbon by redesigning their distribution and logistics chain.” (CDP Supply Chain Report 2009, p. 7, accessed on 2010-01-10 at www.cdproject.net/reports.asp.)

For companies whose primary customers are other businesses, meeting the demand for information concerning their greenhouse gas emissions and other climate risk management strategies can be challenging. Many corporate staffs find it difficult to respond, with in-house expertise thinned and overextended. What’s more, the desired response from customers seeking climate change related information is not satisfied with the provision of a copy of the supplier’s environmental policy or ISO 14001 registration certificate. Real data are demanded that meet data quality standards and adequately characterize uncertainty.

Help is available from specialized consultancy firms like Futurepast. And new international standards and consensus-based protocols are under development. One of the first documents specifically to address supply chain reporting of greenhouse gas emissions is the Scope 3 Accounting and Reporting Standard, to be published as a Supplement to the GHG Protocol Corporate Accounting and Reporting Protocol. This document is available in draft form (November 2009) from the Greenhouse Gas Protocol Initiative, at www.ghgprotocol.org/standards/product-and-supply-chain-standard (accessed on 2010-01-10).

The International Organization for Standardization (ISO) also has begun to develop a document. ISO Technical Report 14069, Greenhouse gases – Quantification and reporting of GHG emissions for organizations (carbon footprint of organizations) – Guidance for the application of ISO 14064-1, is intended to complement the ISO 14064 Part 1 standard published in 2006. Publication of the ISO technical report is not likely before the end of 2012. Futurepast’s president, John Shideler, serves as a US Expert on the ISO working group developing this document.

The main purpose for counting Other Indirect emissions is, of course, to manage them better. Once quantified, organizations in all parts of the supply chain can focus on initiatives to design more sustainable products, improve energy efficiency in manufacture, optimize transportation and logistics resources, and promote end-of-life recycling. Some observers will see connections to other business planning tools such as Six Sigma and Lean Manufacturing which now will be applied to help meet the goals of reducing carbon emissions and managing climate risks.

Top Five New Year’s Climate Change Resolutions for Organizations of All Types and Sizes

New Year’s resolutions may date back millennia, perhaps as far as early Babylonian times. In the modern era individuals may make solemn commitments to lose weight or exercise more. Meanwhile, organizations set about to achieve quality and environmental objectives while maintaining or improving financial performance metrics. Fortunately, when it comes to climate change resolutions, organizations—and individuals—can often achieve win-win outcomes. In this spirit Futurepast offers its Top Five Climate Change Resolutions for Organizations in 2010.

We rank as number five the establishment of an organizational inventory of greenhouse has emissions. For leading organizations, GHG inventories are not new. However, getting one is the place to start for organizations that have put off formal consideration of the carbon intensity of their operations and products. An inventory allows companies, governmental units, and other types of organizations the chance to quantify how much carbon dioxide equivalent gases they emit on an annual basis. The inventory is broken down by type of emission, such as Direct Emissions from stationary and mobile combustion, as well as process and fugitive emissions. Another category is Energy Indirect Emissions, which acknowledge how an organization’s demand for purchased electricity or steam frequently causes utility companies to combust fossil fuels to produce the energy an organization needs. A third category of accounts is Other Indirect Emissions which includes emissions associated with both the upstream supply of raw and processed materials an organization uses as well as the downstream effects of the products and services it furnishes to the market. Transportation of these materials, goods and services typically are also included in the upstream and downstream calculations. Definitely, if your organization doesn’t already have one, now is the time to establish an accurate and verifiable GHG inventory.

Number four on our list of resolutions for the New Year is to obtain information from your supply chain about the carbon intensity of their inputs to your organization’s activities. Leading companies like Walmart have pioneered in this field, and more and more market leading organizations understand the importance of doing so. It comes down to sustainability. Simply put, organizations that are not able to reduce their carbon footprint in the coming years run the risk of falling behind their competitors and losing market share. This is bad for them, their customers, and other stakeholders. Now that market leading organizations have inventoried their carbon emissions and considered ways to reduce them, the next logical place to look is in the upstream part of the value chain.

Our number three resolution is to use the organization’s inventory to set emission reduction targets. An inventory allows organizations to see clearly where their most carbon-intensive operations or activities lie. Armed with this information, objectives for performance improvement can be set. This typically occurs at the highest level of the organization during periodic exercises known as “management reviews.” Top management sets the direction, assigns responsibilities and time frames, and allocates the resources necessary to achieve the targeted improvements.

Futurepast’s second most important resolution for organizations this year is to communicate its GHG performance and improvement objectives to stakeholders. The audience for this communication is both internal and external. Employees must understand the message so they can take needed actions to meet the organization’s climate change objectives. Suppliers need to know what part of the value chain the organization has identified as bearing the highest potential for targeted emission reductions, so they may rise to the challenge and deliver them. Customers are an important audience as well, because increasingly they will make business-to-business or consumer decisions based upon least intensive carbon options, when all other factors are equal. Last but not least, the investor community has a growing desire to know how the organizations they own are meeting the climate change challenges of the twenty-first century. Indeed, in some cases, climate change disclosures may already be called for in securities regulations in those cases where a publicly traded company has determined that a reasonable person could be influenced by its climate change risks and management’s decisions about how to address them.

This year we cap our suggestions for resolutions with our number one recommendation: Reduce the carbon footprint of your organization’s activities and products. Implement actions that reduce consumption of energy, squeeze carbon emissions from the upstream supply chain, and reduce the carbon footprint of products over their life cycles. Increase the efficiency of lighting and heating/cooling systems, optimize distribution networks, reduce packaging, and improve recyclability. Encourage employee car-pooling, transit use or biking to work. Like the individual that goes on a diet and exercises more, organizations that produce equivalent products and services that use less materials and energy will gain an edge in the competitive marketplace and augment its appeal to customers. And in the classic win-win way, it will achieve these benefits while benefiting the organization’s bottom line.