Five Winds International

The Changing Carbon Management Landscape

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Courtesy of Five Winds International

How far we have come, key trends, and what the future holds

Over the last decade, the carbon management landscape for companies has changed dramatically. Today, the business drivers for managing carbon are much clearer, and there are many examples of companies that are gaining business value by managing the risks and opportunities associated with climate change. Although much uncertainty remains, Five Winds expects to see carbon management become increasingly mainstream in the years ahead. To understand where we are going, it is useful to step back and ask, 'How did we get to where we are today?'

In business, carbon management has a long history. In the early days, it was a specialized field involving few people, who worked mainly for very large greenhouse gas emitters such as the energy supply sector and heavy industry. There was a notable focus on industries with long planning horizons for new or replacement capital investments. The key business driver in the early days was anticipated government action to directly limit greenhouse gas emissions or put a price on carbon via a carbon tax or cap-and-trade emission trading scheme.

Businesses anticipated government action on climate change mainly due to international initiatives and commitments. Key milestones include the UN Framework Convention on Climate Change (UNFCCC), signed in 1992, and the Kyoto Protocol, which was signed in 1997 and became legally binding in 2005. To meet these international commitments, governments around the world developed a wide range of legislation and regulations, including carbon pricing, low carbon energy supply mandates, energy efficiency mandates, and R&D spending and incentives. Europe emerged as a leader in this area.

There are now several examples of carbon markets around the world, including regulated markets (e.g., European Emission Trading System) and voluntary markets (e.g., Chicago Climate Exchange). International Standards for carbon accounting such as quantification, reporting, and verification, have emerged in the last decade. Leading standards include the WRI/WBCSD GHG Protocol Corporate Standard (1st edition 2001, revised edition 2004) and the ISO 14064 family of Standards (2006). Mandatory greenhouse gas reporting is a reality in many countries, and will begin in the United States in 2010. There is a growing interest in energy efficiency and renewable energy to address cost management, economic recovery and green jobs, U.S. national security concerns, energy price uncertainty, and climate change concerns.

Carbon management is increasingly mainstream, even in North America where government action on climate change lags behind Europe. Al Gore's movie An Inconvenient Truth (released in 2006), became hugely popular and seemed to strike a nerve in the collective zeitgeist. GE's 'ecomagination' initiative (with a focus on new revenue from climate change solutions) and Walmart's Supplier Sustainability Assessment (with a focus on identifying carbon reduction opportunities in the supply chain) have contributed to higher awareness of the business value associated with a broader approach to carbon management. Most recently, in early 2010, the U.S. Securities and Exchange Commission (SEC) issued guidance to companies about how to disclose their risks and opportunities associated with climate change. The SEC gave formal recognition to earlier efforts, notably the Carbon Disclosure Project (CDP), which was launched in 2000.

From a Five Winds' business perspective, we have come a long way. Working with our clients, the focus has shifted from 'Why is climate change a business issue?' to 'How can I generate business value from reducing the carbon footprint of my operations, my supply chain, and my products?' In many ways, everything has changed, including: who is managing the issue (from technical specialists to board room generalists); the motivation for doing the work (from compliance to competitive advantage); and the breadth and depth of the work itself.

What is the future of carbon management? Some key trends already underway will continue and new issues will emerge. Here are eleven trends we expect will become more important in the coming years.

Business Drivers

1. Regional and Sector Policy Initiatives. Governments will continue to put in place legislation and regulations to try to meet their international commitments on climate change. However, frustration with the slow progress of the international process (e.g., outcomes of the Copenhagen meeting) and the complexities of reaching agreements among over 190 countries will contribute to the continued growth of regional and sector specific initiatives.

2. Private Regulation. Higher expectations from stakeholders such as investors and customers will lead to higher levels of 'private regulation'. The emerging synergy between the CDP and Walmart's Supplier Sustainability Assessment is a leading example. The CDP Supply Chain Report 2010 showed that over half of large companies expect to stop doing business with suppliers who do not effectively manage carbon.

3. Broader Definition of Business Risks and Opportunities. As stakeholder expectations evolve, we expect a broader and more nuanced view of the business risks and opportunities associated with climate change to emerge. For example, the SEC's statement in early 2010 highlighted the following risk/opportunity examples:
• Impact of Legislation and Regulation
• Impact of International Accords
• Indirect Consequences of Regulation or Business Trends, and
• Physical Impacts of Climate Change.

Business Responses

4. Mitigation and Adaptation. Business responses to climate change have typically focused on lessening impacts through reducing greenhouse gas emissions. Because the climate is already changing and greenhouse gases persist for decades and centuries, a certain amount of climate change is already 'locked in'. Hence, we expect to see an increased business focus on adapting to climate change, both to meet operational needs (e.g., increased focus on water availability), and as an opportunity to meet the needs of customers (e.g., building new infrastructure).

5. Globalization of Carbon Markets. Carbon markets are currently immature, diverse, and uncoordinated. There is no single global carbon market and this is likely to continue for the foreseeable future. However, as carbon markets grow and mature, we expect to see growing linkages between them, and for regulated markets to continue to dominate voluntary markets.

6. Low Carbon Technologies and Products. Even more important than carbon markets, the markets for low carbon technologies and products will grow dramatically. The most important sectors affected will include energy supply, energy demand (including buildings and transportation), agriculture, and forest products.

7. Carbon Footprint of Consumption. Companies exist to meet consumer needs by providing products and services. Traditionally, government and business addressed climate change by focusing on production. However, this approach has not been successful, at least in part because globalization has exported emissions throughout the supply chain. We expect to see more focus on expanding carbon footprint boundaries to include the entire value chain for both companies and products. This will include actions by business and perhaps also, actions by governments (e.g., border tax adjustments proposed in Europe to 'level the playing field').

8. Integrated Sustainability Responses. As governments and businesses become more sophisticated in understanding sustainability issues, systematic whole system responses will need to be developed to address issues that are intrinsically linked such as climate change and water. Integrated responses will provide more leverage than single issue approaches to address the root causes of problems. The rising bar for what constitutes 'leadership' will reflect the need for integrated responses.

Carbon Management Body of Knowledge

9. Codification of Best Practices. The first generation of international standards to codify best practices in carbon accounting emerged in the last decade. These standards have been somewhat successful in promoting consistency and transparency. The transition to a low carbon economy will require additional carbon accounting standards with a broader scope and increased consistency. Examples of current initiatives include the WRI/WBCSD GHG Protocol for Products and Scope 3 Standards, and the ISO 14067 Carbon Footprint for Products Standard. We expect this trend to continue, with an increased focus on developments to ensure consistent application of methods and comparability of results (e.g., sector specific initiatives and Product Category Rules (PCRs).

10. Proliferation of Tools. As carbon management becomes increasingly mainstream, the need for, and availability of industrial strength tools will grow. We anticipate a movement away from stand alone tools to enterprise-wide carbon management tools that are integrated with core business processes. As supply chain carbon and product life cycle carbon management grows more strategically important, this trend will continue and the availability of reliable data will increase.

11. Shortage of Skilled Practitioners. As carbon management grows in importance and the associated body of knowledge expands, the current shortage of trained and experienced practitioners is likely to grow. There are some initiatives underway to address this shortage; however, they do not appear to be sufficient to meet the gap between supply and demand.

Clearly, carbon management for companies has changed, and we expect to see continued change as businesses develop innovative solutions for what many believe will be the defining challenge of our generation. We have come a long way in the last decade. Solid building blocks for continued improvement have been set, and there are many signs of hope—but we still have a long way to go.

For more information on carbon management services, please click here, or contact Duncan Noble at or +1.613.722.6629 x224.

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