As a member of the general public, you can hardly open the newspaper, watch the news or go to the movie theater without running into some mention of what has become the most notable environmental issue of the decade: climate change. But as a business person, you must move beyond the public debate and think about how climate change will affect your business environment.
In fact, you should not think of climate change as an environmental issue at all.
Instead, you should think of it as a market transition.
Controls on the emission of greenhouse gases will affect the price of energy and the products, services and sectors that rely on that energy. In other words, it will affect virtually all sectors of the economy to varying degrees. Some will be disadvantaged, but others will be advantaged. As in any market transition, there will be winners and losers, and some of those winners, such as
, have already set themselves apart by forging best practices in their respective industries.
In the face of this emerging reality, the questions for you are numerous: What kind of climate-related action is prudent for my company? Are there opportunities in the uncertainty of this market transition? What do my competitors see? Gaining share in unsaturated markets, such as the markets for carbon and energy-efficient equipment, can give your company a competitive advantage.
What some call "constraints," others see as opportunities in new worldwide markets in carbon, capital, advanced technologies and products, and services that emit lower amounts of greenhouse gases (GHGs). Revenues from GE's "ecomagination" strategy -- a cross-company business initiative offering energy-efficient products -- crossed $14 billion in 2007 and are targeted for $25 billion in 2010.
All businesses have a managerial and fiduciary obligation to assess their business strategy to determine whether such opportunities exist for them. As John Woody and I outline in our book from Harvard Business Press,
, you need to look closely at how your company will be affected by a market price for carbon in the present, near future, and long-term; and you need to decide how to position it to take full advantage of those developments.
Three Key Steps
It is important to understand three key steps in preparing for and capitalizing on the issue of climate change. The most basic step involves understanding your company's level of exposure to the issue.
What is your company's carbon footprint, and how will potential changes in policy and market domains affect the positioning of your products and services?
The next step involves taking action to reduce that carbon footprint and searching for ways to find strategic advantages in those actions.
Finally, the most advanced step involves gaining a "seat at the table" of policy development. Policy that regulates GHG emissions will set the rules of the game and change the competitive landscape. But to gain a seat at the table, you must first take credible action and develop legitimate expertise to bring to bear.
For the second step, many companies look to carbon offsets as both risk mitigants to reduce their carbon footprint as well as opportunities from a carbon trading perspective.
Internationally, the majority of the carbon trading activity has occurred in the area of allowance-based transactions under government mandated cap-and-trade programs, such as assigned amount units (AAUs) under the Kyoto Protocol or European Union allowances (EUAs) under the EU Emission Trading Scheme.
Domestically, there is a large unregulated, voluntary market in project-based carbon credits. According to a recent report from the Government Accountability Office (GAO), the supply of domestic offsets has increased 66 percent, growing from about 6.2 million tons in 2004 to10.2 million tons in 2007. Both renewable energy credits (RECs) and verified emission reductions (VERs) may be recognized under future carbon regulatory schemes, but such recognition is not guaranteed, as standards are currently being developed.
The World Bank warns that this voluntary segment lacks a generally acceptable standard, which could tarnish the entire range of carbon markets, and is plagued by weak mechanisms for verifying that the claimed emission cuts are taking place. This situation leads to a word of caution on using offsets such as VERS or RECs to meet your climate-related goals.
Offsets are a very popular way to offer a needed element of flexibility to many cap-and-trade programs, and there is much at stake in the rulemaking for what is an acceptable type of offset. But this can be very treacherous terrain. You should do your due diligence and know who you are buying credits from, how the seller is using your money, and whether the reductions are legitimate. Even then, this could be a risky way to achieve your goals.
That said, there are still many instances in which RECs and VERs can be valid instruments that offer marketing and public relations benefits of purchasing them today.
Played correctly, carbon markets are an opportunity at profit generation that offers great potential, as international compliance markets take hold and carbon becomes an international commodity.
Going forward, just how large could the worldwide carbon market get? Some estimates range from $100 billion to $3 trillion per year by 2010 after the United States enters international trading schemes.
Andrew J. Hoffman is the Holcim (U.S.) Professor of Sustainable Enterprise at the University of Michigan and Associate Director of the Erb Institute for Global Sustainable Enterprise. John Woody is a Deal Associate at MMA Renewable Ventures, a renewable energy firm in San Francisco. Previously, he was the Business Solutions Fellow for the Pew Center on Global Climate Change.