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Facing the Carbon Challenge By Anthony D’Agostino Director, Emissions Markets, Royal Bank of Canada Climate change and greenhouse gas (GHG) emissions aren’t just environmental issues – they’re also business issues. That’s how they need to be considered if the manufacturing sector is to effectively reduce its emissions. The sector’s contribution to GHG emissions in Canada is about 15%, according to a 2009 CME paper. Thanks to improvements in energy efficiency, replacement of industrial processes, fuel switching and other measures, the CME notes that emissions in manufacturing have been falling since the 1990s (Climate Change Policy in 2009, CME 2009). Industry leaders realize that getting a handle on emissions is simply smart business. Carbon is – or will be – a risk for any manufacturer. Customers (whether end consumers or other businesses), shareholders, financial markets and ultimately regulators will all demand action – concrete steps to quantify, disclose and control your carbon footprint. The key question: are you prepared? Mix of reduction approaches Start with the current regulatory landscape. Much of the world is watching to see what the U.S. will do when it comes to regulating carbon emissions. These proceedings will heavily influence legislation in other jurisdictions, including Canada. advErTorIal The latest talk in the U.S. Senate involves a utilities-only carbon bill. That narrows the group of emitters affected, including some carbonintensive industries. That’s how the political winds are blowing now – but the utilities plan, if enacted, may be just a start. In Canada, we already see a mix of approaches. Currently, there is no national regulation on GHG emissions reduction; however, the federal government has taken action to promote energy efficiency and technological developments in the field, outlined a domestic GHG offset system and established GHG reporting systems. The federal commitment remains to reduce Canada’s GHG emissions by 17% from 2005 to 2020, which is aligned with the U.S. target (and subject to adjustment to remain consistent with the U.S. target). on the provincial front, B.C. has a carbon tax. alberta’s Specified Gas Emitters regulation requires facilities emitting over 100,000 tonnes/year to reduce their carbon emissions intensity. and the Western Climate Initiative – involving six U.S. states plus B.C., Manitoba, ontario and Quebec – proposes launching a regional cap- and-trade system on Jan. 1, 2012. Markets manage cap-and-trade Carbon is usually priced in metric tonnes, with prices varying depending on the program. For example, allowances from the Chicago Climate Exchange program trade at US$0.10/ metric tonne, whereas EU emission allowances (EUas) trade at €14.50/ metric tonne. Many programs and jurisdictions fall between these price levels. The wide ranges are due to different perceptions of value and whether there is a compliance need. When companies see a price on carbon, they can make informed decisions about how to abate it. That’s why market mechanisms like cap-and-trade can be so effective. With cap-and-trade, for instance, governments set caps on carbon emissions, and it’s up to the emitters to find ways to stay within their cap. often, the government allocates or auctions an amount of carbon credits that equals the cap. If you fall below the cap, you can sell excess credits; above, you can buy credits from an emitter that doesn’t need all its credits. The worldwide value of carbon trading was US$136 billion last year, more than double what it was two years ago. as an example of this growth, rBC has traded over 225 million tonnes of carbon instruments globally, helping companies hedge their exposure to the carbon market through instruments like forwards, futures and options. Europe currently has the world’s biggest carbon market. Their cap-and-trade plan covers sectors that include oil and gas; pulp and paper; public power and heat (industrial/district heating); cement, lime and gas; metals; and “other” – a wide swath of manufacturing companies that have to be part of the program. North american lawmakers are examining the European model closely, and we can learn from its successes. Supply and demand tells us that as caps get tighter and the supply of carbon credits (allowances and offsets) goes down, the price of carbon goes up – meaning an increased incentive for factories to reduce their emissions.
Voluntary push No doubt, carbon regulations are coming. Some companies will act only when compelled. But there are plenty of incentives to be proactive even without regulations. Many manufacturers are eager to put a carbon-neutral stamp on their operations and products, whether because of social responsibility, market expectations or the opportunity to ultimately save costs. In Europe, again, the public assumes a certain level of “green” in the business sector. That’s driving consumer choices and business Keep monitoring at the very least, this is the time for manufacturers to learn as much as possible about carbon and its implications – regulatory, environmental, financial and otherwise. So number one, stay current with the discussions around regulations. Number two, track how much carbon dioxide your company is emitting – anything produced by a particular activity at a particular point in time, using tools from smokestack monitoring to computer accounting programs. With the right software, you can track the carbon footprint of, say, a tire, from Malaysia where the latex was tapped, to the plant where the tire was made, to the destinations where it arrived by ship or train. Number three, keep an eye on what your competitors are doing too. and number four, keep your ears open to what customers are expecting. actions on emissions. This mindset seems to be gaining momentum in North america. Managing carbon starts with getting an objective, comprehensive method of quantifying your carbon footprint. Usually this is measured in three different scopes: n direct emissions that you control, i.e. arising from your operations. n Indirect emissions from consuming purchased energy, e.g. electricity, steam, fuel. n other indirect emissions, i.e. incurred by suppliers and transportation-related activities. I know one company that has decided to take positions in the carbon offsets market, not because of compliance or any commitment to reduce emissions, but simply to educate themselves – to see how the carbon markets and the registries work and to track a specific carbon credit. In short, they want to be ready for the day when they might have to be active in the emissions market. Carbon regulations on your sector may have a direct impact on your company. But manufacturers need to prepare for other types of impacts. Perhaps when carbon legislation is enacted, it won’t apply to your manufacturing segment. But your cost of energy may rise, and that certainly will affect you and may change how you run your plant. regulations may be in limbo, but in the meantime your competitors may be mounting an aggressive green campaign that may affect you too. The first two categories are the most straightforward, looking at the emissions factor from your operations and energy consumption. The third category is more complex, and is partly based on suppliers doing their own environmental accounting. It’s encouraging to see initiatives like the Carbon disclosure Project (www.cdproject.net), where organizations measure and report their GHG emissions. More and more are doing so, and a higher percentage of Canadian manufacturers and other firms now see opportunities around carbon reduction rather than risks. Many manufacturers have demonstrated that it’s possible to achieve greater efficiency and increase production, all while reducing their carbon footprint. These experiences should motivate others as the need to control carbon becomes one of the biggest environmental and business issues facing manufacturers. For more tips and tools on greening your business, visit our advice centre at rbc.com/business-advice. The strategies, advice and technical content in this publication are provided for the general guidance and benefit of our clients only. This publication is not intended to provide specific financial, investment, tax, legal, accounting or other advice for you, and should not be relied upon in that regard. Readers should consult their own professional advisor when planning to implement a strategy to ensure that individual circumstances have been considered properly and it is based on the latest available information. ® Registered trademarks of Royal Bank of Canada. RBC and Royal Bank are registered trademarks of Royal Bank of Canada.
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