Cutting Emissions While Boosting Profits

Cutting Emissions While Boosting Profits

From a business perspective, not all carbon cuts are created equal. Business leaders may care about climate issues in a general way, but they want the emissions cuts to boost profits.  

The press and other media teem with suggestions. In the absence of coherent regulations, the decision becomes a complex economic one, and not many organizations have the time and the analytical oomph to sort through all the calculations.  

Fortunately, the industrious numbers-crunchers at McKinsey & Co., of management consulting fame, have done the hard work. The firm examined the costs and effectiveness of many methods of cutting carbon dioxide emissions with admirable thoroughness in their December 2007 report, "Reducing U.S. Greenhouse Gas Emissions: How Much at What Cost?"  First, they devised a plausible "business as usual" reference case against which they could make comparisons. They arrived at a number of conclusions for policymakers that are also directly relevant for businesses.

Anyone following recent climate and energy discussions has seen this chart. It's probably the single most useful comparison of carbon cutting methods, and with the slowing economy, it's more relevant than ever. McKinsey arranges the methods from left to right according to cost.

Global cost curve for abatement measures (Click for full-sized image)

Figure 1

The vertical axis is the cost of abating greenhouse gas emissions, while the horizontal axis shows the gigatons of gasses cut.  Each green bar shows the cost abatement profile for a particular method, ranging from building insulation to carbon capture and storage. The width of the green bars shows how much carbon the method prevents from entering the atmosphere. Below the zero line, the methods below the zero line cut emissions and cut expenses. Measures above the zero line may cut emissions, but cost more than business as usual.

For example, "avoided forestation" on a large enough scale cuts a huge amount of CO2, but the cost is high.  Wind power on a small scale isn't quite as expensive, but it's still costly.

The most profitable methods for cutting a business's carbon dioxide emissions crowd the left-hand side of the chart:
-- Insulation
-- Fuel efficiency in commercial vehicles
-- Lighting systems

To take the top three in reverse order: Lighting means replacing incandescent with compact fluorescent lights.  Since every schoolchild and magazine reader in America has been thoroughly drilled on this topic, we don't need to say more.

Fuel efficiency in commercial vehicles is obvious, too, and even with the current low prices for gas and diesel fuel, the case for better mileage is compelling. A large swath of businesses thinks, "Ah, problem over. Everybody back in the pool."  Yet it's a safe bet that eventually the price of oil will climb again.  The parabola in oil prices will be back -- even if it turns out to be another asset bubble unmoored from the underlying supply constraints.

The first step -- building insulation -- should galvanize business readers. Redoing insulation in existing structures takes an investment of time, trouble and money, but the return period is pretty prompt. In fact, upgrading insulation pays off so quickly that it's worth doing even in the absence of greenhouse gas abatement plusses. The overall profit improvement is even better than it first appears, because insulation also improves air conditioning efficiency as well as heating.

Conventional fiberglass insulation helps, and many contractors know how to install it. Even more effective in most circumstances is blown-in foam, which is well-suited for retrofits. Foam comes in many varieties, and companies must research which one suits their buildings best.  

Insulation is lacking in glamour and visual appeal. But why step over dollars to pick up pennies?

Brian Thomas, a writer who specializes in climate change and the capital markets, maintains the blog "Carbon-Based." While at Swiss Re, he managed the firm's participation in the Harvard
Medical School's "Climate Change Futures" project.