The Dilemma of Voluntary Climate Action

The Dilemma of Voluntary Climate Action

With the summer-long legislative recess over, the Senate prepares to dig into negotiations on climate legislation later this month. Most people expect a climate bill to eventually become law -- even after a fight similar to that of the House of Representatives' ACES Bill.

While many deep-green companies have long ago adopted environmental policies as the right thing to do for their mission, more mainstream businesses like Weyerhaeuser are embracing efficiency and cutting emissions for a variety of reasons ranging from compassion to competition. And far more than just the ExxonMobils of the business world, many otherwise concerned companies are holding back on climate action.

But click through the pages of this website and you'll see just how many industries are already moving to reduce their greenhouse gas (GHG) emissions before the mandatory regulation begins. Why are these firms acting when others wait? And should your business join those who are becoming early adopters of climate goals?

What's Driving the Early Birds

As the political process shapes climate legislation at the federal level, California is going full steam ahead; the state's AB32, the Global Warming Solutions Act of 2006, lays out a preliminary framework for recognition of the voluntary actions companies take before the law's full implementation. As a result, much of what is currently underway in the Golden State can serve as a bellwether for what may come on the national level.

Even outside California, companies are dipping their toes into what is known as the voluntary carbon market. The Chicago Climate Exchange is one arena of trading activity in the U.S., allowing members to buy and sell carbon offsets like any other commodity. Other types of early action include reducing GHG emissions through operational efficiency and projects approved by the Climate Action Reserve, such as capturing methane from landfills or forestry. 

It will likely come as no surprise that most businesses that already buy carbon offsets in the voluntary market are using those offsets to meet their internal GHG-reduction goals, which they communicate to customers or clients, according to John Battaglia, associate broker with Evolution Markets, a brokerage and financial services firm specializing in environmental and energy markets.

But other groups see potential boons in the voluntary markets: Financial traders are also purchasing voluntary offsets in the hopes of making money in the future by selling these offsets at a higher price, Battaglia said. Unlike some traditional businesses, traders can take more risks on these purchases that may or may not qualify as "compliance-grade" offsets -- which might offer a financial reward down the line, he added.

Even without the guarantee of a return on investment, an increasing number of companies see the benefits of participating in the so-called "pre-compliance" market, said Jennifer Weiss, communications director for The Climate Registry.

"Smart companies are working today to gain sophistication in the operation of the carbon market so that they can hit the ground running when a regulatory market is established," Weiss said in an email message. She likens it to managing risk in a company’s balance sheet: emissions are like liabilities and offsets are like assets.

In fact, a 2009 survey by The Climate Registry noted a few important reasons why its 300-plus members joined the group, among them:

·      88 percent wanted to demonstrate environmental leadership

·      76.8 percent planned to use the membership to track emissions data in order to plan for future reductions Nearly 60 percent of those in the survey also anticipate their facilities will be regulated in a future mandatory reporting program.   

Reducing GHG emissions can also be a means to save money on overhead costs, especially for companies that view waste as a resource. Waste Management, for example, reduces methane emissions by capturing the potent greenhouse gas before it escapes from its landfills and converting it to natural gas used to power its trash trucks. Methane capture also provides a buffer for the wild fluctuations in fuel prices, and might provide an additional benefit if landfill gas capture is accepted as an early action program.

The California Air Resources Board is still negotiating whether projects like these will receive any type of credit for acting before the regulatory mandate is in place.

Why Some Businesses Wait

Some firms already report how much carbon dioxide (CO2) emissions they offset each year -- through entities such as the Chicago Climate Exchange or The Climate Registry -- in addition to the cost savings or efficiencies they accrue as a result. But there are logical reasons why other industries are not moving full speed ahead.

Simply put: Some industries view early climate action as doing more harm than good. By lowering their baseline before regulation, a company has less leeway to reduce emissions even further when action becomes mandatory, Battaglia said.

Volunteers plant trees in an economically underserved neighborhood in Oakland, Calif. Urban forestry project protocols like this have been approved by the Air Resources Board as a way to reduce GHG emissions. Photo by Sarah Terry-Cobo. tree planting
Compared to power plants that were required to reduce sulfur dioxide emissions in the 1990s, there are not that many low-cost technologies available to reduce carbon emissions beyond the low-hanging fruit of operational efficiency, said Gary Stern, director of market strategy and resource planning for the utility Southern California Edison.

Back then, coal-fired power plants could install scrubbers on smokestacks to remove the majority of the acid rain-forming compounds. Similar pollutant-reducing technology -- such as carbon capture and sequestration -- does not exist on a commercial scale, he said.

"That is the whole reason why offsets can be helpful," Stern explained. "They add an additional supply to the market and make lower-cost options available to help contain costs associated with our goals."

In addition, there is some uncertainty on exactly what types of GHG reduction projects will be accepted and receive credit for early adoption. California’s Air Resources Board has not approved any individual project, said Stanley Young, the agency’s media and public relations spokesperson, noting that each project’s emissions must be measurable, verifiable and replicable in other cities across the Golden State.

If approved, the agency would issue "set asides," or credits for the number of tons of GHG emissions avoided -- which the company might be able to use toward its reductions goal. "But we haven’t developed a hard and fast policy yet," Young said.

Sometimes waiting is just part of the bureaucratic process.
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Southern California Edison, which has also begun reducing emissions through demand-side management and energy efficiency, has expressed interest in some early action projects, such as forestry and livestock methane capture, but Stern said the utility needs assurances these projects will receive credit for early action from the California Air Resources Board. The company also must get permission from the state's Public Utilities Commission to pass on the capital costs of these projects to consumers. Topping the process off, making sure offsets are measurable and verifiable by a third party can also be a difficult process.

The Air Resources Board has accepted three protocols outlined by the Climate Action Reserve that the government agency considers to be viable offset programs: forestry projects, urban forestry projects and dairy methane capture. But the Board has not determined whether entities that begin these projects will get credit for early action.

But while some companies are not jumping on the early action bandwagon, they are managing their climate strategies through different means. Utility Pacific Gas and Electric, which serves the Northern and Central California region, decided not to begin these types of projects before the Air Resources Board establishes which will be eligible for early action status, said PG&E spokesperson Cindy Pollard.

"We use a comprehensive energy strategy in ways that are consistent with the state’s energy planning goals," Pollard explained. As part of a broader overall strategy, PG&E seeks to reduce CO2 emissions through a combination of demand-side management, promoting efficiency with their customers, and procuring renewable energy before traditional electricity generation, she said.

"We have no idea whether or not a particular project might qualify or be eligible," under California’s AB32, The Global Warming Solutions Act of 2006, "and that could provide a substantial cost risk to our customers."

To be sure, PG&E is no slouch when it comes to the environment. The company’s energy efficiency strategy includes offering rebates for commercial and residential customers who embrace energy efficiency and partnering with Habitat for Humanity to install solar panels on houses built by the organization.

In addition, customers can offset their CO2 emissions through the utility’s Climate Smart program, which invests fees based on individual energy usage into offset projects that are independently verified and registered with the Climate Action Reserve, including forestry and dairy methane capture.

The company generates a higher percentage of power from hydro and natural gas, lowering its overall carbon footprint compared to others that use a higher proportion of coal. Its direct purchase of coal-generated electricity is only 1.7 percent, but due to purchases on the open market, California regulations state the company must assume some of this power comes from coal, about at 8 percent, Pollard noted in an email message.  

Similarly, Weyerhaeuser has not engaged in any early actions on the voluntary carbon market, but has taken steps to evaluate the company’s internal GHG emissions and has help shape public policy through engagement  with the Western Climate Initiative (WCI),  a regional agreement among western U.S and Mexican states and Canadian provinces. Like many companies, Weyerhaeuser has developed a climate steering team, which helped identify inefficiencies in the manufacturing process and increased the amount of biofuel used in operations, among other things.
Three Steps to Climate Action

Without question, the process of taking action on climate change is daunting on all fronts. To simplify if and how your company should proceed, we've developed this easy visual tool to help companies understand how to move forward on early action projects while preparing for upcoming legislation.

Green means every company should do this; Yellow: consider doing this, but proceed with caution based on your company's need to reduce GHG emissions; Red: best left to the companies who can take can afford the risk.

Green light: Learn the regulations: understand how it will affect your business; Do an internal audit of your carbon footprint: find out where you can reduce operational inefficiencies or achieve emissions reductions

Yellow light: Find a reduction project, register the project, get it verified by a third party, run infrastructure that monitors the trading

Red light: Start buying carbon offsets if your company can take the risk associated with purchasing a credit that may not receive "pre-compliance" credit.


These internal improvements haven’t generated any offset credits, but the company does support credit for early action in climate policy, said Anthony Chavez, Weyerhaeuser’s public affairs manager. Since the details of a federal climate policy -- in particular what is going to count for early action -- are still up in the air, the company can still move forward in reducing GHG emissions internally without taking risks on projects that may not count as early action.

But the company can have a role in shaping policy by providing input to entities such as California’s Air Resources Board and WCI through public comments. "Because the policy will determine the winners and losers at the end of the day, we’ve been engaged at state and federal level," in pushing for the inclusion of elements like early-action credits, Chavez said.

Why Early Action Makes Sense

Improving your reputation is one reason why companies should move forward now, but there can also be financial returns on cutting overhead costs. Waste Management is a leader in measuring and capturing methane from its landfills, and recently broke ground on a new plant that would turn landfill methane into various forms of natural gas to power its trash truck fleet.

"We’re not holding our breath we’ll get financial credits, but we think it’s the right thing to do and it is consistent [with AB32s regulations]," said Charles White, director of regulatory affairs for Waste Management in the western U.S.

While many expect landfill capture will get credit as an early action offset project, it is a complex scenario. There were no monitoring systems in place for landfills when the company began capturing the naturally-occurring methane, so Waste Management had to create the monitoring tools, said White, who is also a registered civil engineer.

Working with the U.S. Environmental Protection Agency, Waste Management’s scientists developed a tool called a tunable diode laser that is placed in several spots around a landfill’s surface, and uses lasers and mirrors to detect and monitor methane emissions. White admits the company doesn’t have perfect control over capturing landfill-generated methane, but is doing everything it can to improve.

Turning landfill gas into carbon offsets will provide a good financial return for the company if the price of carbon rises as some expect. A lack of technological fixes needed to reduce carbon emissions will likely increase the need for offsets, pushing prices up because of an insufficient supply.

Although a carbon tax seems to be politically untenable in this country, a legislative guarantee on the market price of CO2 could provide businesses the certainty needed to make concrete decisions on how many offsets to purchase. In British Columbia, Canada, the provincial government has a CO2 tax that will rise to C$30 (about US$27) per metric ton equivalent by 2012, up from the current price of $15.

Purchasing carbon credits, while not a guaranteed moneymaker, might turn out to be a financial boon. Making an educated guess and purchasing credits depends on how much risk a company can take, said Aimee Barnes, former senior manager for U.S. regulatory affairs for carbon trading firm Ecosecurities. (Disclosure: Barnes is also a regular blogger for GreenBiz.com)

"You can never have perfect knowledge, and there is a lot of opportunity -- if your educated guess is correct -- to generate money for shareholders and be a responsible organization," Barnes explained.

Not all sectors will see immediate benefits from participating in early climate action projects, but that doesn’t mean companies should wait on the sidelines. The Climate Registry’s  Weiss said, "Sectors that are likely to be regulated will benefit by understanding and preparing, while non-regulated sectors will see opportunities to supply offset credits."

And even if these voluntary actions do not generate significant financial benefits in the form of early action credits, the Air Resources Board’s Young encourages businesses, governments and non-profits to consider other benefits.
A map of which U.S. states will be covered under regional legislation. Click for full-sized. INSERT ALT TEXT HERE
"We enthusiastically support early actions by companies, cities and individuals, because in the end, these actions will both save money through improved efficiency and generally contribute to the larger goals that AB32 is designed to deliver -- and that is to move us away from fossil fuels, to an sustainable economy based on clean energy."

Regardless of where -- or how -- climate policy is implemented, a majority of states will be covered under a state or regional legislative scheme (see map). Knowing how to improve your own company is just the beginning, but can help position your business within cap-and-trade negotiations. A company prepared for incorporating the total costs of GHG pollution into their business model is most likely to succeed in a new era of governance.