Climate Change Compliance as a Business Opportunity
A great deal of attention is being paid to the development of multilateral and national accords and legislation designed to compel private industry to reduce carbon emissions. The key assumption underlying these efforts seems to hold that private industry worldwide cannot be counted on to initiate or facilitate carbon emissions reductions voluntarily, and certainly not as part of a preferred business model. But suppose for a moment that this assumption is not entirely correct, that private industry is in fact ready to start embracing climate change as a function of its own self-interest. The implications of such a trend could be far reaching.
The evidence is interesting. In 2007, the Carbon Disclosure Project (CDP), founded by Merrill Lynch, surveyed 2,400 of the largest publicly traded companies worldwide seeking detailed information on the perceived business risks and opportunities presented by climate change and global greenhouse gas emissions. While virtually all respondents recognize the risks, up to 80 percent of firms internationally also consider it an area that holds important business opportunity, with a majority considering the issue significant enough to include as an ongoing area of attention by board members and upper management. In the U.S., this includes an increasing number of companies adopting formal programs of climate change risk disclosure, impact and opportunities disclosure to their shareholders and in publicly filed documents.
This apparent shift is being driven, in part, by the private investment community. Investment banks, brokerage firms and insurance companies have started to channel their expertise and capital into identifying and implementing climate change opportunities, with new products emerging in the areas of risk management and finance. The trend initiated by these industry sectors, coupled with new legislation, consumer awareness and market demand, is resulting in a new focus on green activities in other traditional industries such as:
- Utilities, energy and materials production are focusing attention on retrofitting existing energy and industrial facilities to produce lower levels of carbon emissions, and creating new ones powered, in part, by new forms of renewable energy supported by a rapidly growing number of alternative energy technologies and technology companies supported by privately and publicly funded research and development.
- Consumer products and services industries are identifying clear trends among consumers to buy green products.
- The resort industry is a good example of a service industry that has discovered strong marketing and business advantages to offering green resort facilities and amenities.
In short, climate change has begun to acquire cache among consumers and the ramifications for this are just starting to be felt.
These shifts in industry perception of climate change are new and evolving, but if they continue to expand at the rate seen in the last 5 years, the positive implications for climate change are clear.
Climate Change and Aviation Fuel: A Tough Problem to Solve
Large aircraft require high energy fuel, and lots of it. But jet fuel is very difficult to clean up to satisfy climate protection imperatives, which has led to a major dispute in the US over the role coal-to-liquids and other alternative aviation fuels may play. Congress, the US Air Force, the major airlines, the US Environmental Protection Agency, its Federal Aviation Administration, a special Defense Department task force, coal-state senators, and many, many others are getting into the dogfight, which may go on for a long time.
With all the publicity aircraft greenhouse emissions are receiving, one might conclude that they rank right up there with electrical utilities, vehicle emissions, and other prominent categories in terms of greenhouse threats. In fact, US aircraft operations account for 10 - 12 percent of greenhouse emissions from the transportation sector and for only about three percent of total US greenhouse emissions, which is also about the total percentage contribution to greenhouse gases from aviation worldwide. The difficulty is, controlling aircraft carbon emissions is a particularly intractable problem, and the problem is going to become much worse over the next few years as demand for air travel and transport doubles or even triples by 2025. The issue is exacerbated by scientific uncertainty about just how much more potent at high altitudes aircraft emissions are in causing the greenhouse effect as compared to emissions on the Earth’s surface.
The airline industry has done a great deal already, however, to increase its efficiency and lower the rate of increase in greenhouse emissions per air mile traveled. The industry claims that improvements in operational efficiency over the past 30 years have reduced carbon dioxide emissions 70 percent in the course of improving fuel efficiency 110 percent. The most promising pathways at present to further reduce the carbon footprint of aviation involve improved air traffic control systems, on-ground aircraft operations management, lighter engines and more aerodynamically designed aircraft, and flight altitude and speed adjustments. Still, attempts to improve jet fuel composition and performance have received the lion’s share of attention in recent months.
Finding less climate-challenging fuels for today’s jet fleet is proving to be a particularly challenging and controversial topic. Some promising experiments in fueling aircraft reminds one of a trip to a botanical garden, to a marsh, or to the supermarket, or of the early days of flight at Kitty Hawk. Recent forays include biofuels derived from babassu nuts, coconut oil, algae, or the central American plant, jatropha (a relation of castor oil). A very light, albatross-like solar-powered aircraft is under development in Germany, while Boeing has actually flown – for twenty minutes at 60 miles an hour – a manned aircraft powered by hydrogen fuel cells and lithium battery-stored electricity. But the major battle over alternative aircraft fuel is taking place over fuel liquids derived from coal or oil (tar) sands.
Coal-to-liquids (CTL), whether for aircraft or for other consumption as a fuel, is hardly new. Germany pioneered the process in the Second World War, and for the past nine years South African Airways has flown its jets on a 50-50 mixture of CTL synthetic and ordinary commercial fuel. The US Air Force has completed a test program very much like the South African fuel mix, using 50 percent Fischer-Tropsch synthetic fuel and 50 percent commercial fuel. Even B-52s can safely burn the fuel.
The Air Force and members of the Senate and House from coal-producing states, not to mention proponents of tapping the vast reserves of oil sands in Canada, are pushing strongly for development and use of CTL aviation fuels. The difficulty is, among other things, that a lifecycle analysis conducted by the US EPA found that CTL fuel releases 118.5 percent more greenhouse gases than conventional fuel (EPA, 2007). Perhaps carbon capture and sequestration technology, were it to be developed, could be used to overcome this large carbon deficit? No, said EPA, even after going to the difficult and expensive effort of capturing and sequestering CTL carbon compounds, emissions would still be 3.7 percent greater than for conventional petroleum. The Defense Department has already asked MIT to study the lifecycle carbon profile of CTL production and use, and Senator Lautenberg intends to re-insert in the Federal Aviation Administration funding re-authorization bill making its way through Congress a provision requiring the National Academy of Sciences to organize a study committee to address the question. While these studies are pending it may be correct to say that the jury is still out on the climate implications of CTL and other alternative aviation fuels, but it is clear that widespread adoption of CTL and oil sands to liquids fuels would be accompanied by major environmental challenges.
The Air Force is particularly partial to CTL as a source of aviation fuel and is aggressively pursuing its development. However, a major study done by the Defense Science Board Task Force on DoD Energy Strategy at the request of the Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics, titled “More Fight – Less Fuel,” has concluded that domestically produced synthetic fuel will not contribute to the DoD’s most critical fuel problem – delivering fuel to deployed forces. The Task Force, co-chaired by James Schlesinger and retired General Michael Cairns, wrote that full carbon life-cycle analysis should be performed and that synthetic fuels should have a carbon footprint less than conventional petroleum fuels before they are adopted.
This last remark may be directed at a DoD-commissioned legal analysis attempting to show that in the Energy Policy Act of 2005, Congress did not intend for the military services to be considered as “federal agencies.” Why? Because section 526 of the 2005 law bans federal agencies from purchasing any fuels that produce higher levels of greenhouse gases than conventional jet fuels. (This provision is kicking up sand in many quarters and may not survive the political pressure that is being brought to bear.)
The EPA plans to join with the FAA in considering regulation of aviation greenhouse emissions in the course of the climate “town hall” comment period that EPA has called for to gather thoughts about using the Clean Air Act to broadly regulate greenhouse gas emissions, a topic we have covered in an earlier blog. The European Union first tried to ignore aircraft greenhouse emissions in its first round of actions under its climate authority (the issue, is, as we said above, a very difficult one), but it is now considering requiring airlines to participate in the emissions trading system.
The debate over how the US will attempt to come to grips with the difficult issue of direct aircraft engine emissions of greenhouse gases is just getting started.
Coal: The Energy Source of the Future?
Gas, oil, nuclear energy, biofuels, other alternative energy, energy conservation – are they enough to cause plentiful, Btu-rich, relatively inexpensive coal to take a back seat to post-Kyoto climate concerns in the developed and developing economies of the world?
With high prices for oil and gas and other promising sources of energy, precisely the opposite appears to be happening, with uncertain implications for carbon dioxide emissions levels and the success of technological fixes for Old King Coal’s dark side.
The expanding global demand for electricity, the skyrocketing prices of oil and natural gas, and the stubbornly high price of alternative energy sources have led to a global re-examination of the place of coal in supplying energy. Despite global attention to climate change, Old King Coal is receiving a new look, as well it might considering worldwide energy price pressures for all other fuel sources. Coal use in the United States, however, could face a less certain future.
As the price of natural gas has surged, utility companies have begun to reexamine coal-fired electrical generation. Coal offers utilities several advantages:
- Oil and natural gas reserves are expected to last for another 50 years, coal reserves will last for another 200 years.
- Coal is less expensive than oil and natural gas.
- Coal is found throughout the world and is exported by many countries. With so many supply sources, no coal cartel exists and buyers have more room to negotiate prices.
As surprising as the statistic may be to observers of the climate debate in the US, the Post-Kyoto economies of Europe contemplate adding about 50 coal-fired plants over the next five years. Although the European Union operates a greenhouse emissions trading program which forces utilities to purchase permits to emit carbon dioxide, the price of oil and natural gas is so high that burning coal represents the cheapest mode of electricity production in Europe, even after accounting for the permit cost. Further, countries like Italy and Germany have banned and are phasing out nuclear power, departing sharply from the pro-nuclear path France has chosen. Facing a narrow range of options, Italy’s largest power producer, Enel, has focused on coal and will soon produce 50 percent of its power from coal. As a country, Italy will increase its reliance on coal from 14 to 33 percent over the next five years.
In India, Tata Power recently received 450 million dollars in funding from the International Finance Corporation to open a 4,000 MW coal fired power complex. Between India and China, the worlds largest producer and user of coal, a new coal-fired plant opens almost every week.
Of course, the growth in coal as an energy source has major ramifications for climate change. Even under optimal conditions, coal emits more than twice as much carbon dioxide per unit of electricity produced as natural gas, according to the Electric Power Research Institute. While “clean coal” plants can reduce particulate matter, sulfur dioxide, and nitrous oxide emissions, clean-coal technology has a minimal impact on carbon emissions. Further, carbon capture and sequestration are not currently commercially available and, even if they become available relatively soon, many power plants cannot be retrofitted for sequestration without major renovation. With a growing global population and a growing global middle class demanding more energy, and over two billion people lacking access to viable energy sources, the world’s hunger for energy will not subside anytime soon. Coal, as a relatively inexpensive and readily available energy source, will play a major, and likely growing, role in supplying the world’s energy needs.
In the United States, coal could be facing a less certain and stable future as investors, legislators, and the public have taken a keen interest in climate change and carbon dioxide emissions. According to Global Energy Decisions, an energy information supplier, natural-gas and renewable power projects have leapt ahead of coal in the development pipeline. Gas and renewables each show more than 70,000 megawatts under development compared with about 66,000 megawatts in the coal-power pipeline. In 2007, utilities scrapped plans for 59 coal power plants. The investment banks Citigroup, J.P. Morgan, and Morgan Stanley also recently announced that their financing for new plants would be contingent on the utilities’ plans to control greenhouse gas emissions. In Congress, Senate Majority Leader Harry Reid recently said that “there’s no such thing as clean coal,” and House Oversight Committee Chairman Henry Waxman recently called for a ban on new coal-fired power plants unless they come up with a way to control their carbon dioxide emissions.
The three presidential candidates seem committed to cap-and-trade for all greenhouse emissions when discussing climate change policy. Further, a report released by Synapse Energy Economics, Inc. stated that utilities that plan their futures around new coal-fired power plants will face “risks and uncertainties” comparable to those that derailed the US nuclear power industry in the 1970s. The risks associated with nuclear power led to fierce legal opposition to new plant construction, resulting in delays and cost overruns and causing investors to pull out of nuclear investments. The Synapse report concludes that “coal is losing its appeal as a predictable investment and is instead fraught with uncertainty.”
The United States is not immune to the input price pressures which are causing energy companies in other countries to turn to coal. Such pressures are amplified by a desire for energy independence from Middle Eastern energy sources, residual opposition to nuclear energy, and vastly underdeveloped renewable energy sources. Today, 22 new coal-fired power plants are under construction and more are on their way as companies rush to get them operating before carbon-emissions standards are enacted. But, energy must come from somewhere, so unless consumers are willing to pay substantial premiums for energy, coal should remain a major energy source in the United States for the foreseeable future.
Food vs. Fuel and Impacts on Climate Change: Biofuels Under Siege
Concern about world food prices and shortages is causing law makers in both the EU and the US to consider either a moratorium or a cutback in biofuels production. In particular, ethanol produced from corn is being blamed as a significant contributor to the world food crisis. [summary]
International concerns over world food prices and shortages has recently triggered a major fuel-or-fuel debate. A UN official said recently that massive production of biofuels is “a crime against humanity” because of its impact on global food prices. In its April 7 cover story, Time Magazine, blasted the impact increased biofuels consumption may have on climate. While US Department of Agriculture economists point to a large array of factors contributing to the current constriction in basic food commodities like corn, wheat, and rice, citing regional drought, larger population demand, and increased cost of production because of rising fossil fuel costs, the attention biofuels has attracted means a rough passage for biofuels and may portend badly for their future use.
The Time Magazine article indicts biofuels for “dramatically accelerating global warming” because of clearing of tropical rain forests for cropland for sugarcane, soybeans, or other fuel crops. The article says the US’s increased production of corn for ethanol has caused farmers to plant fewer acres of soybeans. This, in turn, has caused the world-wide commodity price of soybeans to increase, “spurring a dramatic expansion of Brazilian agriculture, which is invading the Amazon at an increasingly alarming rate.” According to Time, deforestation accounts for 20 percent of all current carbon emissions. A Rhode Island-sized area of Brazil was deforested in 2007 alone.
What is most interesting is the intensity of the reaction of UN entities. Concern for food supply has led to what some feel is an overreaction to the role biofuels production may play, as compared to drought, cultivation and transportation costs, and demand. The UN’s Special Rapporteur for the Right to Food Jean Ziegler has warned that the world is headed “towards a very long period of riots” and conflict stemming from food shortages and price increases. He went on to say that in recent months, rising food costs have sparked violent protests in Cameroon, Egypt, Ethiopia, Haiti, Indonesia, the Ivory Coast, Madagascar, and Mauritania. In Pakistan and Thailand, army troops were deployed to prevent seizure of food from fields and warehouses, while price increases led to a general strike in Burkina Faso. Ziegler called on the International Monetary Fund to change its policies on agricultural subsidies and to stop supporting programs aimed exclusively at debt reduction. He went on to say that “international market speculation on food commodities must cease.”
While Mr. Ziegler’s views may represent an extreme in the current food debate, both he and Time Magazine raise (and at the very least exemplify) issues about biofuels development that must be addressed in the coming months if the promising role biofuels may play in addressing climate, security, and oil dependence is to be realized.
The first is question of whether US biofuels production is causing world food prices to rise dramatically. World Bank President Robert Zoellick seems to thinks so. At a news conference on April 11, he said that demand for ethanol and other biofuels is a "significant contributor" to soaring food prices around the world. The World Bank has projected that food prices will stay high or go even higher over the next couple of years, with biofuels a major factor in keeping them high. "Biofuels are no doubt a significant contributor," Zoellick says. "It is clearly the case that programs in Europe and the United States that have increased biofuels production have contributed to the added demand for food."
The second question that has been raised is whether the impact of biofuels on the environment may outweigh their benefits. In addition to Time’s concern about global warming, just last week the U.S. Environmental Protection Agency (EPA) felt compelled to address these impacts after a period of relatively benign acceptance of biofuels’ potential environmental impacts. Among the issues are the increased impacts of nitrogen compounds on the environment stemming from use of nitrogen-based fertilizers and higher nitrogen emissions compared to conventional gasoline. According to Inside EPA, “adding to the concern is the expanded renewable fuels standard (RFS) that Congress included in the recently enacted energy law, which boosts the prior RFS of 15 billion gallons by 2012 to 36 billion gallons by 2022.”
We will address the food-or-fuel issue in future blogs, including the promise of fuel from cellulosic ethanol production, favored by the President and leading environmental organizations alike. Cellulosic ethanol feedstocks, such as pine slashings and switchgrass (the fast-growing plant made famous in the President’s State of the Union two years ago), do not directly compete in food markets. The promise of cellulosic ethanol remains bright, as organizations such as 25X25 have recently begun to reemphasize.
