By Andrew J. Hoffman and John G. Woody  

From Chapter #3: Create Your Climate Change Strategy

Step #1: Know Your Carbon Exposure

Every company should analyze its GHG emissions profile throughout the value chain. This is a fundamental analysis for anticipating your company"s vulnerability to climate change regulations and market shifts that result. Some companies may find only modest impacts from carbon constraints; some may find that they are severely disadvantaged, and some may find that carbon constraints pose an opportunity. Do not make assumptions. Your analysis can yield surprising results. Shoe manufacturer Timberland was surprised to discover that the largest carbon impact of its product came not from the transportation of its materials and final product (as had been expected) but from the manufacture of its raw materials. In other words, the major carbon impact of its product came before even the making of the shoe.

The point is that you cannot know how your business model will be impacted without (a) identifying the sources, types, and magnitude of GHG emissions your company produces; (b) assessing the vulnerability of your business lines to constraints on those emissions; (c) knowing whether you might be a buyer or seller in carbon markets; and (d) comparing your vulnerability to your industry peers.

Develop an Emissions Inventory.
An emissions inventory is an essential first step in assessing your carbon footprint. This involves deciding what to measure, how to measure it, how to store and analyze that data once collected, and then where to register it for external verification.

What gets measured gets managed. For the first challenge of determining what to measure, the World Resources Institute (WRI) and World Business Council on Sustainable Development (WBSCD) have codeveloped a Greenhouse Gas Protocol Corporate Accounting and Reporting Standard that has become the most commonly used protocol to account for emissions. It classifies emissions into three categories:

ï    Scope 1: Direct emissions
ï    Scope 2: Indirect emissions from the use of purchased heat, steam, or electricity
ï    Scope 3: Other indirect emissions from upstream and downstream sources

Direct emissions come from sources owned by the reporting company and generally include emissions from on-site production processes, the direct combustion of fossil fuels in boilers and furnaces, and on-site power generation. Indirect emissions come from purchased energy, emissions generated by the use of the company"s products, material transport, business travel, and commuting.

One additional area from which the footprint can be measured is biological and terrestrial carbon sequestration. The former involves planting trees to store carbon; the latter involves pumping CO2 underground, a practice common with many oil companies for increasing well yields.

In order to understand your full exposure to climate change regulations, you should conduct a full emissions audit that includes all direct and indirect emissions. But, as emissions trading regimes become established around the world, you can see that they differ on which emissions will be counted. Phase I of the EU ETS, for example, covers 11,500 installations in principal sectors (approximately 46 percent of EU CO2 emissions) and measures only emissions from direct combustion. Companies registered with the voluntary Chicago Climate Exchange (CCX), on the other hand, measure their footprint as all direct combustion from their operations plus indirect emissions from the electricity, heat, and steam they purchase. Other sources, such as business travel, are not counted in their footprint calculations.

Emission measurement tools and techniques. While determining what emissions to measure may seem to be a daunting task, the actual process of measuring them can be even more daunting. Some companies measure actual emissions, while others estimate emissions using fuel-based calculations (based on methodologies such as those created by WRI/WBCSD, the EU ETS, the U.S. Department of Energy (DOE), CCX, and others). These methodologies use the energy (BTU, or British thermal unit value) of the fuel consumed multiplied by its carbon intensity (pounds of CO2 emitted per million BTU). The decision to measure actual or calculated emissions depends, in part, on the complexity of the task. Companies with many emission sources or extremely hostile stack environments (that degrade equipment placed within them) prefer to avoid on-site measurement, owing to the cost of purchasing, installing, maintaining, and replacing continuous emissions monitors (CEMs).

Conversely, some companies find the paperwork challenges of collecting and reconciling fuel invoices to obtain an estimate of COemissions from their fuel input to be overwhelming. There is no simple answer.

Data management systems. After collecting the information, the next challenge is storing and analyzing it. Most companies have developed new information systems to track ongoing GHG emissions. These can be quite complex, but make a difficult task manageable. Alcoa, for example, has developed an effective centralized system that includes detailed process and energy consumption information for forty-one facilities
worldwide, including four power generation facilities, nine alumina refineries, and twenty-six smelters.

The system uses the EU ETS methodology to calculate emissions and sweeps databases every evening to download process and production data. Designated individuals at each plant are then responsible for manually entering energy-consumption data on a monthly basis, and reminders are issued automatically to ensure that data for all facilities is available as soon as possible at the end of each month. This information is aggregated for analysis by headquarters and the individual facilities.

But Alcoa’s system is not the norm. Many companies are still searching for data management tools that efficiently and effectively gather emissions data from facilities around the world and link it with integrated performance measurement systems like SAP, allowing them to link emissions reductions to financial measures. Even companies that have a lot of experience tracking emissions see room for improvement.

This is a perfect business opportunity for companies that develop expert systems.

Reprinted by permission of Harvard Business Press. Excerpted from CLIMATE CHANGE: What’s Your Business Strategy? Copyright © 2008 Harvard Business School Publishing Corporation. All Rights Reserved.

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