Profiting from carbon: the prickly environmental truth
Every day I awake to the sound of my “Chinese bag lady” in heated discussions over empty bottles.
Each bottle is worth 5 cents.
The ‘bottle collectors’ spend their whole day, every day, scouring Manhattan for deposit bottles to get their 5c per bottle. By the time they reach the East Village – home to a very popular bottle bank – their huge, polythene bags are laden with booty.
Then, they wait, religiously and, more often than not, impatiently, for the bottle bank to open. It opens. There is a mad dash. Sometimes it even gets nasty as bottle ownership issues arise. Then, remuneration, silence and the crowd disperses. Before long the bottle collectors are back out on the streets for the day with their liberated shopping carts, doing one of Manhattan’s essential yet unsung green jobs.
Watching this daily ritual brings home what a critical role all market-based instruments, from bottle return to congestion charges and cap and trade, play in the growing challenge to stabilize emission levels.
For me, this is one of the purest green phenomena I have seen anywhere in the world. Though you would be hard pressed to find a ‘bottle collector’ who would claim to be green, they are truly environmental in the 2008 sense of the word and very honest users of this particular market-based instrument.
Three thousand miles away, I experience a very different crowd with a surprisingly similar ethos. On a dreary winter’s day in Copenhagen, at the yearly Point Carbon conference, I rub shoulders with Deutsche Bank, BNP Paribas, Eco Securities, Barclays and the like. This is an environment conference. Yet you are more likely to be met by the sound of voices of privately-schooled, British financiers and investors than see Birkenstocks. These environmentalists have made the quick trip from London’s financial district to hear the latest analysis on the carbon markets, prices, and CDM projects. Like my “Chinese bag lady”, they are all also looking to profit from the “green marketplace.”
By contrast, in my New York day job, my clients seldom feel comfortable in this same world where environmental efforts and profits go hand in hand. More often than not, they feel compelled to excuse their corporations’ environmental platforms for not being solely driven by altruism. And mainstream “green media” aren’t comfortable with the idea either. On returning from the Point Carbon conference, I was reminded only too quickly of this in a Wall Street Journal article on how these very same European carbon investors were “cashing in” off the Kyoto Protocol’s Clean Development Mechanism – the United Nations’ cap and trade system – which, according to the article, was just about “paying to pollute.”
But let’s look at the facts:
Cap and trade is not a license to pollute: An industry-wide cap (or in this case a global cap) is set for a period of time, usually 4-5 years, and then tightened with a new cap into the next period. The aim is to bring down emissions of the entire industry, and at the same time afford the fluidity of a market which allows the smarter companies, who reduce their emissions, the right to trade their surplus credits. The emission reductions are made and the market rewards the emission reducers.
Cap and trade, then, is very different from a carbon tax, which is arguably a “license to pollute.” No overarching limit is placed on emission levels. With a carbon tax, an industry can emit as much as it wishes and simply pay the tax. As the years go by, emissions grow and an industry can pay for this right to pollute.
There is nothing new or groundbreaking about these facts. The issue is that too many top-tier articles about the environment and the emerging carbon markets are negative: “paying to pollute,” “credits going up in smoke,” “…the flawed European emissions trading scheme.” The irony here is both the timing and the voices. I can’t think of a period in history when the promise of a way out of economic slowdown or a new “dot.com” wouldn’t be more welcome. So, why are business/environment reporters attacking the principles of market mechanisms? I will leave that question to you.
What is interesting for today’s discussion is not the ‘why’ but the ‘how long.’ How long will it take before the top-tier business/environmental media change their tune? And how long will it be before navigating the environmental media becomes easier?
These challenging times will not last long, and I see two key signposts in the media (and the Boardroom) that will show when a new dawn is rising:
- Carbon offsets (whether from voluntary or compliance markets) are viewed as an acceptable part of a firm’s arsenal in its fight to reduce its carbon footprint (and not as an indulgence to be pinned to the wall of the company’s environmental reputation)
- Carbon markets (and their implications for clean tech) are viewed as the big economic opportunity
Besides the pain at the pump, both of these signposts will be ultimately influenced by the next President (as both propose federal cap and trade) and the timing for cap and trade. The latest timeline I hear from reliable sources suggests that 2010 for legislation (at the earliest) and implementation around 2012: timing, interestingly enough, that corresponds to the expiration of Kyoto’s successor.
With this in mind, what should companies be doing to prepare for this changing tide? Essentially, companies must be ready to move away from sustainability platforms as they know them today: sustainability platforms where climate change and emissions are but one, often patched on, component. These will be replaced by platforms driven by the emissions issue and include secondary climate change-related components, like water, biodiversity and waste. In the same way that carbon will become a cost on the books for firms operating within the economy-wide cap and trade, carbon will also take precedence in corporate sustainability platforms. And like my neighborhood “bottle lady,” there will be no shame in the pursuit of profit from the market-based instruments that we put in place to encourage this.
In the next month’s article, I will talk about this climate change or emissions-driven sustainability platform and how it differs from what we have seen up until now. I will look at the baseline requirements and give insights into what carbon credits or offsets strategies of tomorrow will look like for corporations.