Andre de Fontaine
By Truman Semans and Andre de Fontaine
This case study on DuPont and BP’s partnership on advanced biofuels aims to provide insights into how industry alliances can deliver innovation and new technologies in an accelerated fashion.
In June of 2006, DuPont and BP announced a partnership to develop and market advanced biofuels designed to overcome many of the environmental and economic limitations associated with biofuels currently on the market. The first product scheduled for commercialization is biobutanol, which can be made from the same plant materials as ethanol, the currently dominant biofuel. Biobutanol, however, has several advantages over ethanol, including potentially lower lifecycle greenhouse gas (GHG) emissions, higher energy content, and better supply and distribution dynamics. These advantages stem in part from the novel method DuPont developed to convert plant sugars and starches into a combustible liquid, using an advanced biocatalyst instead of traditional yeast.
Focusing particularly on DuPont’s perspective, this paper describes important elements of the corporate strategy process that resulted in this effort to capture a new business opportunity for climate-friendly technology. It is part of the Pew Center’s ongoing research into best practices for corporate strategies that address climate change. The paper is not an endorsement of biobutanol or any specific fuel DuPont and BP may develop in the future. Rather, the goal of this paper is to highlight the strategy and process DuPont undertook in partnering with BP to develop the fuel, in hopes of identifying lessons that other firms can apply in advancing climate-related technologies as changes in public policy dramatically transform markets worldwide. The Pew Center also aims to help policymakers understand how to shape policies and programs in a way that unleashes the innovation and investment capabilities of the private sector in addressing climate change.
This article originally appeared in ClimateBiz.
The past several years have seen a steady transformation of business attitudes and behavior on climate change.
Faced with the prospect of new regulations, increased pressure from shareholders and changing consumer demands, many companies are developing comprehensive corporate strategies to address new climate-related risks and opportunities. Companies have set internal greenhouse gas reduction targets, developed new low-carbon products and services, and become increasingly engaged in the national policy debate.
Despite these actions, businesses have been relatively slow to address one critical piece of the climate challenge: adaptation to the physical impacts of climate change.
As with most climate-related issues, adaptation can initially appear complex. Some businesses are reluctant to take it on because it adds a new layer to the existing challenge of preparing for regulatory changes and shifting markets. Meanwhile, projections of physical impacts of climate change are often characterized by uncertainty and extended time horizons.
A new report from the Pew Center on Global Climate Change, "Adapting to Climate Change: A Business Approach," attempts to break down the adaptation challenge to more tractable components. Authored by Frances G. Sussman and J. Randall Freed of ICF International, the report builds a clear business case for adaptation, presents a screening process companies can use to assess climate-related physical risks, and provides three case studies of companies in the Pew Center's Business Environmental Leadership Council (BELC) that have taken action on adaptation.
The business case rests on the notion that early preparation can prevent, or at least reduce, future losses from climate-related impacts. Many of these projected impacts, including sea level rise, increased incidence and severity of extreme weather events, and prolonged heat waves and droughts, could have serious consequences across a range of businesses.
For example, higher demand for air conditioning during prolonged heat waves could stress and possibly overwhelm the electricity grid; longer and more intense rains could restrict access to construction sites and slow productivity in the buildings sector; and extended drought could render large swathes of previously arable farmland unusable. While some sectors face greater risks than others, all businesses face the possibility of property damage, business interruption and changes or delays in services provided by private or public infrastructure.
The report stresses the importance of proactive adaptation, or recognizing and acting on threats before they occur. This means relying less on historical trends and past decisions to guide business planning, and instead relying more on the anticipation and analysis of projected future impacts.
Proactive adaptation will initially be more difficult but, ultimately, less costly for most businesses to execute than a strictly reactive approach. Consider, for example, the cost of moving an existing manufacturing facility further inland to avoid damage from rising sea levels compared to the cost of conducting a preliminary study to select a less vulnerable construction site. The guiding principle is a familiar one -- an ounce of prevention is worth a pound of cure.
Businesses that begin evaluating potential physical risks will also be better positioned to exploit climate-related opportunities. For example, some tourist regions may benefit from an extended spring and summer recreation season. Biotechnology companies could profit from early development of new seed and other agricultural products that help crops withstand new climatic extremes. Melting ice could open new shipping routes in the Arctic. While these opportunities exist across various sectors of the economy, it is important to note that the Intergovernmental Panel on Climate Change made it clear that climate change will almost certainly result in net costs to society, with these costs growing steeper over time as temperatures increase.
The Pew Center report lays out a screening process companies can use to evaluate the potential physical risks of climate change and decide if more action is needed. In brief, the first step is to determine whether climate is an important factor in business risk. If the answer is yes, the next step is to determine whether climate change presents an immediate risk or threatens assets and investments over a longer-term horizon. The final step is to determine the cost of a wrong decision. If the costs are large, then a more comprehensive risk assessment that looks in greater detail at climate projections and their impact on the business may be warranted.
Depending on how these questions are answered, the screening process will lead to one of three possible outcomes: 1) climate change poses a significant risk that should be managed in the short term; 2) climate change poses a potential risk that should be monitored and reassessed over time; or 3) climate change does not appear to pose a risk and no further analysis is required.
A key message from the report is that companies should take a broad view of climate risks as they conduct the screening process. This means going beyond core operations to include a review of the entire value chain, along with broader supply and demand networks such as electricity, water and transportation infrastructure. A manufacturing plant may escape direct damage from a major storm but still face business interruption risk if transmission lines delivering power to the facility are knocked out, or roads and highways surrounding the facility are left inoperable.
While adaptation is a new issue for many companies, there are some notable exceptions. Three of these are highlighted in the report:
- A New Orleans-based utility, Entergy, suffered $2 billion in losses from Hurricanes Katrina and Rita and has begun relocating important business operations to areas less vulnerable to severe weather events. Entergy also recognizes that, if it goes unchecked, climate change poses long-term risks to the economic viability of its service area and is working with local government agencies and civic organizations to enhance the region's adaptive capacity.
- Travelers, a major property insurance company, is exploring new pricing strategies to encourage adaptive actions from its commercial and personal customers. It is also working with a range of stakeholders to help better integrate climate change science into catastrophe modeling and loss estimates.
- Mining giant Rio Tinto is using high-resolution climate modeling to conduct detailed site assessments and gauge risks to high-priority assets. Extreme flooding and prolonged drought have emerged as the greatest sources of concern, creating additional justification for the development of a strong water strategy.
Not every business will need to take action to adapt to the physical impacts of climate change, but all firms should be aware of the potential risks. An initial screening can often be conducted relatively easily using publicly available information on climate trends and projections. This screening helps companies determine whether more focused action is needed. It can also help firms uncover hidden opportunities that a changing climate may hold. The companies that take early action on adaptation may gain a competitive advantage over industry peers that stand idle as the physical effects of climate change creep up and surprise them -- and their bottom line.
Andre de Fontaine is a Markets and Business Strategy Fellow with the Pew Center on Global Climate Change.
By Truman Semans, Director for Markets and Business Strategy, Tim Juliani and Andre de Fontaine, Markets and Business Strategy Fellows
Recent months have seen an explosion of activity on climate change, to the point where it is now almost impossible to pick up a newspaper without reading about a major new climate-related initiative from the business or policymaking community. This is not surprising, as it is clear that climate change will have economy-wide impacts, and create regulatory, physical, and reputational risks for a wide range of companies.
Manufacturing is not immune from these effects, for as a sector it represents nearly one-fifth (19 percent) of domestic direct emissions, and it is indirectly responsible for an additional 11 percent of emissions through electricity use. Furthermore, for powered manufactured goods such as appliances, electronics and autos, up to 90+ percent of emissions are created from product use, not their manufacture. Considering this greenhouse gas footprint, it is clear that manufacturing will be significantly impacted by any future climate change regulatory regime, and must now, as a sector, begin to confront the risks and opportunities that climate change presents. This includes awareness of and engagement in the national policy debate, as well as examining how climate can be factored into core business strategies.
Although a handful of scientists on the fringe continue to garner press attention with their contrarian views, the overwhelming majority of the scientific community believes that the warming in the atmosphere is unequivocal, and that the warming is human-induced. The latest report of the Intergovernmental Panel on Climate Change (IPCC) – a group of 2,500 climate scientists from across the globe that evaluate the peer-reviewed research on this issue – asserts that there is a greater than 90 percent certainty that most of the warming over the past century is human induced, and that a range of impacts are already being observed.
As the science has strengthened over the last decade, momentum has grown at the local, state and federal level to enact policies that reduce GHG emissions. Today, nearly all 50 states have enacted some form of climate-related standard, while the past several years have seen a steady increase in the level of Congressional attention to climate change.
A carbon-constrained future is imminent, a fact that many businesses now realize. In a survey of large corporations conducted during the development of the Pew Center’s 2006 report, Getting Ahead of the Curve: Corporate Strategies That Address Climate Change, 67 percent of businesses said they expect greenhouse gas regulations to take effect between 2010 and 2015.
A further 17 percent expect this before 2010. This implies climate legislation will pass Congress even sooner. The question now is not whether legislation will pass, but about its timing and the form it will take. Companies that prepare for this future will be the winners, while the rest will be left playing catch up.
Action on emissions
Manufacturing operations that are most likely to be affected by climate change regulations are those that result in significant direct greenhouse gas emissions (GHG), such as cement, iron and steel production, as well as those that are highly energy intensive, such as paper and chemicals operations. Climate change rules are likely to result in upward pressure on energy prices, which means that operational efficiency improvements will have greater benefit than in the past as a basis for advantage. Companies such as DuPont, which figures it has saved over $3 billion from efficiency since 1990, demonstrate the financial benefits embedded in these efforts. Manufacturers that produce highly efficient consumer products will also gain a competitive advantage over producers of similar, but more energy intensive goods and services.
Driven at least partly from a desire to influence the policy debate, a growing number of leading companies across many industries are now openly calling for national GHG limits. One of the most significant recent developments was the formation earlier this year of the U.S. Climate Action Partnership (USCAP). This coalition is an unprecedented collaboration of 23 major corporations and six leading nongovernmental organizations that is calling on Congress to enact mandatory, economy-wide climate protection legislation at the earliest date possible. Specifically, the group recommends Congress establish an emissions reduction pathway with short and mid-term targets equivalent to: between 100-105 percent of today’s levels within five years of rapid enactment; between 90-100 percent of today’s levels within 10 years; and between 70-90 percent of today’s levels within 15 years. Additionally, USCAP recommends a long-term reduction target of 60-80 percent below current levels by 2050.
USCAP believes a cap-and-trade system should be the cornerstone policy to meet these targets, but that additional policies should also be pursued in sectors such as transportation and buildings, in which the initial price signal from cap-and-trade will not be sufficient to reduce emissions and advance new technologies. The coalition also recommends that a federal technology research program be established that provides stable, long-term financing for low-GHG technologies. Additionally, Congress should urge the administration to engage in international negotiations with the aim of establishing emission reduction commitments by all major emitting countries.
The companies involved in USCAP, which include major manufacturers such as Alcoa, Caterpillar, Dow, DuPont, GE, John Deere, Johnson and Johnson – and the big three U.S. automakers – have chosen to become closely involved in the policymaking process because they realize, as the popular saying goes, “If you’re not at the table, you’re on the menu.” Yet, to earn a credible seat at the policymaking table, many companies have found they need to demonstrate their own commitment through meeting their own voluntary emission reduction goals. According to the Pew Center’s research, companies that have taken these steps report financial benefits from a range of climate-related programs, including energy efficiency improvements, process changes, fuel switching, and customer relations (see chart).
The Pew Center’s research found that the ultimate achievement related to climate is a game-changing strategy that allows a company to jump ahead of competitors by creating new markets or reshaping the rules of existing markets in their favor – for climate this means reshaping policy. And such strategies are beginning to emerge. GE and BP are working together to develop up to 15 clean-burning fossil-fuel based power plants that will separate and burn hydrogen while capturing and piping the resulting carbon dioxide into either deep geologic formations or existing oil wells to boost petroleum production. At the same time, BP is also partnering with DuPont to produce biobutanol, a biologically-derived, lower carbon transportation fuel that could replace ethanol for a wide-range of applications in the economy for significant market segments.
The consequences of climate change policy will be most severe for those who do nothing to prepare for it today. By engaging in the policy debate now, firms will help shape the carbon-constrained future in which they will operate. And while there is undoubtedly risk from climate regulation, there is also a great opportunity for the U.S. manufacturing sector to lead the world in producing new climate-friendly products and technologies, thereby helping not only the climate, but also the top and bottom lines.
Truman Semans is the Director for Markets and Business Strategy at the Pew Center on Global Climate Change. He manages the Center's Business Environmental Leadership Council (BELC), a group of 43 largely Fortune 500 corporations working with the Pew Center to address issues related to climate change, and directs Pew research on business and climate. He has consulted with McKinsey & Co. and served as the U.S. Treasury Department’s International Economist on global environment and natural resources.
Timothy Juliani and Andre de Fontaine are Markets and Business Strategy Fellows at the Pew Center on Global Climate Change. They work with the Center's BELC and engage in Pew Center analytic work on climate-related markets and investment issues.