Ensuring Offset Quality: Integrating High Quality Greenhouse Gas Offsets Into North American Cap-and-Trade Policy
An Offset Quality Initiative White Paper
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This paper aims to provide policymakers with practical recommendations regarding the integration of greenhouse gas (GHG) offsets into emerging regulatory systems. Offsets have an important role to play in controlling the costs associated with regulating and reducing GHGs, and in driving technology transformation in sectors not mandated to reduce their GHG emissions. In order for offsets to deliver on their intended purpose — the achievement of a real and verifiable reduction in global GHG emission levels beyond what would have otherwise occurred —regulatory programs must be designed to ensure the quality and effectiveness of offsets used to meet GHG reduction requirements. Policymakers must also have a clear understanding of both the opportunities and challenges presented by the integration of offsets into GHG emission-reduction systems.
This document represents the consensus of the member organizations of the Offset Quality Initiative: The Climate Trust, Pew Center on Global Climate Change, California Climate Action Registry, Environmental Resources Trust, Greenhouse Gas Management Institute and The Climate Group. The GHG mitigation field is evolving at a rapid pace and will continue to do so over the next several years; this document will be updated over time to reflect any changes in the Offset Quality Initiative’s consensus positions.
The work of the Offset Quality Initiative is generously supported by the Energy Foundation.
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.
Speech by Eileen Claussen, President, Pew Center on Global Climate Change
Aluminum Association Spring 2008 Meeting
April 22, 2008
Thank you very much. I am honored to be here at your spring meeting, and let me say you have chosen a delightful time to gather here in Washington. And it is an important day, too. Today is both Earth Day and the Pennsylvania Democratic primary election. So Americans will be planting a lot of trees today – and we may get closer to determining how to replace a Bush.
President Bush, in fact, has taken so many shots to his public approval rating in recent months that he said he feels like Hillary Clinton arriving in Bosnia in the 1990s.
And John McCain … when he was asked about the unique convergence of events happening today, said that every day is Earth Day as far as he’s concerned … and, given the way the Democrats have been going after each other, he said he wished every day could be the Pennsylvania Democratic primary.
In all seriousness, I am delighted to be here, no matter what day it is. Because it gives me a chance to address a group of industry leaders whose efforts will be crucial as we finally get serious about addressing this enormous challenge known as climate change.
What you do within your companies to reduce greenhouse gas emissions, through increased energy efficiency and process and product design improvements, will make a major contribution to the broader effort to protect the climate. Primary aluminum production, as you know better than anyone, is among the most energy-intensive industries in the nation. At last count, it was responsible for 1 percent of all U.S. energy use; and more than 3 percent of all energy use in the manufacturing sector. And the indirect contributions to climate change from that level of energy use are substantial. But aluminum production is also a major direct source of greenhouse gases – including process CO2 emissions as well as PFCs, although you have made enormous strides in reducing these emissions in recent years.
At the same time, of course, all of you know that it’s not just upstream and process emissions that have an effect on your industry’s climate footprint. It’s downstream as well. And there, your product, aluminum, actually can play a crucial role in reducing emissions from other sectors of the economy, primarily transportation. Reducing a vehicle’s weight by 10 percent yields about a 7-percent reduction in greenhouse gas emissions. So at the same time that many of you may be concerned about what’s coming down the pike in terms of government action on this issue, a comprehensive climate policy could present both real opportunities and real challenges.
Aluminum – this wonderful material that all of you produce – is uniquely malleable and adaptive. And your industry, I believe, will need to exhibit the same properties as the climate debate moves forward. You need to show that you yourselves are malleable and that you can continue to adapt your processes and your operations and your core business strategies in the search for ever-increasing reductions in emissions. Because, I am here to tell you today that the table is being set for serious domestic and international action on this issue. And, unless you want to be on the menu, it’s in your best interest to keep serving up progress – because that’s the best way to be involved in shaping solutions.
With that as an extended prologue, my main task today is to provide you with a sense of where we are right now in the domestic and international response to climate change, and why I believe we will see serious action on this issue in the next one to two years. A new international treaty may take a bit longer than this, but U.S. enactment of a national climate policy will certainly galvanize efforts toward a strong global agreement.
The Science of Climate Change
But before all of that, a quick update on climate change science. Because the science is really the basis for everything else. The reason we are even having this conversation is because the science on this issue has developed to a point where there is no longer any doubt that this problem is real, it is urgent, and it demands solutions right now. Over the last decade, the case for a skeptical, wait-and-see approach to climate change has melted faster than summer sea ice in the Arctic.
Just last month, the world was alerted that an ice shelf that was seven times the size of Manhattan had collapsed … disintegrated in a matter of days. Faster than Bear Sterns even, but in this case there was no Fed or JP Morgan standing at the ready to try and piece things back together. Scientists immediately attributed the collapse to global warming. They noted that these sorts of things are happening with increasing frequency in recent years and, in fact, we may be reaching a tipping point where many of these changes that are happening start to feed on one another and cannot be reversed.
The Nobel Prize-winning Intergovernmental Panel on Climate Change has said the warming of the climate system is – I quote – “unequivocal.” This group of more than a thousand scientists from throughout the world represents the most comprehensive source of science-based information on climate change. The IPCC’s 2007 report stated that it is certain that most of the observed warming of the past half-century is due to human influences.
Looking ahead, the IPCC affirms that climate change will accelerate unless we achieve substantial reductions in worldwide emissions of carbon dioxide and other greenhouse gases. Their projection: global temperatures will increase between 2.0 and 11.5 degrees Fahrenheit by 2100. Sea levels will rise by a foot to a foot-and-a-half or more. Many species will be lost. In addition, there is a 90-percent chance or greater that the world will see more hot extremes, heat waves and heavy precipitation events. And it is likely we will see more droughts as well, plus an increase in the intensity of tropical cyclones.
So that’s the bad news – we have a very serious problem on our hands. The good news is that people are listening. A recent Harris poll showed that 81 percent of Americans agree that the United States needs to be in the lead when it comes to controlling greenhouse gases. Eighty-one percent. That’s an important number to think about as your industry, and others, develop strategies for the future. To the extent that you are seen as part of the solution, you will have the people behind you – your customers in America and abroad. And that kind of public support and goodwill, as all of you know, is an invaluable asset as your companies and your industry move forward.
The Business Response
For a long time, many in the private sector preferred to dodge this issue. In meetings like the one you are having now, there was a great deal of hedging and denial.
But beginning in 1998, when we formed the Pew Center on Global Climate Change, we began to see major companies step out from behind this curtain of denial. One of our priorities from the start was to recruit major companies to serve as founding members of our Business Environmental Leadership Council. Companies that joined our organization early on included industry leaders like Dupont, Toyota, and Alcoa. These firms agreed to a set of principles that basically said this: we know enough about the science of climate change to justify taking action now.
Today, 10 years later, our Council includes 42 companies representing roughly $2.8 trillion in market capitalization and over 3.8 million employees. It is the largest U.S.-based association of companies committed to climate change policy and business solutions. Members come from a range of sectors, including high technology, diversified manufacturing, oil and gas, transportation, electric and gas utilities, chemicals, healthcare, insurance, financial services -- and, of course, aluminum.
So the question is: why has this Council grown? Why are all of these businesses joining in? The growth of our Council is a reflection of business leaders’ understanding that serious government action to address this issue at all levels is inevitable; it is only a matter of time. Ninety percent of the companies we polled in 2006 said they believed climate regulations were imminent in the U.S. A more recent McKinsey study revealed that more than 80% of business executives polled expected climate change regulation within 5 years.
But the problem for business is that we don’t know exactly how governments will act. And not knowing what’s on the horizon, as all of you know very well, is not good for business. Taking a seat at the table will help ensure new legislation and regulations that make sense for your industry.
Of course, there are other motivating factors for business to get involved in this issue, including mounting concerns about a patchwork of sub-national regulations. And then there is the main motivating factor that drives all business: profits. Your companies and your industry, for example, regularly tout the benefits of aluminum as a lightweight material for the transportation sector – cars and planes, as I already noted, can go farther on a given amount of fuel if they are made of aluminum. And to the extent that the transportation sector responds to climate change by using more of your product, then …. Ka-ching! Addressing climate change becomes a good thing for your businesses.
Other industries, and other companies, are recognizing the same potential for profits. GE, for example, has committed to doubling its investment in environmental technologies to $1.5 billion by 2010. That is the equivalent of starting a new Fortune 250 company focused exclusively on clean technology. Real opportunities for real profits in a world where carbon constraints become the norm. And, of course, none of this has escaped the notice of investors around the world. Wall Street in recent years has exhibited a growing interest in and affection for those companies, industries and sectors that stand to benefit in a world that finally gets serious about constraining carbon. And that is helping to drive the business response.
Now, before I go any further, I want to make a few notes about how your industry, aluminum, is responding. Because I think there are a lot of good things happening in this industry. Consider our Business Council member Alcoa, which has established a goal to reduce its greenhouse gas emissions by 25 percent from 1990 levels by the year 2010. When the company’s inert anode technology is fully commercialized, it anticipates an overall reduction of 50 percent.
Or Alcan, a company that joined us in 2005, before it was purchased by Rio Tinto, which conveniently is also a member of our Council. And Alcan has its own story to tell about reducing emissions. The original objective of the company’s TARGET program was to reduce GHG emissions by 800,000 metric tons of CO2 equivalent. But the company more than quadrupled that – reducing emissions by a remarkable 3.5 million metric tons. Today, the second phase of the TARGET program is under way and it is delivering still more reductions.
I suppose you could say that these aluminum industry leaders are thinking “outside the bauxite” when it comes to climate change. Sorry, I couldn’t resist.
And it is not just these two companies. As I said, the aluminum industry as a whole has made important strides in recent years in reducing emissions. The industry’s Voluntary Aluminum Industrial Partnership reduced PFC emissions by about 45 percent between 1990 and 2000. And industry-wide recycling continues to account for a substantial share of production – all of you should be very proud of the 1.5 billion pounds of used beverage cans that were melted in 2005. That’s a lot of Diet Cherry Vanilla Dr. Pepper empties. And it amounts to a huge level of energy savings – and reduced emissions.
But the bottom line – and in business it’s all about that – is that all of the efforts I have talked about still have not contributed to an overall slowing of U.S. emissions growth. Yes, it’s great news when individual companies or industries begin to see climate change as a problem – and, for some, as an opportunity – and when they pursue voluntary actions that will reduce their contribution to the problem over time. But a global issue like climate change does not respond to voluntary actions taken here and there – in various pockets of the private sector, or in various places around the world.
Global greenhouse gas emissions continue to grow. For the United States, the Energy Information Administration says greenhouse gas emissions in 2005 were 17 percent higher than they were in 1990. Eighty-three percent of the total in 2005 consisted of carbon dioxide from the use of fossil fuels. This simply cannot continue—scientists say we need to reduce – reduce – emissions on a global basis by as much as 80 percent from 1990 levels in the next half century. Voluntary action is a great place to start and learn, but it is not going to get us where we need to be … it won’t even get us close.
And this is why I believe the President’s announcement last week, suggesting that the United States should continue to grow its emissions until 2025, was a non-starter. From an environmental perspective, it simply does not address the problem we are dealing with. And it ignores the reality of what is happening in the business community, in the states and in Congress.
The businesses we work with at the Pew Center understand that we need mandatory policies to compel broad-based action on this issue, both here in the United States and around the world. That’s why Alcoa, Alcan and several of the other businesses on our Council have joined with the Pew Center and others in a high-profile appeal for U.S. government action to address climate change. We’ve come together as the U.S. Climate Action Partnership, and this isn’t just a blanket call for government to do something. Rather, the USCAP group has issued a specific cap-and-trade proposal with specific targets and timetables—a real plan of action to slow, stop and reverse U.S. emissions. In addition to cap and trade, the group has embraced an array of other policies aimed at building a low-carbon energy economy.
When Fortune 500 CEOs take a stand for policies that in the past were tagged by private-sector leaders as extreme or unwarranted, and worse, it moves the politics on this issue to a new place. Senator John Warner, Republican of Virginia, summed up the impact of this unique coalition when some of its members appeared before a U.S. Senate committee hearing last year. “A group like this, you’ve got my attention,” he said.
And so, on Capitol Hill, after years of inaction, we see Congress finally gearing up to address global warming by requiring mandatory reductions in U.S. greenhouse gas emissions. A cap-and-trade bill from Senator Warner and his cosponsor, Joseph Lieberman, has emerged from the Senate
Environment and Public Works Committee, and is really the vehicle to watch at the moment. It would reduce U.S. emissions by 19 percent by the year 2020, and by 71 percent by 2050. Vote counters on Capitol Hill believe the bill, with some modification, could get the 60 votes needed in the Senate to beat a certain filibuster from opponents of climate legislation. In the House, Representatives John Dingell and Rick Boucher, influential moderate Democrats who lead the key committee, are working on a similar bill.
Now, I know what you’re thinking. You’re thinking the chances of climate legislation being enacted in 2008 are about the same as the chances of Hillary Clinton or Barack Obama ending their quest for superdelegates tomorrow. But I believe there are signals that President Bush might sign a cap-and-trade bill with strong bipartisan support. A number of Republican senators have made it clear that they support cap-and-trade – by voting for, sponsoring, or even coauthoring various pieces of legislation. And outside Congress, support for climate action has become even more bipartisan. Of the 25 governors who have committed their states to mandatory reductions in GHG emissions, eight are Republicans. And so the reality is that any climate bill that gets to the president's desk this year will, in fact, have significant bipartisan support, and therefore it will not be easily dismissed.
And then there is the U.S. presidential race. The three remaining candidates all support strong action on climate change – so it is going to happen one way or another in the next couple of years. I do not buy into the arguments that some advocates have made that we would be better off waiting for the next president to get a bill enacted. We have a shot – not a great one, I grant -- at getting a good climate bill this year. It would be irresponsible to pass that by, and, from my perspective, industry influence this year will be greater than in subsequent years. Furthermore, if we lose this opportunity, we will see emissions continue to rise unchecked for another year or maybe two before Congress can act again.
A final argument for enacting a climate bill in this Congress is that an important early responsibility for the next president will be to lead the world in forging a new climate treaty. Getting this done will be much easier – indeed, some would say it is the only feasible way to do it – if we have a U.S. cap-and-trade policy in place before our negotiators sit down at the table. We need only consider how a country like China will respond when the next U.S. president says in the course of these negotiations that all countries have to do their part. Unless the United States is already committed to reducing its own emissions, that kind of talk is just not going to fly.
Action in the States
At the same time that there is all of this discussion going on in Washington, it is easy to forget that the U.S. states have been strong movers on the climate issue for several years now. They aren’t just talking about it. They are designing and implementing real solutions. California is a case in point. If it were a country, California would rank 13th in the world in greenhouse gas emissions. Recognizing this, the state’s leaders have established an ambitious set of greenhouse gas emissions targets—such as reaching 1990 emission levels by 2020. Not only that, but California also has gone the next step and passed legislation, with real enforcement, to give the targets the force of law.
Of course, California is not the only state to be exercising a leadership role on this issue. There are 26 states, including large emitters like Texas, that require electric utilities to generate a specified amount of electricity from renewable sources. Seventeen states have targets for reducing their emissions.
And then there are the 23 states that are working across their borders to develop regional cap-and-trade systems through the Western Climate Initiative, the Regional Greenhouse Gas Initiative in the Northeast and Mid-Atlantic, and the Midwestern Greenhouse Gas Reduction Accord.
And it is not only state leaders who are acting. There is also local action on this issue across the United States. To date, more than 800 U.S. mayors have signed a commitment to reduce emissions in their cities. The target: a 7-percent reduction below 1990 emission levels before 2012, which not coincidentally is what the Kyoto Protocol would have required for the United States as a whole.
So, if anyone tells you there is nothing happening on this issue in the United States, I hope you will correct them. There is a great deal of activity and a great deal of commitment at the state and local levels … where leaders are developing real plans to reduce emissions. However, despite all the great things that are happening, and despite the leadership of the nation’s states and cities and businesses, U.S. emissions still are trending up not down, as I said. Which is why we need national, mandatory policies that will put the United States on an environmentally sustainable path.
And, of course, domestic action alone is not enough. We also need to commit as a nation to play an active part in crafting an effective global response to climate change. Even if the United States were finally to get serious about reducing its emissions, our actions will amount to precious little if they are not part of a wider global effort that commits all major emitting nations to do their part.
Today, there are a number of countries that are indeed taking serious action on this issue—and they deserve credit for what they are doing. The EU’s Emissions Trading System, for example, is the world’s most ambitious and far-reaching example of a cap-and-trade program. The initial program design includes limits on carbon dioxide from approximately 12,000 facilities in 27 European Union member states; it covers power plants and five major industrial sectors. Has the effort faced some challenges? Definitely. For example, the system generated excessive profits for some companies that received too many emissions credits to start with. But adjustments can and are being made to address these problems as more is learned about the system. And the fact is, the EU has established a functioning market for CO2 reductions in a relatively short period of time. Europe now has a price for CO2 that is being included in business decision-making.
Elsewhere, we see that Australia has come out in favor of a nationwide cap-and-trade system. And, Canada has adopted a regulatory framework aimed at achieving significant cuts in emissions. Even in China, we see significant progress. That country’s leaders have established a domestic target of a 20-percent reduction in energy intensity by 2010. China also has aggressively developed its renewable energy sector. It has established a goal to raise the proportion of renewable energy in the primary energy supply to 16 percent by 2020, up from 7 percent today.
But, as we all know, isolated actions on the part of individual nations, just like isolated actions by individual U.S. businesses or states, are not enough. We need a global solution, with commitments by all major emitting countries.
What kind of commitments are we talking about? Well, I will start by telling you what we are not talking about. We are not talking about having the United States ratify the Kyoto Protocol. We could not possibly meet our target at this late date. Kyoto is too politically tarnished in the United States for us to return to it, and it is unlikely that the major emitting countries in the developing world would agree to binding absolute targets for their emissions. But what they might agree to, especially if they see the United States and other developed countries adopt economy-wide emission targets, are binding commitments of another type. The major emerging economies, for example, could agree to policy commitments, such as renewable energy targets or fuel economy standards.
Or, they could participate in international sectoral agreements, agreements within a particular sector to a set of intensity targets or performance standards that become part of a binding international agreement. Already, the International Aluminum Institute has put forth voluntary objectives for your industry, such as an 80-percent reduction in PFC emissions per metric ton of aluminum produced. Making this agreement part of a broader framework could address competitiveness concerns, broaden participation among more countries, and result in significant benefits.
But whether we are talking about sectoral agreements or some other form of commitments, what’s essential is that any international commitments be measurable, reportable, and verifiable. And they must – they must -- put us on the path to stopping and reversing the growth in global emissions.
International engagement has recently drawn greater attention in Congress. Last month, the Senate Foreign Relations Committee, headed by Senators Joseph Biden and Richard Lugar, declared its intent to make international climate change negotiations a top priority. Their efforts will focus on the Bali roadmap. This plan, approved by more than 180 countries – including the United States ¬– calls for a new global climate agreement to be reached by the end of 2009.
Now, obviously, 2009 is not very far away, and I have my doubts as to whether the date can actually be met. But I am confident that if we in the United States move forward with our own mandatory emission reduction policy, we will be able to engage as a powerful and respected player on this issue at the global level. And that will increase the chances of reaching an agreement with developing and developed countries alike about the path that we must take to address this critical issue.
The world has made real progress in trying to figure out what will work to reduce emissions and protect the climate. Your industry is a case in point – from recycling to increased energy efficiency to the work that all of you are doing to reduce PFC emissions, these are important steps forward. But we have a much-longer journey ahead of us to transform the way we do business, transform the way we produce and use energy, and transform the way we think about our economy, our environment and our climate.
This nation recently commemorated the 40th anniversary of the death of Dr. Martin Luther King, Jr. Dr. King once said that the ultimate measure of a person is not “where he stands in moments of comfort and convenience, but where he stands at times of challenge and controversy.”
The controversy about climate change may be over, but there is no doubt that this is a time of great challenge for our nation and our world. And the measure of each of you, and of your industry and of the companies you lead, will be where you stand on one of the most urgent problems of our time – and, more importantly, what you do to address it.
I thank all of you for listening, and I look forward to your leadership on this issue in the months and years to come.
Thank you very much.
Adapting to Climate Change: A Business Approach
Prepared for the Pew Center on Global Climate Change
Frances G. Sussman and J. Randall Freed
This report outlines a sensible business approach to analyzing and adapting to the physical risks of climate change. It focuses on a critical first step in assessing these climate impacts: understanding the potential risks to business and the importance of taking action to mitigate those risks. Not all businesses need to take action now; this paper develops a qualitative screening process to assess whether a business is likely to be vulnerable to the physical risks associated with climate change, and whether a more detailed risk assessment is warranted.
Download entire report (pdf)
In 2007, the Intergovernmental Panel on Climate Change (IPCC) affirmed that warming of the climate system is unequivocal, with effects such as increasing land and ocean temperatures, rising global average sea level, and reduced snow and ice already being observed. These changes—which are linked directly to human activities producing greenhouse gases—are already causing changes in ecosystems, water supply and availability, and patterns of extreme events, with (in many but not all cases) consequent damages to human health, buildings, livelihoods, and infrastructure. The question is no longer, “Is there human-caused climate change?” but “What can be done to react and adapt to it?” Adaptation does not preclude steps to reduce greenhouse gas emissions, but recognizes that we are unavoidably committed to some amount of climate change, and that changes are already occurring.
The business community has for some time been aware of the risks and opportunities associated with greenhouse gas mitigation and current and future climate change policies. Many businesses have taken steps to reduce greenhouse gas emissions voluntarily. Many are taking into account some of the impacts of climate change—potential state and federal regulations, shareholder perceptions, and changes in consumer and supplier markets, for example—on the cost of doing business now and in the future. Fewer businesses, however, are incorporating the risks and opportunities associated with the physical effects of climate change in their business planning. As trends in climate become clearer and the uncertainty surrounding future changes is reduced, more businesses will want to consider whether to adapt to projected changes by taking action now. This, in turn, involves reacting to and managing risks as well as taking advantage of opportunities.
Climate change represents a new and somewhat daunting topic for many businesses. The challenge is compounded by the diverse and uncertain projections of changes in temperature, precipitation patterns, extreme events, and other effects. This paper outlines a sensible business approach to analyzing and adapting to the physical risks of climate change. It focuses on a critical first step in assessing these climate impacts: understanding the potential risks to business and the importance of taking action to mitigate those risks. Not all businesses need to take action now; this paper develops a qualitative screening process to assess whether a business is likely to be vulnerable to the physical risks associated with climate change, and whether a more detailed risk assessment is warranted.
Section I of this paper offers context on the broader risks and opportunities presented by climate change. Sections II and III summarize the case for business action to adapt to the physical effects of climate change, and the pathways by which climate can affect business. Section IV describes a screening process that businesses can use to assess whether they are likely to be vulnerable to the physical risks associated with climate change. If the screening indicates that climate change may pose a significant risk, a business can decide whether to undertake a more detailed financial risk assessment, and then, if indicated, take action. Section V presents case studies of three companies that have begun to look at climate risks. These case studies highlight the very different circumstances that motivated each company, and how the companies may be moving towards different conclusions about the appropriate response to the changing climate. Section VI concludes with a summary of key points.
About the Authors
Frances Sussman is a senior economist with ICF International and has been analyzing issues associated with the economics of climate change for nearly two decades. For several years following the adoption of the UNFCCC in 1992, Dr. Sussman led ICF’s climate change economics group, which conducted pioneering research on design options and practical considerations for greenhouse gas (GHG) emissions trading and credit programs, and developed the seminal GHG mitigation cost curves for the United States. Recently, her research has focused on the appropriate use and interpretation of economics and economic models in policy analysis. As part of this, she has been investigating approaches to setting priorities for adaptation and evaluating the business opportunities and risks associated with the physical effects of climate change. She is also the one of the lead authors of a Synthesis and Assessment Report of the Climate Change Science Program (CCSP), Analyses of the Effects of Global Change on Human Health and Welfare and Human Systems. In addition to her affiliation with ICF, she is an adjunct instructor at Southern Connecticut State University. Prior to joining ICF, she worked as an economist in the Office of Toxic Substances at the Environmental Protection Agency and at the Congressional Budget Office. She received her doctorate in Economics from the University of Maryland.
Randall Freed leads ICF International’s Climate and Energy Policy group, with staff in the US, Canada, UK, Brazil, Russia, and India. The group develops GHG inventories/ carbon footprints, programs and strategies for mitigating GHG emissions, risk assessments of climate change impacts, and risk management plans to promote sustainability and adapt to climate change. Mr. Freed’s expertise includes analyzing climate change impacts and adaptation related to water resources, ecosystems, land use, and infrastructure; GHG emissions and sinks associated with waste management and non-energy uses of fossil fuels; and policies and programs to mitigate emissions. He has over 30 years’ experience and is an internationally recognized expert in exposure and risk assessment, environmental program development and policy analysis, and water quality issues. Mr. Freed has an MS in Water Resource Management and a BS in Zoology, both from the University of Maryland.
April 16, 2008
Contact: Tom Steinfeldt, (703) 516-4146
WASHINGTON, DC -- The Pew Center on Global Climate Change today released a new report that outlines a business approach to adapting to the physical effects of climate change. Adapting to Climate Change: A Business Approach examines a range of risks businesses face from the physical impacts of climate change and presents a framework for assessing vulnerability to these risks across a company’s operations, value chain, and broader commercial environment.
Authored by ICF International senior economist, Frances G. Sussman, and senior vice president, Randall Freed, the study focuses on a critical first step in assessing climate impacts: understanding the potential risks to business from the physical effects of climate change and the importance of taking action to reduce those risks. It examines case studies of three companies in the Pew Center’s Business Environmental Leadership Council (BELC) that have taken initial steps to address these risks.
“We know climate change is occurring and the real world ramifications of that change are already being felt,” said Eileen Claussen, President of the Pew Center on Global Climate Change. “In addition to policies that reduce greenhouse gas emissions, we also need strategies to adapt to those climate change impacts that are unavoidable. The private sector faces a range of risks and it is important that they begin now to assess their options and strategies for adapting.”
The study adds to the Pew Center’s expanding body of work on adaptation, an issue that has grown in importance as governments and businesses around the world recognize that a certain amount of climate change is unavoidable and that impacts are already being observed.
The report finds that susceptibility to the physical effects of climate change varies considerably across sectors of the economy. 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 the agriculture industry is at risk of extreme drought that could render previously arable land unusable. While some sectors are more at risk than others, all businesses face the possibility of property damage, business interruption, and changes or delays in services provided by electric and water utilities and transport infrastructure.
Despite these known threats, relatively few companies have developed climate change adaptation strategies. A few have begun taking steps to evaluate and act on the physical risks of climate change, and their experiences offer important insights to other companies. The report’s case studies highlight actions three BELC companies have taken on adaptation:
- Entergy, the New Orleans-based utility, which suffered $2 billion in losses from Hurricanes Katrina and Rita, has begun relocating important business operations to areas less vulnerable to severe weather events.
- Mining giant Rio Tinto is using high-resolution climate modeling to conduct detailed site assessments and gauge risks to high-priority assets.
- Travelers, a major insurance company, is exploring new pricing strategies to encourage adaptive actions from its commercial and personal customers.
This and other Pew Center reports are available at www.c2es.org.
The Pew Center was established in May 1998 by The Pew Charitable Trusts, one of the United States’ largest philanthropies and an influential voice in efforts to improve the quality of the environment. The Pew Center is an independent, nonprofit, and non-partisan organization dedicated to providing credible information, straight answers, and innovative solutions in the effort to address global climate change. The Pew Center is led by Eileen Claussen, the former U.S. Assistant Secretary of State for Oceans and International Environmental and Scientific Affairs.
The BELC was established by the Pew Center in 1998. It is comprised of mainly Fortune 500 companies representing a diverse group of industries including energy, automobiles, manufacturing, chemicals, pharmaceuticals, metals, mining, paper and forest products, consumer goods and appliances, telecommunications, and high technology. Individually and collectively, these companies are demonstrating that it is possible to take action to address climate change while maintaining competitive excellence, growth, and profitability. The BELC is the largest U.S.-based association of corporations focused on addressing the challenges of climate change, with 42 companies representing over 3.8 million employees and a combined market value of $2.8 trillion.
C2ES’s Markets & Business Strategy (MBS) Program conducts research and analysis at the nexus of climate change and business. Market-based environmental policies are not unique to climate change, and their success in other contexts is why they have been embraced by both sides of the political spectrum. By employing the power of the market, market-based climate policies are designed to minimize compliance costs of reducing GHGs. The MBS program also seeks to help companies, policymakers and investors understand how to successfully manage carbon risks and capture new business opportunities as changes in public policy and customer preferences transform global markets.
The MBS Program works with the business community to develop policy solutions to achieve important climate goals that provide flexibility and incentives for innovation. Market-based environmental policies are those in which a price associated with pollution emerges, and each regulated business is able to choose independently how much pollution abatement is appropriate, and how to best achieve that based on its individual circumstances. Some companies can reduce pollution more cheaply than others (because of the age of their equipment or the technology they are using), so allowing them to reduce their pollution more, and compensate for others doing less, means that the environmental objective will be achieved as cheaply as possible.
Importantly, these policies allow a great deal of flexibility by encouraging firms to achieve environmental outcomes through pollution reduction in the least costly way they can find, and allows new or unexpected solutions to emerge. Because there is a constant financial incentive, companies will continually work to reduce emissions and do not just remain at a status quo level of emissions output. By creating a dynamic market for pollution reduction, market-based policies achieve environmental objectives at the lowest possible cost in the near term and lead to even greater environmental outcomes through innovation in the long-term.
In addition to our work on markets, the MBS program educates policymakers on how to shape policies that unleash private sector low-carbon innovation and investment. To this end, C2ES collaborates extensively with the business community, primarily through our 34-member Business Environmental Leadership Council (BELC). An invitation-only group, the BELC is now the largest U.S.-based association of corporations focused on advancing business and policy solutions to climate change. The program’s report “Getting Ahead of the Curve: Corporate Strategies That Address Climate Change” is illustrative of its approach to the climate issue. The report lays out a step-by-step process for companies to reshape their core business strategies in order to succeed in a future marketplace where greenhouse gases are regulated, carbon-efficiency is rewarded, and low-carbon products are in demand.
Notes and Source
|Arizona: State-wide||2000 levels by 2020|
50% below 2000 by 2040
|Executive Order 2006-13|
2000 levels by 2010
|Executive Order S-3-05|
|California: Major industries state-wide||1990 levels by 2020||AB 32|
|Connecticut: State-wide||1990 levels by 2010|
10% below 1990 by 2020
75-85% below 2001 levels in the long term
|Connecticut Climate Change Action Plan|
2000 levels by 2017
|Florida: Electric Utilities|
2000 levels by 2017
|Hawaii: State-wide||1990 levels by 2020||Act 234|
|Illinois: State-wide||1990 levels by 2020|
60% below 1990 levels by 2050
|Maine: State-wide||1990 levels by 2010|
10% below 1990 by 2020
75-80% below 2003 long-term
|LD 845 (HP 622)|
|Massachusetts: State-wide||1990 levels by 2010|
10% below 1990 by 2020
75-85% below 1990 long-term
|Massachusetts Climate Protection Plan of 2004|
|Massachusetts: Electric Utilities||10% below 1997-1999||CO2 target only.|
310 CMR 7.29
15% below 2005 levels by 2015
|Next Generation Energy Act|
|New Hampshire: State-wide||1990 levels by 2010|
10% below 1990 by 2020
75-85% below 2001 long-term
|The Climate Change Challenge|
|New Hampshire: Electric Utilities||1990 levels by 2006||CO2 target only.|
|New Jersey: State-wide||1990 levels by 2020|
80% below 2006 levels by 2050
|Press release and executive order|
|New Mexico: State-wide||2000 levels by 2012|
10% below 2000 by 2020
75% below 2000 by 2050
|Executive Order 05-033|
|New York: State-wide||5% below 1990 by 2010|
10% below 1990 by 2020
|State Energy Plan of 2002|
|Oregon: State-wide||Stabilize by 2010|
10% below 1990 by 2020
75% below 1990 by 2050
|Oregon Strategy for Greenhouse Gas Reductions|
|Rhode Island: State-wide||1990 levels by 2010|
10% below 1990 by 2020
|Rhode Island Greenhouse Gas Action Plan|
|Vermont: State-wide||1990 levels by 2010|
10% below 1990 by 2020
75-85% below 2001 long-term
|Washington: State-wide||1990 levels by 2020|
25% below 1990 levels by 2035
50% below 1990 levels by 2050
|Executive Order 07-02|
Western Climate Initiative
|15% below 2005 levels by 2020||Western Climate Initiative Statement of Regional Goal|
|Regional Greenhouse Gas Initiative: CO2 emissions from power plants|
Cap emissions at current levels in 2009
|New England Governors and Eastern Canadian Premiers:|
|1990 levels by 2010|
10% below 1990 by 2020
75-85% below 2001 long-term
|Climate Change Action Plan of 2001|
Notes & Source
Lieberman-Warner Climate Security Act
|4% below 2005 level by 2012|
19% below 2005 level by 2020
71% below 2005 level by 2050
|As introduced 5/2008|
Low Carbon Economy Act (Bingaman-Specter)
2012 level in 2012
|As introduced 7/2007|
|Climate Stewardship and Innovation Act (McCain-Lieberman)|
|2004 level in 2012|
1990 level in 2020
20% below 1990 level in 2030
60% below 1990 level in 2050
|As introduced 1/2007|
|Global Warming Pollution Reduction Act (Sanders-Boxer)|
|2010 level in 2010|
2%/year reduction from 2010-2020
1990 level in 2020
27% below 1990 level in 2030
53% below 1990 level in 2040
80% below 1990 level in 2050
|As introduced 1/2007|
|Climate Stewardship Act (Olver-Gilchrest)|
|2006 level in 2012|
1990 level in 2020
22% below 1990 level in 2030
70% below 1990 level in 2050
|As introduced 1/2007|
|Global Warming Reduction Act (Kerry-Snowe)|
|2010 level in 2010|
1990 level in 2020
2.5%/year reduction from 2020-2029
3.5%/year reduction from 2030-2050
62% below 1990 level in 2050
|As introduced 2/2007|
|Safe Climate Act of 2007 (Waxman)|
|2009 level in 2010|
2%/year reduction from 2011-2020
1990 levels in 2020
5%/year reduction from 2020-2029
5%/year reduction from 2030-2050
80% below 1990 levels in 2050
|As introduced 3/2007|
|Electric Utility Cap and Trade Act (Feinstein-Carper)|
|2006 level in 2011|
2001 level in 2015
1%/year reduction from 2016-2019
1.5%/year reduction starting in 2020 (may be adjusted by Administrator)
Electricity sector; all GHGs
|Clean Air Climate Change Act of 2007 (Alexander-Lieberman)|
|2300 MMT CO2 (approx. 2006 level) from 2011-2014|
2100 MMT CO2 (approx. 1997 level) from 2015-2019
1800 MMT CO2 (approx.1990 level) from 2020-2024
1500 MMT CO2 (approx.17% below 1990 level) from 2025 forward
|Electricity sector; 4 pollutants|
As introduced 4/2007
|Clean Air Planning Act of 2007 (Carper)|
|2006 CO2 level in 2012-2014|
2001 CO2 level in 2015
1%/year reduction CO2 level from 2016-2019
1.5%/year reduction CO2 levels starting in 2020
1.5%/year reduction CO2 levels starting in 2020 (may be adjusted by Administrator to 3% in 2030 & beyond)
25% below 1990 CO2 level in 2050
|Electricity sector; 4 pollutants|
As introduced 4/2007
|Clean Power Act of 2007 (Sanders)|
Goal is to facilitate the worldwide stabilization of atmospheric concentrations of global warming pollutants at 450ppm CO2e by 2050*
2300 MMT CO2 (approx. 2006 level) by 2011
|Electricity sector; 4 pollutants|
As introduced 4/2007
Notes & Source
|Voluntary "greenhouse gas intensity" target for the U.S.||18% below 2002 intensity levels by 2012||Announced 2/14/2002|
Notes & Source
8% above 1990 by 2008-2012
6% below 1990 by 2008-2012
8% below 1990 by 2008-2012
6% below 1990 by 2008-2012
1990 levels by 2008-2012
20% below 1990 by 2020
CO2 target only.
Target for 2008-2012
13% below 1990
7.5% below 1990
21% below 1990
21% below 1990
25% above 1990
13% above 1990
6.5% below 1990
28% below 1990
6% below 1990
27% above 1990
15% above 1990
4% above 1990
12.5% below 1990
[i] The EU-15 nations have joined a "bubble" which allows the joint fulfillment of emissions commitments and preserves the collective emissions reduction goal of 8% below 1990 levels by 2008/2012
Our Business Environmental Leadership Council (BELC) is a group of leading companies worldwide that are responding to the challenges posed by climate change. This section provides a sampling of GHG reduction targets set by these companies. Through their efforts, they are demonstrating that GHG emissions can be reduced significantly and cost-effectively.
Press Release: The Travelers Companies, Inc. Joins Pew Center’s Business Environmental Leadership Council
October 30, 2007
Pew Center Contact: Katie Mandes (703) 516-4146
Travelers Contact: Jennifer Wislocki (860) 277-7458
THE TRAVELERS COMPANIES, INC. JOINS PEW CENTER'S
BUSINESS ENVIRONMENTAL LEADERSHIP COUNCIL
Insurance Industry Leader Commits to Advancing Climate Change Solutions
WASHINGTON, D.C. - The Pew Center on Global Climate Change announced today that The Travelers Companies, Inc. has joined the Pew Center's Business Environmental Leadership Council (BELC) and its efforts to address global climate change.
As one of the largest property casualty insurance companies in the world, Travelers is sensitive to the changing climate and the risks and opportunities it poses to both the company and the economy as a whole. The potential for more frequent and severe weather events arising from climate change affects a wide range of the company’s business activities, including catastrophe modeling, coastal underwriting, claim services, risk control, and other operations. Travelers has become a leading voice calling for proactive collaborative private and public sector strategies to adapt to the physical impacts of climate change and increased resilience to future weather-related catastrophes.
Travelers recently formed a multi-disciplinary team to investigate ways to integrate its core business strategies with initiatives to address the impacts of climate change, including strategies that respond to customer needs arising from the effects of climate change. The company is also in the process of calculating its own carbon footprint and has taken several steps to reduce greenhouse gas emissions, including reducing energy consumption through workplace design and operation, as well as utilizing more energy efficient heating and cooling methods.
“Travelers is committed to supporting initiatives and actions for our company and customers that mitigate the negative impacts of climate change and encourage environmentally responsible behavior,” said Jay Fishman, Chairman and Chief Executive Officer of Travelers. “We are proud to join the Pew Center’s efforts to develop a thoughtful approach to adapt to the inevitable physical effects of climate change.”
“Perhaps no other industry is more exposed to the financial risks of climate change than the insurance industry,” said Eileen Claussen, President of the Pew Center on Global Climate Change. “But the unique risks faced by the industry also present it with an opportunity to take a leadership role in responding to the climate challenge. I am delighted to have Travelers and their considerable expertise join us as we work to advance practical solutions to climate change in this country and globally.”
Headquartered in St. Paul, Minn., Travelers provides a range of commercial and personal property and casualty insurance products and services to businesses, government units, associations and individuals. It is the second-largest writer of commercial U.S. property casualty insurance, and second-largest writer of U.S. personal insurance through independent agents. Travelers has total assets of approximately $114 billion, total revenue of $25 billion, and employs approximately 33,000 people. The company’s stock (ticker symbol: TRV) is traded primarily on the New York Stock Exchange. For more information on Travelers visit its web site at http://www.travelers.com/.
The BELC was established by the Pew Center in 1998, and the Center is a leader in helping these and other major corporations integrate climate change into their business strategies. The BELC is comprised of mainly Fortune 500 companies representing a diverse group of industries including energy, automobiles, manufacturing, chemicals, pharmaceuticals, metals, mining, paper and forest products, consumer goods and appliances, telecommunications, and high technology. Individually and collectively, these companies are demonstrating that it is possible to take action to address climate change while maintaining competitive excellence, growth, and profitability. The BELC is the largest U.S.-based association of corporations focused on addressing the challenges of climate change, with 45 companies representing over 3.8 million employees and a combined market value of over $2.8 trillion.
The other members of the BELC are: ABB; Air Products; Alcan; Alcoa Inc.; American Electric Power; Bank of America; Baxter International Inc.; The Boeing Company; BP; California Portland Cement; CH2M HILL; Citi; Cummins Inc.; Deutsche Telekom; DTE Energy; Duke Energy; DuPont; Entergy; Exelon; GE; Georgia-Pacific; Hewlett-Packard Company; Holcim (US) Inc.; IBM; Intel; Interface Inc.; John Hancock Financial Services; Lockheed Martin; Marsh, Inc.; Novartis; Ontario Power Generation; PG&E Corporation; PNM Resources; Rio Tinto; Rohm and Haas; Royal Dutch/Shell; SC Johnson; Sunoco; Toyota; TransAlta; United Technologies; Weyerhaeuser; Whirlpool Corporation; and Wisconsin Energy Corporation.
For more information about global climate change and the activities of the Pew Center and the BELC, visit www.c2es.org.