By Truman Semans, Director for Markets and Business Strategy, Tim Juliani and Andre de Fontaine, Markets and Business Strategy Fellows
This article originally appeared in US Industry Today, September/October 2007
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.