Stepping on the gas as the lights turn green

The last year has seen the entry into force of the Kyoto Protocol, the start of EU-Emissions Trading and the emergence of alarming new evidence of climate change and its likely impacts. In the UK the government launched its latest Energy Review in July, following on from a revised Climate Change Strategy earlier in the year.

Amidst these developments, the climate issue is rising up the business agenda internationally. Many companies are implementing measures to cut their greenhouse gas emissions and progress is, in some cases, dramatic. For example, Bayer, BT, Dupont and Norske Canada have all achieved absolute reductions of greenhouse gas (GHG) emissions in recent years of 60% or more. What’s more, their total gross saving as a result of the actions taken is estimated to be $4bn. Recent research by the Climate Group suggests that another 21 companies have achieved reductions of over 25% and saved another $10.9bn.

Although this big picture makes a compelling case for action, it is important to realise that the actual initiatives undertaken can be very different from company to company. From driving through energy efficiency to actively seeking to develop new technologies which will help build the low carbon economy, the corporate approach to climate change is far from uniform.

Reducing energy use

Many companies, particularly those in the most energy intensive sectors, have focused on improving energy efficiency. This is an important first step, especially as it can present a win-win situation where projects yield clear financial advantages.

US-based Dow Chemicals, for example, has reduced its energy consumption per unit of production by 21% since 1994, saving itself £3 billion in the process. Germany’s BASF, another chemicals company, has cut its annual costs at one site alone by €500m through improved efficiency.

There comes a point, however, when most easily available reductions in energy use have been made. For example, while BASF cut its GHG emissions per unit of sales volume by 61% over the 12 years to 2002 it is only aiming for a cut of 10% over 2002-2012.

Many leading companies are therefore starting to take a more holistic approach to minimising their carbon footprints. When reducing their own emissions they are looking at options beyond simply relying on a reduction in energy use. Furthermore, these progressive companies are no longer looking simply to reduce their own GHG emissions. They are also seeking to influence their clients and customers and to address their position in the wider economy.

Beyond efficiency

In terms of reducing direct emissions one of the most popular approaches, after improvements in energy intensity, is to increase the use of renewable energy. One company that has made a particularly strong commitment to alternative energy is UK telecommunications firm BT. In October 2004, it completed what we believe to be the world’s largest green energy deal after agreeing a three-year contract with British Gas and npower for 2.1 TWh of electricity of renewables and combined heat and power.

Some companies are also choosing to go ‘carbon neutral’ (effectively reducing their net carbon emissions to zero). Take HSBC and Sky, for example, who recently became the first bank and media company in the world to make such a commitment. They will achieve carbon neutral status not just by improving energy efficiency and buying green power but also by ‘offsetting’ to compensate for their remaining carbon footprints.

Offsetting is basically the process of purchasing emissions reductions made elsewhere (from a renewable energy project in the developing world, for example), to count against those of your own emissions which are too difficult or expensive to tackle directly. It’s an option which is already available to those participants in the regulated market of the EU-ETS and Kyoto. But the blossoming voluntary market demonstrates the increasing number of companies who want the benefits of flexibility when taking voluntary steps to reduce emissions.

Customers and clients

Alongside its carbon neutral commitment, HSBC also recently announced a strategy to help clients respond to the challenges and opportunities of creating a lower carbon economy, saying that it will advise them on the implications of climate change and the business opportunities that arise.

There are a range of organizations which, like HSBC, are starting to look beyond the boundaries of their own offices or factories in their attempts to reduce emissions. And for the less energy-intensive sectors it is this approach that could have the most significant impact.

Marks and Spencer, for example, estimates that 90% of a retailer’s energy impact lies in its supply chain and in the use and disposal of products by customers. According to Mike Barry, Sustainable Development Manager, ‘These wider impacts are something we have only just begun to scratch the surface of. Some supermarkets might say that product-use emissions are the customers’ problem. We are saying that, as a business, we have a role to play in empowering our customers, and our suppliers, who are on this journey with us.’

As well as thinking about the products and services they are offering, companies are increasingly starting to think about how to market these ‘climate-friendly’ offerings to customers. A recent report from the Carbon Trust suggests that climate change could be a mainstream consumer issue by the end of this decade.

On this basis consumers will increasingly be attracted to those brands whose products and services offer them the chance to minimise their climate impact. So this is a course of action that represents a very real business opportunity.

Building the low carbon economy

The Toyota Prius, the world’s first mass-produced gas-electric hybrid vehicle, is a good example of a product where reduced environmental impact has been taken into consideration in both design and marketing. Sales of the Prius passed half a million units worldwide in April this year. Its success is particularly important because motor vehicles are responsible for a disproportionate amount of GHG emissions compared to many other product groups. Genuine technological advances in ‘high-impact’ areas like this create essential building blocks for a low carbon economy and there are a range of companies, in addition to the leading vehicle manufacturers, vying to fill this space.

R&D into clean technology has leapt up. General Electric, for example, recently launched ‘ecomagination’, a commitment to invest $1.5bn annually by 2010 in this area. In November last year BP announced that it plans to double its investment in alternative and renewable energies to create a new low-carbon power business with the growth potential to deliver revenues of around $6bn a year within the next decade.

Building on the success of BP Solar — which expects to hit revenues of $1bn in 2008 — BP Alternative Energy will manage an investment programme in solar, wind, hydrogen and combined-cycle-gas-turbine (CCGT) power generation, which could amount to $8bn over the next ten years.

With the worldwide market for wind, solar, geothermal and fuel cell energy estimated at $200bn in 2020, it is no surprise that dynamic companies are looking to establish their leadership in this field. 

A common denominator?

So what do all these organisations have in common? They have responded to a diverse set of drivers, including shareholder and consumer pressure, legislation, personally committed CEOs, and the lure of business opportunity.

They have used a wide range of approaches — renewable energy purchases, internal energy efficiency, new plant, and working with suppliers and customers.

What brings them together is that they have all recognised the synergies between cutting GHGs and increased productivity. And they are clear about what they need from policy-makers in order to continue — a robust policy framework set out over a timeframe consistent with investment decisions.

As negotiations over the EU-ETS and the international policy framework continue, policy-makers would do well to note that addressing global warming does not have to result in economic cooling; on the contrary, the successful economies of the future will be the first movers in addressing this challenge.

Steve Howard is CEO, and Sophy Bristow is project manager, The Climate Group — which works to catalyse leadership among governments and companies to address the challenge of climate change. www.theclimategroup.org