Global Warming: Why Businesses Are Acting Now

Aug. 1, 2001
A growing number of companies are convinced it is a mistake to ignore the threats -- and opportunities -- posed by global warming.

What do some of America's largest companies, most of the world's governments, nearly all scientific experts and environmentalists, and the National Conference of Catholic Bishops have in common? They all believe human activity is altering the earth's climate and that steps must be taken now to avert a future catastrophe.

Admittedly, these groups differ over how far and how fast to mitigate the problem of greenhouse gas (GHG) emissions. But the decision earlier this year by the Bush administration to reject the Kyoto Protocol, an international agreement that imposed mandatory GHG cuts on developed nations, and adopt instead a "business as usual" approach has led some observers to see the United States as the odd man out on this issue.

Many companies are not waiting for government regulation before they take action to address global climate change.

"In my 16 years of work in the environmental area, I've never seen so much voluntary corporate activity as there currently is on the issue of climate change," said Chris Loreti, a consultant at Arthur D. Little in Cambridge, Mass.

An example is BP, one of the world's largest producers of oil, a fossil fuel that is a key culprit in global warming. The company is in the forefront of corporate voluntary efforts to cut carbon dioxide (CO2) emissions and find alternative renewable energy sources.

"Global warming is clearly something our customers are concerned about," said Jeff Morgheim, BP's climate change manager. It is also a concern for the nations where BP does business, so the company is investing now to cut CO2 emissions and to offer energy solutions that are not only affordable and reliable, but also environmentally friendly.

Rising Temperatures and Alarm

The "greenhouse effect" is a natural phenomenon that is necessary for the earth to be hospitable. Certain gases act like the roof of a greenhouse, allowing the sun's light in while preventing the heat from escaping.

Since the dawn of the environmental movement in the 1970s, however, concern has increased that this greenhouse effect has grown out of balance. Over the past two centuries, humans have been steadily increasing the amount of GHG emissions, most notably carbon dioxide, primarily through the burning of fossil fuels (oil, coal and gasoline). There is overwhelming scientific evidence that global temperatures have been rising over the past 100 years, according to the Intergovernmental Panel on Climate Change (IPCC).

This international panel of climate scientists, organized by the United Nations, is the most prominent to have studied the problem. What has alarmed so many scientists of late is that, over the past 10 years, the rate of climate change has accelerated (see Figure 1). According to estimates of annual global temperatures made by climatologists, the top six warmest years on record occurred during the 1990s.

Natural forces, such as volcanic activity and changes in the sun, influence the earth's climate. The scientific consensus, however, is that since 1950, human activity has been the prime mover in global warming.

One powerful piece of evidence supporting this view is that atmospheric concentrations of carbon dioxide have increased sharply, from 325 parts per million in 1970 to 367 parts per million in 1998. This accounts for nearly half of the total increase in CO2 since industrialization.

If current trends continue, IPCC predicts average global temperatures will rise by 3 to 11 degrees Fahrenheit this century. Some sense of how fast the situation is deteriorating comes from comparing this with the 2- to 6-degree estimated increase the IPCC made just five years ago.

The potential consequences of global warming on this scale are so dire that they are difficult to comprehend. They include rising sea levels that could flood many low-lying areas and submerge some island nations, reduction in crop yields in tropical and sub-tropical areas, and an increasing number of dramatic floods and storms. IPCC warns of other nasty surprises, such as the paradoxical possibility that the slowing of the Gulf Stream will chill Western Europe.

It is getting increasingly difficult to find skeptics about the problem, but one of the few remaining is Paul Georgia, an environmental analyst at the Competitive Enterprise Institute, a Washington think tank that defends free market principles. He agreed there is a consensus that the earth is warming and that CO2 is rising.

"The scientific consensus breaks down over whether CO2 is the cause of global warming," Georgia said, "and whether catastrophic climate changes harmful to humans will necessarily result" from the warming trend. One big issue has to do with whether global warming will have self-correcting, negative feedback effects, or whether a small amount of global warming will be multiplied by positive feedback effects. These feedback assumptions have never been tested."

It looks like they soon will be. Thanks in part to the United State's rejection of Kyoto, few people believe global GHG emissions will come down in the foreseeable future.

Taking Action

The Pew Center on Global Climate Change, established three years ago in Arlington, Va., by the Pew Charitable Trusts, started with 13 companies. Its ranks have swollen to 33, and the Pew Center's president, Eileen Claussen, expects to have 40 by the end of the summer.

Joining Pew means a company agrees to serious global warming principles of policy and practice. Members must "accept the views of most scientists that enough is known about the science and environmental impacts of climate change for us to take actions to address its consequences." The Kyoto Protocol is accepted as "a first step in this process."

In practical terms, Pew Center companies agree to inventory their total GHG emissions, then set and meet targets for emission reductions.

Such demanding criteria no doubt have deterred many would-be members, but not such corporate heavyweights as DuPont, Boeing, Toyota, BP, Alcoa, Intel, IBM, Maytag, Sunoco, United Technologies and Baxter International.

Claussen, who before joining Pew was the assistant secretary of state for Oceans and International Environmental and Scientific Affairs, believes there are a mix of reasons why companies are getting serious about global warming:

Immediate cost savings. The easiest, most obvious way to cut GHG emissions is to become more energy efficient, and this can result in significant reductions in operating costs.

Seat at the table. Many businesses believe government regulation of GHG emissions is inevitable, and they figure that if they act now, they can influence the shape of future rules.

Experience. If controls on GHG emissions are inevitable, being prepared and gaining experience on how to do it will give companies a competitive advantage. This is an especially powerful motive for companies with European operations, where regulation is already a certainty.

Desire to be part of the solution. Although businesses are not altruistic, Claussen thinks most companies believe the science and want to be part of the solution, not part of the problem.

Vision. Companies want to position themselves for a future that will rely less and less on carbon fuels.

In addition to the five factors cited by Claussen, Arthur D. Little's Loreti added two more. Many companies want to be included among socially responsible investment portfolios. If they ignore GHG emissions, they fear they may lose this opportunity.

A second motivator Loreti identified appears to be having the widest impact on business.

"More and more companies want to know where they stand with greenhouse gas emissions," Loreti said. "Even if they aren't planning to do anything immediately, they want to know if it's a big deal for them or not." As a result, they are taking the first step in addressing climate change: doing an inventory of their GHG emissions.

Baseline Protection

Understanding your footprint may sound simple, but it raises a number of issues that require careful thought.

Knowledge about what and how much your company is emitting is obviously the first step in addressing the problem. Companies should take an inventory of current GHG emissions and establish a baseline with a rigor that will withstand outside scrutiny, according to Mike Radcliffe, senior manager in KPMG's integrity management services, an accounting firm that has an international GHG consulting practice headquartered in London.

For companies that are serious about reducing their GHG emissions, taking an inventory is important for another reason: "baseline protection."

Some companies that have taken the lead in cutting their GHG emissions worry that once government regulation begins, they will not receive credit for what they have done. If these companies are forced to reduce their emissions by the same percentage as competitors who have done nothing, the early actors could actually be at a competitive disadvantage, having already plucked all the low-hanging fruit.

This is a concern for Bill Blackburn, Baxter International's vice president and chief counsel for environment, health and safety. Baxter International is a global medical products and services company with headquarters in Deerfield, Ill., and operations in more than 110 countries. In one sense, Baxter has been going after its GHG emissions since the late-1970s energy crisis, according to Ron Meissen, senior director of engineering at the company's corporate environment, health and safety department.

In 1997, the company set a goal of improving its energy efficiency by 10 percent per product value by 2005.

Two years ago, having met its target six years ahead of schedule, Baxter upped the ante to 30 percent, according to Blackburn.

Like most companies that are active on global warming, Baxter believes government regulation is inevitable, especially in Europe. "As a policy, we favor some sort of government regulation, provided that it would allow us to capture what we have done and allow us to take credit for that," Blackburn said.

Emissions Trading

KPMG's Radcliffe specializes in GHG emission trading, something that has sprung up in the United States, even without government-imposed emissions caps.

"Companies are buying these emissions credits to hedge against future risks. I can't imagine the U.S. is not going to have some sort of climate change program," Radcliffe said. "This market is growing."

One of the most likely scenarios is that the government will require emission caps, just as it did to control acid rain. Buying GHG emission credits is a way to hedge against this future risk, because the credits will be more costly once the government acts.

Companies active in emissions trading are also building their experience, so when government regulation comes, they will be prepared.

The opportunity to sell GHG emission credits is another reason for companies to consider addressing global climate change. Almost all the big oil companies are already engaged in this kind of trading, according to Radcliffe.

BP is one of a handful of companies that has an internal emissions trading system. Because there are a number of gases that contribute in varying degrees to global warming, a commonly accepted way of accounting for GHG emissions is "CO2 equivalents."

Morgheim explains that the company set a goal of reducing CO2 equivalents by 10 percent by 2010, using 1990 as its baseline. As of last year, BP was halfway there.

To help BP meet its 2010 target, the company has set up interim targets and allocates them to its 150 business units. Each unit is free to choose whether it makes more sense for it to cut emissions in-house, buy credits elsewhere or make enough GHG reductions to sell them to other business units, Morgheim said. The market price of the system is determined within BP.

"Internal trading helps us achieve our goals in the most cost-effective way, while rewarding innovation," he said. There is some motivation for people to "think outside the box," because a business unit that comes up with a great idea can greatly improve its financial performance if the idea is sold throughout BP.

Competitive Pressures

For many companies, reducing GHG emissions just makes good business sense. "Cost control and GHG emissions go hand in glove," Blackburn said.

That's also the experience of Philadelphia-based Sunoco, an independent oil and petrochemical refiner that says it has cut CO2 by 13.2 percent since 1990, along with significant reductions in other greenhouse gases such as methane and nitrogen gases.

"Our performance in reducing greenhouse gases comes about because saving energy makes economic sense for us," said Carolyn Green, Sunoco's vice president for health, environment and safety.

Sometimes reducing GHG can lead to competitive disadvantages, however, requiring companies to act creatively. For example, chemical giant

DuPont of Wilmington, Del., was one of the first companies to tackle GHG emissions systematically. After completing its initial inventory, the company discovered that one of its largest

GHG problems was nitrous oxide, an otherwise harmless gas used by some dentists to help nervous patients relax. Nitrous oxide occurs in one step of the nylon production process, something DuPont produces in large quantities.

The only way to reduce these emissions was to retrofit, according to Tom Jacob, senior adviser on global affairs, an expensive undertaking that would have put DuPont at a competitive disadvantage had it acted alone.

"So we went out to our competitors and we formed a consortium to tackle this problem so we wouldn't be competitively handicapped," Jacob said. The effort was a success: Nitrous oxide has turned out to be the biggest single contributor to DuPont's GHG emissions reductions. Through efforts such as this, DuPont has cut its global GHG emissions in half during the past decade.

DuPont's experience with nitrous oxide helps illustrate the company's view of dealing with global warming. "We see it as a threat, if we don't change in significant ways," Jacob said, "but also as an opportunity for those that get ahead of the curve."

Where is EPA on Global Warming?

So far the Bush administration has been skeptical about the science underlying concerns about global climate change. To respond to the issue, however, the Environmental Protection Agency is promoting a number of voluntary programs, two Web sites -- and -- and, appropriately enough, a "hotline" (888) 782-7937).

"EPA has an array of voluntary partnerships to promote business and economic growth, while at the same time protecting the global climate," according to Maria Vargas of EPA's climate protection partnerships division.

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