| by Lawrence E. Goldenhersh
Posted: February 1, 2010 Greenhouse gases power environmental engineers into the C-Suite.
With the EPA's recent announcement of its final greenhouse gas (GHG) reporting rule, an all-but-foregone presidential review of the EPA's December 2009 endangerment finding, and President Obama's pre-COP 15 declaration of his intention to institute GHG reduction goals, GHG reporting stands to become industry's next compliance mandate. While new compliance mandates historically have increased the need for consulting services, GHG regulation brings with it unprecedented opportunity for the environmental consulting industry.
The increased opportunity lies in the fact that GHG data will, in short order, become financial data, not just compliance data. This transformation will occur as soon as some branch of the U.S. government implements a cap-and-trade system to manage the reduction of GHGs. Many predict that cap-and-trade will be set in motion in 2010, either by Congress or the EPA.
Assessing risk and growth potential
A cap-and-trade system will impose limits on GHG emissions, and make the right-to-emit an increasingly scarce resource. As allowance prices rise with increased scarcity, so will a company's cost of emitting GHGs in excess of its allocation.
The potential financial risk companies face with respect to GHG is substantial. Deutche Bank, for example, has estimated that the price of CO2-equivalent (denoted as CO2e) will range between $15 and $60 per ton in California from 2012 to 2020. For companies that must purchase allowances to conduct business as usual, this new carbon-related cost could prove devastating if not properly analyzed, measured, accounted for and financed.
For publicly traded companies, the risk is not just financial; as the price for GHG emission allowances rise, the cost of such emissions are likely to become "material" to operations, requiring that they be disclosed in federal securities filings. These filings will subject CFOs and their companies to scrutiny from shareholders and regulators, including the new C-Suite of the carbon constrained world: the Securities and Exchange Commission (SEC); Federal Trade Commission (FTC) and the Commodities Future Trading Commission (CFTC), not to mention the U.S. Justice Department.[1]
As GHG emissions management and reduction become core strategic objectives for senior management, the C-Suite will demand a reliable system to manage this new financial data. With their domain expertise and experience in managing air emissions, their understanding of the calculations needed to derive CO2e from process emissions, and their knowledge of the legacy systems that store the relevant emissions information, environmental engineers should expect well-informed C-Suite executives to turn to them for guidance in the selection of this system.
Despite the inevitability of some form of carbon reporting, a June 2009 report from AMR Research titled The New Age of Carbon stated that only 54 percent of respondents were currently tracking GHG emissions data. Significantly fewer (34 percent) were publicly reporting the information.
The winds blowing from D.C. suggest that all of this is going to change, quickly. And with this change comes great opportunity for environmental engineers to take a seat (comfortable or otherwise) at the C-Suite table. When management requests guidance on implementation of a GHG management system, these professionals had better be ready.
System selection
Managing GHG with Microsoft's Excel or homegrown systems will be no more acceptable than using such products to manage inventory or accounts receivables.
According to a May 2009 report by Paul Baier of Groom Energy Research, spreadsheets were used to prepare most of the estimated 3,000 carbon footprints created as of that time. This reliance on spreadsheets suggests a belief that GHG can be managed like air compliance reporting in the mid-1990s, when violations and inaccuracies posed relatively little risk to a company's financials.
Just comparing GHG risk to that posed by air compliance, however, provides a revealing gauge for the shift in accountability required for GHG software. While Title V air compliance must be certified under oath, problematic filings under Title V have historically been greeted with state-imposed monetary fines that were extremely modest compared to a company's gross income.
By contrast, missteps in the accounting for and reporting of GHG data could result in substantial restatement of company financial statements, adverse profitability impact from unplanned, spot-market purchases of GHG emissions allowances, enforcement action by the SEC, and private class action lawsuits demanding millions in damages for investors "misled" by the misstatements about the cost and risk posed by GHGs. Given this increased risk, investors, regulators and juries will no more excuse the use of Excel or homegrown systems to manage GHG data than they would the use of such products to manage receivables, inventory and other financial metrics on which the market relies to value a company.
Accountability: In vetting GHG systems for accountability, it is important to note that carbon accounting is not simply a matter of ones and zeros. Safe management of GHGs requires a centralized software system that operationalizes the cost-effective air emissions management practices that have evolved in connection with efforts to comply with Title V air rules. These practices include sound data collection and validation protocols, facility-based task management (including deadline and escalation path management), trend management, reporting, and workflows to accomplish all of these objectives.
All of this is critical to GHG management because much of the GHG data that needs to be tracked will not come from a simple meter reading or monitor. Rather, it will be calculated based on an understanding of the particular industrial process, much the same way air emissions are calculated today for Title V compliance.
Track the right GHGs: GHG software should be grounded in the particular chemistry and requirements of those gases. Simple things like careful differentiation between SF6 and CO2, and safeguards against improper conversion of SF6 to CO2e are important, but can be missed by those unfamiliar with GHG management. A mistake in the conversion of SF6 to CO2e can cause a company's CFO to report GHG numbers that understate CO2e by a factor of 23,900. Beyond straightforward requirements, such as conversion factors and validation, safe GHG software also must be steeped in the protocols being used to standardize GHG data collection, calculation and reporting. Because these protocols are evolving, the software system must also have robust edit capabilities allowing adjustment (forward and backwards).
The right technology: Another important point to consider in software selection is the technology platform. Here there are two basic choices: legacy enterprise-wide architecture (labeled "enterprise architecture" in the 1990s, prior to commercial use of the Internet) and Internet-based architecture – also known today as "cloud computing."
Given the highly distributed nature of the GHG data, and the ease and speed of deployment of Internet connectivity, these Internet-based systems have gained great currency over the last 10 years. As a relatively new market, GHG tracking and control may end up the proving ground for cloud computing architecture. A customer with 10,000 suppliers would not be too keen on installing and maintaining 10,000 enterprise licenses just to track one more thing. And the need for management of GHG along the supply chain is no longer a theoretical matter. According to environmental consultant Farah Marasigan, as quoted in Manufacturing Business Technology earlier this year, about 70 percent of emissions in most manufacturing companies occur within the context of supply-chain activities.
Companies today that are focused on optimizing their supply chains are beginning to evaluate GHG reduction as an important supply-chain goal. Evidence of this trend has been witnessed already, e.g. in a supply chain survey coinciding with the Shades of Green initiative launched by Walt Disney Co.
Checklist for the path forward
Because GHGs, unchecked, have the potential to very negatively impact the profitability of operations, it is likely that the C-Suite initiative for GHG management will involve a cross section of each regulated entity, including IT, operations and EHS. Given the imminence of mandated GHG reporting, which began on Jan. 1, 2010 under the GHG reporting rule, management's initial focus is likely to be on the cost, complexity and schedule for installation of a system that can meet the regulatory reporting challenge. While timely compliance with the reporting rule is of course important, this planning process also should be used to preserve and enhance competitiveness by optimizing carbon management capabilities. Good questions to ask at the outset would include:
1. Has the appropriate environmental engineering expertise been assembled to allow the correct description of the end state requirements, including: (a) identification of the sources of GHG in the industrial process; (b) definition of the appropriate data collection, data validation, task management and reporting protocols; and (c) description of the air management work processes that can be easily adapted to meet the GHG requirements.
2. Regarding technology: (a) Does the existing Title V air management system contain work flows and reporting capability for automating Title V that can be extended to GHG? (b) To what extent has other technology been deployed (like stack monitors, process control devices, etc) that can be leveraged to aggregate the required data and, thereby, avoid substantial additional investment in either technology or personnel? 3. Get to know the CO2e market: (a) What financial exposure does the company face if carbon falls under $10/ton, or rises above $50/ton? (b) If Excel or homegrown systems for air management have been used historically, will this approach provide the CFO with a level of reliability mandated for financial planning, or should the company move to more specified emissions management? (c) What are competitors doing?
The GHG crisis has the potential to insinuate the environmental engineer more deeply into the executive suite than ever before. As the guardians of reliable emissions data, these engineers will now become critical to the integrity of the financial planning that companies will rely upon to preserve and enhance competitiveness and shareholder value.
Note:
1. C-Suite is a slang term for the more senior members of a corporation. Pollution Engineering [pollutionengineering@bnpmedia-email.com] |
