While a low carbon economy may be decades away, measuring your emissions now can better prepare you for an emerging carbon currency, says Andy Leventhal. Here he outlines the issues affecting the business of carbon and the risks and opportunities associated.

The emerging US carbon regime will create a carbon currency that can be manifested in many ways. For one thing, carbon can become an economic indicator for efficiency along the company supply chain. And because no one was collecting carbon emissions data in 1990, the baseline of both the Kyoto Protocol and California’s AB 32, there are many opportunities to create and deploy carbon planning tools. Thus, construction of the baseline will be through financial statements such as 10K and 10Q. Tools that measure and quantify the carbon footprint of companies are very useful to track emissions along the supply chain and create company-wide operational efficiencies.

Impacts on the manufacturer along the supply chain are paramount. The carbon value in processing and transportation will become fairly transparent. Today, it may appear as a cost but it also represents opportunities to reduce a company’s carbon footprint and also reduce waste so that benefits drops to the bottom line. The movement at both the state level for carbon reductions and the reengagement at the US federal level during the next twelve to eighteen months are going to push carbon management into a business mandate from today’s mostly voluntary framework.

While the US has been slow to implement a federal greenhouse gas reduction program, this is about to change with the election of President Obama. He has steadfastly put climate change at the top of his environmental legislative agenda. But it also must be understood, that the US with a carbon footprint of 6 billion metric tons is substantially bigger than the EU and will be a game changer in carbon markets. Size matters, and what is going to emerge is a North American cap and trade system. The Canadians signed the Kyoto Protocol and have essentially done little to reduce their 1.3 billion ton carbon footprint. Canada and Mexico will most probably join a US effort to reduce their carbon footprint. Thus, the emerging of a North American carbon cap and trade market is a huge business opportunity. Elements of this emerging market are already evidenced with the broadening of Climate Registry which involves 41 states, 12 Canadian provinces and 6 Mexican states to report greenhouse gas emissions. The Western Climate Initiative is bringing another cross border commitment to reduce greenhouse gas emission 15% from 2005 levels by 2020 which is roughly comparable to the California reduction of 15% from 1990 levels by 2020.

The Issue of Carbon Taxes
While economists keep promoting carbon taxes as a simple way to apply the carbon cost to US businesses, the reality is that US politicians are not going to promote new taxes particularly during a financial recession. So, while this issue continues to percolate in policy circles and pundits corners, the reality is that the US will follow the route of carbon cap and trade which has become the global template. The US created cap and trade and will follow that road to market-based solutions. It can be argued that cap and trade is a de facto tax on industry and will show up on the pricing of various goods and services such as airline tickets, automobiles, fuel content of gasoline etc. But that is another matter. Carbon taxes are basically verboten in present day US politics.

Where This is All Going
The goal of the low carbon economy is decades away. The reality is that greening the supply chain is a necessary first step to reducing the corporate carbon footprint under a mandatory cap and trade program with enforcement and sanctions for noncompliance. This change to more proactive environmental initiatives will incent industry to move aggressively in energy efficiency and deployment of renewable energy technology to reduce carbon footprints. The need to measure a corporate footprint is fertile ground for business since outside of the energy industry, which has had to comply with emissions laws since 1993, few US corporations have historically measured their carbon footprint.

Delaying participation is understandable—the markets are predominantly overseas and are still evolving. But it’s risky for business to wait until greenhouse gas regulations emerge from the U.S. Congress.

The opportunity cost of ignoring an asset that’s sitting there waiting to be created is significant. And it’s likely that competitors are already learning how to generate carbon credits; once U.S. regulations are finally in place, those companies will be way ahead. Perhaps most importantly, businesses need to understand how carbon markets will affect the competitive landscape and many investment decisions. This is a rising arena for both education and consulting services.

Greening the Supply Chain
The end result of a cap and trade regime is a less carbon intensive economy and a more energy efficient economy. Energy is the glue that binds the US and global economy, and its infrastructure is highly inefficient due to the fact the energy was cheap and abundant until recently. Recent oil prices in the $40 range, offer industry some breathing room to retool and reinvest even in a recession. In fact, what appears to be happening currently in US industry is a radical restructuring of the US economy. Rationalization will shut many inefficient plants as a new green business model rises that is driven by efficiency, continuous technological improvements, and deployment of cleaner technologies across the supply chain. That means waste minimization and reductions are going to percolate not only in apparent ways but also in business processes.

International competitive pressures in this difficult economic environment are going to make the sustainability theme a business imperative in coming years. The question is: does a company wait to be hit with cap and trade expenses or get out in front of the curve today and reposition itself for the low carbon economy? This choice will debated in corporate boardrooms but when voluntary carbon reductions are supplanted by mandated carbon reductions the costs will be material to the bottom line. The present carbon values are roughly $3 to $9 per ton, but in a federalized cap and trade regime, the cost will most likely be in the $30 to $50 per ton range. That makes the financial pain an important decision factor for business. Pay something now or pay more later. The laggards are likely to become more uncompetitive in the future!

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Andy Leventhal is the co-founder and CEO of Planet Metrics, a leader in the emerging Carbon Information Management market. Working with leading companies having large and complex supply chains, Planet Metrics has developed a pioneering software solution to help corporate managers use data to understand the complex challenges of a carbon-constrained economy.