Beyond Copenhagen : Emissions Rate

By Jonathan Naimon, Light Green Advisors:

China president Hu’s recent commitment to reduce the emissions intensity of its growing economy by 40-45% by 2020 holds the key to a new global agreement that will have greater positive impact than efforts to revive the stalled Kyoto Protocol.

Simply put, reducing emissions rates and increasing energy efficiency is the only thing on which all the parties, regardless of their energy base, can agree in Copenhagen.

What’s wrong with a framework based on the inextricable link between energy and greenhouse gas emissions? Energy efficiency and emissions intensity reduction is a goal that is compatible with the growth aspirations of companies and governments worldwide who aspire to the quality of life enjoyed in high energy use countries such as the US, Japan or Europe.

The only way for greenhouse gas emissions to be reduced in any country is for the emissions intensity as measured in CO2/€, CO2/$ or GHG/RMB to be decreased. Therefore progressive reduction of emission intensity of the global economy is a necessary requirement for GHG emissions stabilization.

While critics of emission rate protocols and commitments by governments such as Canada have argued that such reductions not sufficient to guarantee that total emissions go down to a specific level, reductions in emissions rates are required for total emissions to go down on a sustainable basis worldwide.

However, the current Kyoto protocol model, featuring what externally looks like a “tough” absolute emission target – has not in fact resulted in significantly lower emissions in the EU, joint implementation (JI) or Clean Development Mechanism (CDM) economies once economic growth has been factored in. The bulk of the emission reductions that have been achieved have been due to economic recessions as in Russia.

A breakthrough from the right to development/limits to growth stalemate

Why is emissions rate reduction – or its inverse- increasing energy efficiency- a conceptual breakthrough? The short answer is that emission rates provide a practical indicator not only for sovereign states, but for companies whose supply chain and global impacts often span multiple countries.

Increasing energy efficiency and reducing GHG/revenue ratios is a measurable goal that can be incorporated into objectives of both large and small companies that are the global engine for economic activity and job creation. An absolute atmospheric target may be a consensus result, but even advocates would be hard pressed to claim it is related to measurable objectives at the corporate level.

Even in state-dominated economies such as China, specific technology and production choices with GHG intensity impacts are made by companies, and thus it is vital that any metrics for measuring success in climate change be relevant to companies, whatever their capital structure. Emission rates have several advantages over alternative measures.

Emissions rates are a key indicator used by some of the best corporate eco efficiency programs. Back in 1992, the Business Council for Sustainable Development (now WBCSD) coined the term Eco Efficiency to describe programs at companies that serve to decrease the emissions associated with economically productive activities. While companies develop their own eco efficiency programs, tracking energy and reducing the GHG emissions by increasing energy efficiency is a common denominator of many programs that span the vendor supply chain or an integrated service cycle as well as the production cycle in energy-intensive industries. Further information on corporate eco efficiency programs, including a toolkit for companies, is available through the WBCSD.

A second dividend for investors

Nation-states, corporations, and the environment are not the only beneficiaries of a move toward standards based upon a new protocol based upon the global reduction of GHG emission / unit of economic activity rates (what we call GHG/$ as a shorthand). While the investment universe has not developed the expertise of companies in energy efficiency, an increasing number of investors such as the California pension funds CalPERS and CalSTRS are now interested in energy efficiency as a new source of value for equity investors and as a key, along with renewable energy, to a greener economy.

Since 1998, our firm (LGA) has been analyzing corporate energy intensity and eco efficiency to gain insight into competitive advantage in many industries. We have confirmed that the success of corporate programs experience relative to industry peers is related to their financial performance over the past decade. With an increasing number of governments – from China to Canada – looking at emissions rate based analysis, we expect the financial advantage accruing to companies best able to drive down their emissions rates to increase. This corporate competitive advantage can provide both public and private sector investors with insight into how well companies in any market- developed or developing—is doing, as a new type of input, akin to ROE ratios, that change over time but that are common in different currencies and languages.

The future

Almost twenty years from the heady days of the Rio summit, it is certainly clear that energy efficiency is inextricably linked to environmental progress in addressing climate change. The tremendous surge in developing country (e.g. Brazil Russia India and China) stock markets makes it equally clear that any efforts to slow growth in developing markets are misguided.

Global adoption of GHG emissions rate based standards as a basis for gauging compliance with global climate change commitments will accelerate the implementation of energy efficiency and eco efficiency programs at companies, and the adoption of cleaner technologies.

The last 20 years have shown that increasing energy efficiency is compatible with sustained technology development in virtually every industry. It stands to reason that the financial value of these programs, on a global basis, will be magnified substantially by global adoption of energy efficiency and GHG emission rate reduction goals by nation-states signing a new successor to the Kyoto protocol.

Rather than bemoan the end of the Kyoto protocol, we should look forward to the new opportunities that will emerge from a new emissions rate protocol for controlling GHGs, and an even stronger, more global competition to reduce GHG emission rates and increase energy efficiency among countries and companies.

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