Massive monolithic figures that cut across horizons, skyscrapers have been symbols of a city’s wealth, prosperity, and architectural ingenuity since their inception. Now, some skyscrapers are taking on another symbolic venture: a green one. New York City is home to one of the most sustainable skyscrapers in the world. The Bank of America Tower is 1,200 feet of green architecture at its finest. The second tallest building in New York City earned LEED “platinum” status in May 2010 as testament to its energy efficiency, and was the first skyscraper to receive platinum status. The $1 billion tower comes with a gray-water system that captures and re-uses rain and waste water that saves 10.3 million gallons of water annually, a crystalline design that allows for maximum use of daylight, and an onsite 4.6-megawatt generator that provides an efficient, clean power source for part of the building’s energy needs. However, energy efficiency isn’t limited to new, green skyscrapers. Some of the tallest skyscrapers in the United States are now aiming also to become some of the greenest.

In April 2009, New York City Mayor Mike Bloomberg announced plans to invest $20 million to make the 79-year-old Empire State Building, which was the first building in the world to top 100 stories, more energy efficient. With the installation of 6,500 energy-efficient windows, extra installation around radiators, and a more efficient lighting system, the improvements are expected to save the building’s owners $4.4 million annually in energy costs when renovations are complete in 2013. The renovations are also expected to reduce the building’s carbon emissions by 105,000 tons in the next 15 years. In April 2010, the John Hancock Tower in Boston was given gold certification by the U.S. Green Building Council for instituting measures to cut water use and carbon emissions.

Almost 800 miles to the west, the owners of the tallest skyscraper in the United States were also lining up to go green. Owners of the Willis Tower (formerly the Sears Tower), announced plans to invest $350 million dollars to renovate the 36-year-old tower.  The 5-year plan will require upgrades to the lighting system and the replacement of more than 16,000 single-pane windows. The building will add solar power and, possibly, wind power, which is expected to provide all energy needs for an adjacent hotel project. Architects had considered changing the building’s trademark black exterior, which attracts heat, with more energy-efficient silver, but such plans have since been discarded.  The aforementioned buildings are just the most well-known examples. The Skyscraper Museum cites 15 buildings that form a “new class” of sustainable skyscrapers in New York City. That class includes the New York Times Building, the Hearst Tower, and the Freedom Tower that will eventually be built on the World Trade Center site. Other cities are greening skyscrapers as well. The owners of the Christman building in Lansing, Michigan recently spent $8.5 million to green the 81-year-old historic building.

The rush to go green

With a credit crunch and one of the worst construction markets in decades, it seems like an odd time for an explosion of green renovation. One of the main reasons is that buildings need tenants in this uncertain market, and a green LEED certification makes the building more attractive. Real estate researcher CoStar Group, Inc. performed an analysis that found that green-certified buildings had fewer vacancies than other similar sized buildings and had $2.05 per square foot rental premium over their non-LEED counterparts. Additionally, the report said that LEED certification has shifted from new buildings to existing building. Existing buildings made up just 15 percent of LEED-EB certifications in 2008 but is up to 35 percent in the first quarter of 2010.  This is not surprising because evidence suggests that green buildings sell or lease better, retain tenants better, and often have more productive tenants than similar non-green buildings.[i]

Renovation projects aimed at greening skyscrapers almost universally include energy-efficient windows and efforts to install lighting that is energy efficient. For instance, some buildings set the lighting to dim automatically when not needed. Most skyscrapers have flat roofs, which provide the potential for solar power. On a city-scale, this could provide quite a boost to the electrical grid. The Willis Tower is expected to include this approach as it moves toward sustainability, but the Empire State Building, with its antenna roof, does not.

The possibility of more energy-efficient skyscrapers bodes well when considering the energy costs associated with buildings.  In New York City, greenhouse gas emissions from its 900,000 buildings, more than 5,000 of them classified as skyscrapers, constitute almost 80 percent of the city’s carbon footprint. In addition to lowering emissions, green buildings consume less energy, which would lower demand on the grid, greenhouse gas emissions, and local pollution.

It also makes good business sense. Renovation costs, which can total tens of millions of dollars, will be recouped via energy savings and possibly water savings depending on the upgrades. The Empire State Building owners expect energy savings of $4.4 million annually. The brown water system in the Bank of America Tower saves millions of gallons of water every year, which also results in cost savings.  The federal stimulus package alone had $4.5 billion in green building grants. This is in addition to an energy-efficient federal tax deduction that could total up to $1.80 per square foot in commercial buildings. States generally offer incentives as well. As Amory B. Lovins said in a New York Times editorial, “Efficiency can save 75 percent of America’s electricity at lower cost than making it at existing power plants. Helping customers reduce or defer usage when electricity is scarce can also increase distribution equipment’s life and reliability.” Customers who reduce power use at peak times can also negotiate lower rates with utilities.

While energy efficiency and tax deductions can usually pay back the costs of renovations there are still barriers to retrofitting skyscrapers, especially famous ones like the Empire State Building or Willis Tower. The most direct obstacle is the bureaucracy of city planning commissions and various zoning or preservation boards. The Empire State Building is a New York City landmark, which means the New York City Landmarks Preservation Commission will have to approve the plans for the retrofit to the exterior and ground floors of the building.

Bureaucracy isn’t the only barrier. Environmentalists and preservations may find themselves at odds if a historic building’s appearance is changed in the name of energy efficiency. As a blogger for the Chicago Tribune noted regarding the proposed changes to the Sears Tower’s trademark black facade, “Sears is not yet a historic landmark, of course, but the very idea that its iconic image could be radically altered in the name of environmentalism sent shockwaves coursing throughout Chicago’s architectural community.” While this doesn’t guarantee an adverse reaction to a greening of landmark buildings, it indicates that many people are reluctant to alter the icons that define their city.

Another potential barrier could be the amount of time it takes to see cost savings from renovations. A recent report by the Department of Energy shows that while carbon reduction is still high, cost-savings of green renovation can vary wildly by city. A computer model projected identical energy-efficiency improvements for imaginary four-story commercial buildings in Chicago, Baltimore, and Newport Beach, Calif. The computer found the improvements had the greatest effect in windy Chicago with a 23 percent energy reduction, which would pay for itself in nine years. Projections for Newport Beach and Baltimore showed lower reductions and estimated that it would take at least 11 years to pay off via energy savings. Environmentalists dispute the study as flawed and argue that there is more research that demonstrates energy savings. But the uncertainty regarding return on investment, partly due to unknown future energy prices, is often cited as a major barrier to investment.

A solution to this dilemma presents itself in the book Natural Capitalism. The authors contend that direct energy savings are only a portion of the equation. Claiming that energy-efficient buildings provide better lighting, improved air quality and a more comfortable environment, the authors argue that building owners also will see savings from increased productivity, reduced absenteeism, and increased occupancy.[ii]Such savings or gains are difficult to quantify, but could be used to sway hesitant business owners. Case studies that document the financial effects of such outcomes may be the most effective way to demonstrate such results in the absence of a savings model for the methods.

Expanding the green skyscraper movement

As President Bill Clinton noted at the announcement of the Empire State Building’s plans, “We have to prove it’s good economics, and we have to prove we know how to do it. Every person on Earth who cares about this knows about the Empire State Building.” The same could be said about Willis Tower. So despite some obstacles, the fact that the tallest and most famous skyscrapers in the United States are striving for energy efficiency may do wonders to encourage other investors to follow suit.

Market pressures in a depressed economy may encourage property owners to make the investment. The Associated Press reports that one of the Empire State Buildings’ incentives was to fill vacant office space. As the article says “Many high-profile tenants won’t even consider moving into a property without the U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED) certification…They may not even know what the certification means, but they demand it nonetheless.” If the public continues to become more energy conscientious, owners may take steps to cater to them.

In the United States as a whole, buildings account for 38 percent of greenhouse gas emissions and that number jumps to almost 80 percent in a city like New York. As the Bank of America Tower indicates, architects are interested in designing energy efficient buildings and companies are interested in those buildings. Nevertheless, it is still important to note that the greenest building is one that is already built. As New York City’s PlaNYC 2030 estimates, 85 percent of the buildings that will be in New York City in 2030 already exist now. Other major cities are likely to retain old buildings at a similar rate. As New York City Mayor Bloomberg said, “Existing buildings, no matter how tall they are, no matter how old they are, can take steps to significantly reduce their energy consumption.” If a city is going to significantly reduce its carbon footprint, its skyscrapers will have to do just that.

References

[i] Paul Hawken. Natural Capitalism : Creating the Next Industrial Revolution. Ed. Amory B. Lovins and L. Hunter Lovins. Boston: Boston : Little, Brown and Co, 2000.

[ii] Ibid.

This is a guest contribution by my colleague Dr. Werner Kunz, Assistant Professor of Marketing at the University of Massachusetts, Boston. Professor Kunz recently collaborated with consultants A.T. Kearney in a survey-based study demonstrating little consumer interest but the potential for energy efficiency in the industry.

Marketing experts know that the customer ultimately decides what will be produced in the marketplace. Thus, consideration of the customer’s point of view is critical for  success in business. If sustainability and climate change are increasingly important for the customer, companies need to react and adjust their strategies, even if there are costs involved.

But what happens if customers do not care about environmental impacts, at least in relation to a particular market? A recent study by A.T. Kearney in cooperation with the College of Management, UMass-Boston, shows that only 1.5 percent of the customers in the mobile telecommunications industry place significant value on the environmental efforts and social initiatives of their operators. Most customers do not see the mobile communication industry as a major environmental problem, or look to it for environmental leadership.

So does it make sense for the companies in this industry to pay more attention to energy and the environment? One major reason for the low consumer interest more environmental friendly is lack of knowledge. As the study shows, one-hour of mobile phone use, including related network-wide resources, consumes almost the same power like a washing machine at 100°F. From a marketing as well as energy use perspective, there are critical reasons for mobile telecommunication companies to become more green.

First, it would be very risky for the telecommunications firms to bet that consumers will remain ignorant and indifferent. As more companies move toward measuring carbon and labeling products, consumers are likely to take more interest in the environmental performance of a broader range of products and services. Second, a company that starts today to prepare for a low-emissions future can more efficiently plan investments and the deployment of new assets to achieve these goals. The emissions reductions can be substantial.

Such initiatives can be done thoughtfully and systematically, because in the future they will be a necessity anyway. The advantage is that strategic marketing management offers great branding opportunities as an environmentally friendly company, as well as significant cost savings and emission reductions. The study can be downloaded here (in pdf format).

The country faces a serious long-term strategic threat from climate change. The largest population centers are along the coastal plain, just a few meters above sea level, and regional projections point to a decline in winter precipitation of 10-20%, increasing the likelihood of severe droughts. Although more than half the population considers climate change to be a serious threat, there has been little governmental attention to emissions until recently, and even the McKinsey report neglects the potential physical impacts of climate change.

During my visit to Israel in December 2009, I gave a talk at the Hebrew University, Jerusalem, on climate governance (drawing from A Tale of Two Meltdowns), and my Israeli colleague from the university organized a meeting with the Minister of Environmental Protection, Gilad Erdan, and several of his staff, to talk about Israel’s plans for reducing GHG emissions and ways of engaging Israeli industry. Historically, environmental protection has been a relatively low priority in Israel, in light of more pressing security and economic development concerns. Israel has a standard of living approaching European levels, yet because it’s still classified as a developing country in the climate regime, it did not have binding obligations under the Kyoto process. Nevertheless, Erdan has been pushing for the country to adopt aggressive emissions targets, and is seeking ways to get the government as well as industry on board.

The key to advancing the climate agenda in this particular environment is to link it to other national priorities, in order to elevate its strategic significance and build the political coalition needed for action and investment. The Environment ministry recognizes this, and the McKinsey report notes four benefits that would accompany climate action:

An important motive for Israel’s ambitious GHG goals is to graduate from developing to developed country status, with a view to joining the OECD. This would offer broader economic benefits through trade and investment as well as improved international legitimacy. Israel’s active engagement in promoting clean development regionally and supplying critical technologies for global emissions reductions would also bolster its international status, enhance exports, and potentially provide a source of carbon credits.            

Energy security is clearly an important goal, as Israel is almost completely dependent on imported fossil fuels, including natural gas from Egypt. Yet current thinking is that energy security means independence through greater reliance on local renewables, primarily solar. My own view is that energy security can be linked to national security and pursued through regional energy collaboration, primarily with Egypt and Jordan. Though the McKinsey report lists solar power, both CST (concentrating solar thermal) and PV as the single largest contributor to Israel’s GHG reduction potential, the reality is that suitable land is quite limited, even in the southern Negev desert. Collaboration with Egypt and Jordan would open up the possibility of developing a regional grid drawing from large-scale CST in the Sinai desert, southern Jordan, even perhaps northern Saudi Arabia. Moreover, the intermittency of solar can be somewhat offset when complemented with wind power, which has very limited potential in Israel (McKinsey estimates at around 600MW), but is far more abundant in neighboring countries.

Of course, Israel does not want to be dependent on its Arab neighbors for energy. A regional grid would provide security through interdependence. Israel could be a key supplier of technology, as well as a conduit of power between Egypt and Jordan. Economic and technological collaboration on the scale required would also, one hopes, improve political relations. During the 1950s and 1960s, Israel made considerable diplomatic gains in Africa and parts of Asia from its contributions to international economic development. More ambitiously, if a Mideast regional grid were tied into the proposed Desertec supergrid, European participation would provide a strong political guarantee of supply security, as well as smoothing out supply intermittency issues (update: PWC released a report in April 2010 with a roadmap to 100% renewable power based on an integrated Europe-N. Africa supergrid).

Israel has a strong clean tech sector as part of the larger high-tech cluster and entrepreneurial culture in the country (see Start-up Nation: The Story of Israel’s Economic Miracle). The solar thermal and PV clusters are particularly well developed, and the country is home to major firms in water purification and desalination, geothermal energy, and other areas (see here and here, and Jonathan Shapira’s excellent blog on Israeli clean tech). The internal market, however, is far too small to benefit very much from Israel’s own emissions reductions efforts. The large economic payoff will come from exports, technology licensing, and international joint ventures in which Israel is the source for R&D, software, and high value components. BrightSource Industries Israel, for example, a descendent of the CST pioneer Luz, is now a subsidiary of California-based Brightsource Energy, and supplies R&D, engineering services, and key components for the company’s global markets. In fact, the Israeli tech sector is remarkable for its success despite the absence of advanced local markets – during my MBA at Tel Aviv University, I wrote some case studies on how Israeli companies operated within virtual clusters, with their major markets and sources of capital in Europe and the US.

Israel’s Greenhouse Gas Reduction Potential

Though Israel’s total emissions are tiny in global terms, at 71 MtCO2e in 2005, they are growing rapidly, and expected to double by 2030 in a “business as usual” scenario. Emissions per head are already 10.2 tons, about the European average, and expected to rise to more than 14 tons by 2030. The structural reasons for this relatively high and growing carbon footprint are the country’s dependence on coal for power, under investment in public transportation, weak building standards, and high rates of economic and population growth. The country is also committed to energy gobbling large-scale water desalination projects.

The McKinsey report estimates that implementation of abatement measures could reduce emissions by about 45 MtCO2e, corresponding to 2/3 of the expected GHG emissions growth and about 1/3 of total expected BAU emissions in 2030. Behavioral changes, such as reduced air conditioning and greater use of bikes and public transportation, could reduce emissions by a further 7 MtCO2e. With characteristic optimism, McKinsey suggests that the net cost would be zero, with negative cost activities such as efficient lighting and car engines offsetting more expensive measures such as solar power. McKinsey’s estimates for large quantities of solar PV at a cost of under €10/tCO2e seems unduly sanguine.

Ten measures account for about 2/3 of the reduction potential:

As always, the core question is how to implement these measures. Just because more than half the abatement potential can be achieved at negative cost does not mean that it will occur spontaneously, due to the multitude of market failures and institutional hurdles (see McKinsey’s Expanding Free Lunch Program). McKinsey recommends four rather uninspiring steps for the Israeli government to consider:

1. Establish ambitious national GHG abatement goals as government policy.
2. Formulate Israel’s Low Carbon Growth Plan (LCGP) defining the mechanisms and timing of implementation.
3. Translate the national abatement plan into detailed operational measures including ways to finance the upfront investment.
4. Establish a central body to monitor progress in implementation.

What is really needed, in Israel and elsewhere, is a much broader mobilization of the public, government agencies, and business to position climate change at the top of the agenda as the critical strategic threat of the century. At the same time, it offers unprecedented potential for innovation, economic transformation, and regional collaborations. Outside the clean tech sector, Israeli business does not yet take climate seriously – my own research shows that the best way to shift perspectives is to engage people with leaders in the field. In addition to the targets and implementation plans, the Israeli government could partner with charismatic climate champions such as Shai Agassi and local clean tech companies to promote the issue and organize a high profile conference of international businesspeople, policymakers, and experts to jumpstart the process and generate local commitment.

Carbon comes in many forms: depending on how the atoms are arranged, carbon can be a tough brilliant diamond, a rigid bucky-ball, a super-strong nanotube, soft graphite, or a lump of coal. These forms have very different properties and uses – diamonds are not the best fuel for generating electric power. Similarly, carbon measurement and disclosure comes in various shapes and sizes, from the Carbon Disclosure Project to product-level carbon footprints to Enterprise Carbon Management Systems. Yet the various modes of carbon measurement have very different goals and intended audiences, causing considerable confusion amongst firms and potential users of carbon information. This is going to impede the adoption of carbon information systems that are most crucial, those designed to manage and reduce emissions.

The Carbon Disclosure Project (CDP), a non-profit UK-based organization, launched its 2009 report in late September with great fanfare. The report is impressive in many ways. It’s based on a detailed questionnaire sent to companies that includes topics such as greenhouse gas (GHG) emissions, risks and opportunities to the reporting company, programs to address corporate emissions, and the assignment of managerial responsibility. With seven years of data, CDP claims to hold the largest database of primary corporate climate change information in the world.

CDP’s strategy has been to leverage the influence of institutional investors to pressure companies to voluntarily disclose their carbon-related activities, on the premise that this information is important in assessing asset values and predicting financial performance. The CDP has now signed up 475 investors with a total $55 trillion under management. CDP states that over 2,000 organizations in 66 countries around the world now measure and disclose their greenhouse gas emissions and climate change strategies through CDP. The headline 2009 report focuses on the “Global 500”, the 500 largest corporations in the FTSE Global Equity Index Series, which in June 2009 had a combined market capitalization of US$15.5 trillion. CDP achieved an 82% response rate for this group. These are impressive numbers indeed.

The CDP has certainly helped to spread familiarity and acceptance for carbon reporting and disclosure in the corporate world. Yet it is questionable how much CDP has actually contributed to emissions reductions. First, the investors who sign up do not undertake any commitment themselves (unlike the similar but smaller CERES INCR project). As Charles Morand writes in his Alt Energy Stocks blog post “Climate Change & Corporate Disclosure: Should Investors Care?”:

in 2008, worldwide investments in “sustainable energy” totaled $155 billion. That’s about 0.28% of the $55 trillion in assets under management represented by CDP signatories. A mere 1% commitment annually, or $550 billion for 2008, would substantially accelerate the de-carbonization of our energy supply.

Second, and more important, CDP does not generate data that is useful for reporting companies to measure and manage their GHG emissions at the facility, process, or product level. Neither is it adequate for compliance with EPA’s new rules for mandatory carbon reporting, or for carbon trading under ETS, RGGI, or a future national US system. These require carbon information systems, analogous to cost and management accounting systems, designed specifically for these purposes. But the goal of CDP is primarily to pressure corporations to wake up to climate change and pay attention to carbon. It’s simply not designed as a carbon management tool. True, CDP has been evolving under the guidance of the accounting firm PricewaterhouseCoopers, but the problems are structural. Charles Morand points out that “The problem with the CDP is that it’s really an activist organization parading as an investor group.

As with the Global Reporting Initiative (GRI), CDP is designed for a dual purpose: to assess and rank corporate social performance, and simultaneously to institutionalize the disclosure of social and environmental information useful for investors. I’ve recently been involved in academic studies of GRI and CDP (click links to download papers) and after interviewing many of the stakeholders involved, the message is clear. The information is simply not very useful, at least in its current form, for the reporting companies, for investors, and even for environmental NGOs. The reporting systems are put together by awkward coalitions of companies, NGOs, and professional accountants and consultants. As a result of the compromises made along the way, they tend to be too broad and vague. For example, the CDP section on risks and opportunities simply asks companies to write some text in response. There is no format for strategic appraisal in any systematic sense.

There is a rapidly growing market for corporate carbon management systems that attempt to cover multiple purposes. The London-based consulting company Verdantix recently released a proprietary report on carbon management software from vendors such as CarbonView, Carbon Hub, ESS, Greenstone Carbon Management, Hara, IHS, PE International, SAP and SAS. The report notes that “Many Board members would be horrified at the low quality and poor verification of carbon emissions data that is released into the public domain through channels like the Carbon Disclosure Project.” A recent spate of acquisitions demonstrates the spike of interest in this area: SAP bought Clear Standards in May 2009, while EnerNOC bought eQuilibrium Solutions in June. (Update 1.20.10: see NYT article on Groom Energy report).

These software packages aggregate emissions data from multiple sources across a company and integrate carbon price projections for planning purposes. But these systems are very immature compared with financial and management accounting systems, or Enterprise Resource Management systems for logistics and inventory control. While carbon management software systems might be useful for generating data needed for compliance purposes and for CDP-style public reports, they will not realize their potential for management control of carbon till they are better integrated with traditional corporate software systems. Verdantix provides examples of very high rates of return from implementing carbon management, but many companies will likely find the short-term gains to be as elusive as those from Total Quality Management; there are considerable hurdles to system-wide implementation, from confusion and data problems to inertia and even resistance.

One important driver for carbon management and reporting systems is the trend toward product labeling. While already well underway among major European retailers such as Tesco, Walmart jolted its 100,000 strong supplier base with an initiative announced in June to provide a label for every product on its shelves with environmental impact information (see the New York Times and the Wall Street Journal). Walmart will soon be sending an initial survey to all its suppliers with questions regarding their sustainability practices. This project requires that Walmart’s suppliers develop accurate estimates at the SKU level not just of the greenhouse gas emissions, but also of water consumption, air pollution, and other measures for all the inputs required to source, manufacture and ship their goods. As Stephen Stokes of AMR Research wrote in an earlier Climate Inc. post, Sticker Shock, this could prove hugely expensive, divert funds from investments in cutting carbon, and still not provide the information necessary for managing carbon effectively. Moreover, consumers seem either indifferent or confused by the various labels out there.

If CDP is geared toward aggregating carbon information at the corporate level, product labeling aims to allocate these emissions to individual products. Most carbon data has been generated with external audiences in mind, consumers, NGOs, and regulatory agencies. There has not been nearly enough attention to the needs of management for intermediate level information that is designed to help manage carbon and reduce costs at the facilities and process level. Whether enterprise carbon management systems can really serve these multiple needs remains to be seen.

The world faces twin energy-related threats: not having adequate and secure supplies of energy at affordable prices, and the environmental harm caused by consuming too much of it. Companies are central to paving the way towards a low-carbon society because a large portion of carbon inputs and GHG emissions stems from industrial production. As a consequence, stakeholders increasingly require companies to disclose their strategies for addressing climate change. In particular, actors in financial markets are investigating the implications of climate change on the competitive position of companies and on risks to shareholder value. However, business responses to climate and carbon issues have been characterized as ambiguous, and external assessments of corporate efforts have been contradictory, even when analyzing the same firms. Furthermore, for many companies, emissions from their own operations are dwarfed by emissions that occur upstream or downstream in the value chain, e.g. those connected to energy provision or product usage, which are often not covered in voluntary GHG emission reports.

The literature on Industrial Ecology has termed this perspective ‘life cycle thinking’ of material and energy flows. In order to increase the reliability of life cycle-wide carbon assessments and to determine performance differences between companies, indicators are required that concisely measure a company’s performance with respect to carbon. These indicators can be used for analysis and reporting purposes, which aim to increase the transparency of corporate carbon performance assessments.

However, the key question: How to construct comprehensive and systematic carbon performance indicators? In a paper published in the Journal of Industrial Ecology we suggest an answer to this question. We distinguish between two dimensions: on one axis, whether an indicator measures a firm’s physical carbon flow performance or the monetary value of these flows; on the other axis, whether an indicator assesses the carbon performance in a static of dynamic manner. This two-by-two matrix gives four distinct indicators.

The first indicator, carbon intensity, relates to a company’s physical carbon performance in a static manner. It describes the extent to which a company’s business activities are based on carbon usage for a defined scope and year. A firm’s carbon intensity is measured by the ratio between a company’s carbon usage in absolute terms (e.g., the total greenhouse gas emissions of the fiscal year 2005) and a related business metric (e.g., the sales of the same year).

The second indicator, carbon dependency, describes the change in a company’s physical carbon intensity over time – as such this indicator displays a dynamic component. For this purpose, certain steps need to be undertaken: first, a time period has to be determined. Second, the future carbon intensity has to be estimated, for example, based on specific scenarios and models (e.g., the total greenhouse gas emissions and the sales in 2015). Third, a specific carbon intensity (e.g., 2005) is put into relation to a future one (e.g., 2015). Based on this information, the carbon dependency describes the degree to which a company is able to reduce its carbon intensity over time (e.g., between 2005 and 2015). As result, a highly carbon dependent company has difficulty reducing its carbon intensity over a given time period.

The third indicator, carbon exposure, brings the monetary dimension into the picture. For this purpose, the prices for a firm’s carbon inputs (i.e., fossil fuels) as well carbon outputs (i.e., for greenhouse gas emissions, if emission trading schemes or taxation exist) are taken into account. Like the carbon intensity indicator, the carbon exposure assesses the static performance; it, therefore, determines the monetary implications of the business activities due to carbon usage for a defined scope and fiscal year (e.g., 2005). Through the use of prices (for the same year), the carbon inputs and outputs can be combined in one monetary figure. The result describes how much carbon matters for a firm from a cost point of view.

The fourth indicator, carbon risk, describes the change in a company’s monetary carbon performance within a given time period. Similar to the carbon dependency indicator, a firm’s carbon risk measures the relative performance change from the status quo to a future carbon exposure. In order to obtain this future carbon exposure, the results of the estimated carbon dependency can be utilized, complemented by forecasts regarding future price conditions for fossil fuels and carbon emissions (as, e.g., provided by EIA reports).  With these estimates, the risk feature of the indicator becomes vivid: especially when taking into account a future price for greenhouse gas emissions (e.g., $30 per ton of CO2) that are likely under a future international climate regime or national climate policies and the potential increase of fossil fuel prices (due to increasing resource scarcity), the real monetary risks lurking behind carbon become transparent. The indicator does not address potential risks (or opportunities) associated with new technologies or loss of market share for carbon intense products; it reflects increasing costs incurred by a company in paying for fuels and credits.

These indicators shed light on the physical and monetary dimensions of a company’s current and future activities with respect to carbon inputs and outputs. Based on this kind of information stakeholders are enabled to assess a company’s stake in climate change and its efforts towards better managing carbon usage: policy makers can use such information to formulate and evaluate policies, while financial markets obtain insights regarding the performance of companies with respect to carbon and corresponding financial effects. Furthermore, companies themselves can use the indicators for benchmarking purposes with competitions as well as with respect to own performance improvements over time.

The full paper is available here and the citation is: Hoffmann, V.H., Busch, T. (2008): Corporate Carbon Performance Indicators: Carbon Intensity, Dependency, Exposure, and Risk. Journal of Industrial Ecology 12 (4), 505-520.

Addressing climate change and other environmental issues requires real action at the facility and process level –  just creating product labels may not be effective

Walmart’s product environmental labeling aspirations went public in the New York Times and the Wall Street Journal last month and sent ripples of fear and excitement considerably more widely.  Excitement for software and service vendors who anticipate a lucrative business supporting Walmart’s  product labeling program.  Fear for its 100,000 suppliers who will be required to generate the detailed data needed for Walmart’s environmental labels. Walmart will soon be sending an initial survey to all its suppliers with questions regarding their sustainability practices.

Walmart plans to develop labels based on a standardized index  of the environmental impact of every product on its shelves. This ambitious project demands that Walmart’s suppliers develop accurate and defendable estimates at the SKU level of the  greenhouse gas emissions,  water consumption, air pollution, and other measures for all the inputs required to source, manufacture and ship their goods. Walmart’s Chief Merchandising Officer John Fleming made clear that it would require participation from suppliers across the board.

In designing environmental initiatives, there is a need to pragmatically consider what’s achievable, what’s desirable, and what is likely to actually make a difference to the environment.  Rushing to force a product labeling agenda too quickly will result in a lack of standards and expectations, and potentially lead to disappointing  outcomes and a great deal of consumer confusion.

Transformation from the Grinch to the Gentle Green Giant

Walmart’s sustainability program has been transformational for the organization and delivered huge cost savings and performance improvements. It has created a virtual love affair with previously adversarial environmental lobby groups and a new relationship with the customer.  Their programs have been holistically implemented across the global organization.  Best practices in logistics, refrigeration, lighting, energy efficiency and packaging have prompted many to consider the Arkansas Grocer’s transformation to be the model of successful corporate sustainable transformation. Walmart’s vast supplier network and huge scale, approaching 8% of US retail sales, means that it has the power to change industry norms and practices not just in retail but also upstream in the value chain, in consumer goods industries.

But even the largest retailer in the world can stick their neck out too far  in the confusing and complex world of product labeling. It’s great that Walmart is thinking ambitiously and comprehensively about environmental information, but I forecast that it will ultimately be unpopular and unsuccessful if pursued at a store-wide SKU level as currently planned.

Sacked (and Stacked) in the In(store) Zone

Here are some key issues that deserve evaluation prior to the implementation of product labeling.

Who has their eye on compliance costs?

Pepsico UK told us last year that the cost of carbon footprinting their highly publicized Walkers potato crisps (chips for Americans!) was well in excess of $40,000 and took more than four years to complete – for one SKU.  Moving forward they are anticipating costs on the order of $10,000 to $12,000 per SKU.  At 20,000 to 25,000 SKUs per typical supermarket that’s a $250M task just for carbon – and Wal-Mart Supercenters carry over 100,000 SKU’s.

What about the full product life cycle beyond the manufacturers control?

The full environmental impact of goods is frequently strongly influenced by consumer actions.  More than half of the embodied carbon within an Apple MacBook Air for example is associated with downstream energy usage and disposal.  The carbon footprint of Proctor and Gamble’s cold water tide can be reduced by a third if used at 30°C instead of 40°C, and reduced by a further third if used in France where low carbon nuclear electricity dominates grid supply.  Should the labeling be based on cradle-to-gate versus cradle-to-cradle lifecycles? How will they change as consumers adapt their behavior with new environmental awareness?

Who will be able to judge environmental claims and performance?

An environmental label is not directly comparable to a nutritional label.  A challenge to the accuracy of a nutritional claim can be readily verified via laboratory analysis of the contents concerned.  There is no scope for direct back-calculation and tracking of carbon or environmental information once labeled and on the shelf.  And the labels are trying to hit a moving target, because environmental impacts change as companies adjust their sourcing and processes. Manufacturing supply chains are dynamic and evolving systems whose impact or footprint cannot be quantified in a singular value.

Lets not forget the consumer.

Most of the more recent European research in this area indicates that significant (c. 44%) and increasing numbers of consumers would switch to greener products even if they carry a higher price tag.  At the same time, 78% of consumers indicated an awareness of carbon labeling but only 20% saw it as a positive development – it is hard to make the case that this issue is being driven by pull from end customers.  Most report confusion in their attempts to interpret carbon labels at the granulated product level; green branding seem to be more of a market force at the company level – like  the Body Shop, Wholefoods, Apple and Dell.

What should be the functional unit for analyzing corporate environmental performance?

With limited budgets should firms spend much or all of it cataloguing and labeling performance on a product by product basis or actually invest in doing something about it?  Manufacturers pursuing ongoing process and production improvement can rightly expect that the benefit over time will reach throughout the supply chain and through multiple SKUs.  So should we not be tracking, evaluating and benchmarking corporations at the corporate, or at least, facility level? We think so.

At AMR Research we have been analyzing the increasing environmental agenda in manufacturing for some time.   Picking a small subset of SKUs to deep dive into full life cycle impact assessment has merit and will deliver knowledge for process improvement. Labeling of all SKU’s is overkill, however.  The compliance costs associated with the exercise have been mentioned above.  Pepsico were able to reduce energy use (and potential emissions) by more than 11% based on the knowledge they gained in the footprinting exercise. The actions taken by Pepsico depended on this detailed and rigorous  knowledge, not a simplified aggregate environmental rating. Moreover, this knowledge can be rolled out where applicable throughout their snack food lines without subjecting each SKU to the same detailed and rigorous analysis.

Forcing portfolio-wide cataloguing at the SKU level may well siphon funding away from reinvestment in efficient technologies and processes. As energy price volatility continues to increase and continuous improvement forces year-on-year searches for waste and resource reduction, we can reasonably assume that all SKUs under some company or process or production line will over time benefit from the process improvement and investment. In any case, labels at the SKU level require estimating and allocating company and facility level environmental impacts, generating data that are not always useful for management trying to reduce these impacts.

Falling Off the Shoulders of Giants – the Future of Environmental Information Should be Where it can be Accurately and Effectively Traced at the Corporate Level

Environmentally responsible products are produced by environmentally responsible organizations.  Green brands reside at the corporate level, and only rarely with specific products.   Walmart’s decision to drive its supply chains to environmental labels at the SKU level is beyond the level of production utility, of achievable accuracy given limited resources, and of utility to consumers – green or otherwise.  What is key for the future is the collection of accurate and transparent environmental information that is not just meaningful for consumers but helps management to take the necessary action.

The smallprint of the Walmart program, which has been less widely circulated, plots a 5+ year course for a green index which migrates from a supplier-based evaluation to a product-based one.  There is much merit in pursuing environmental performance at the supplier level.  Walmart, like all successful corporations in the newly emerging economy, will wish to do business wherever possible with like-minded, sustainable and environmentally cognizant organizations.  They and their supply chain partners should converge on an appropriate and rationally-based level of environmental information – fixed at the corporate and plant level to ensure transparency and ongoing environmental and sustainable performance.  SKU-based commitments  promise to deliver high compliance costs, out of scope and inaccurate data, and market confusion.