Last week, the Financial Times reported that two large oil companies, BP and ConocoPhillips, along with Caterpillar, manufacturer of heavy industrial machinery, pulled out of the US Climate Action Partnership (USCAP). USCAP, which still has 23 members paying $100,000 a year for the privilege of membership, is the leading business organization promoting cap-and-trade legislation in the US, and many of its members have also been active on the international scene, advocating for a coordinated global approach to emissions reduction. BP’s action is particularly significant because it has long been an industry trendsetter – it was the first oil major to acknowledge climate change and to leave the Global Climate Coalition, and it was a founding member of USCAP in 2007.

Even as BP and Shell were retreating from renewables during 2009 and moving Back to Petroleum, the oil industry still appeared to be part of the grand Carbon Compromise, pursuing a strategy of “hydrocarbon neutrality.” The industry realized that it was not mortally threatened by a flexible carbon regime with low carbon prices; indeed, it could even prosper as demand for liquid fuels for transportation grows, especially in India, China, and Brazil. The industry is also repositioning itself with major investments in relatively low-carbon natural gas. A weak carbon regime would not threaten core business operations in the short-to-medium term, leaving adequate time and resources for longer-term strategic shifts as the climate issue plays out. The Carbon Compromise would also help industry avoid paying the political or public relations price of fighting emission controls, such as the embarrassment caused by CEI’s 2006 risible advertisement Carbon Dioxide: They Call it Pollution, We Call it Life.

Back in August 2009, the oil industry was fighting a rearguard effort against cap-and-trade legislation in the US. The industry front-group Energy Citizens contracted with a professional events management company to plan about 20 rallies, with a focus on energy producing southern states such as Texas and Louisiana. Member companies encouraged their employees to join in. Energy Citizens’ website proclaims that it is “a nationwide alliance of organizations and individuals formed to bring together people across America to remind Congress that energy is the backbone of our nation’s economy and our way of life.” In fact, Energy Citizens was set up and financed primarily by the American Petroleum Institute (API), the US oil industry association, with support from the National Association of Manufacturers and other groups. This project complements a massive increase in lobbying efforts by the fossil fuel industry in the last six months.     

At the time, the oil industry campaign seemed like an anachronistic, even quaint echo of the carbon wars of the 1990s. In hindsight, it appears to be a prescient strategy that would help prepare the ground for the coming climate backlash. This backlash has been spurred by a confluence of seemingly unrelated events. Climategate broke just before the Copenhagen negotiations became hopelessly mired. An unusually cold winter in Europe and the eastern US, together with record snow in Washington DC has fired up the rhetoric of climate deniers, and their voices have been amplified and channeled to mass audiences through the tabloid press and talk radio. It was not cold everywhere, of course – for the planet, the decade 2000-2009 was the hottest on record. But it was cold where it mattered, for the media and climate policy. Public opinion polls in the US and the UK show a dramatic jump in the last year in the percentage of people who don’t think that climate change is a priority issue.

The loss of Ted Kennedy’s Massachusetts senate seat to Scott “the truck guy” Brown deprived the Democrats of their supermajority and made them even more dependent on Republican votes. As the Obama administration has tried to redirect its attention toward unemployment and the economy, healthcare reform has stalled and climate has fallen even further down the priority list. Business senses the vulnerability of the Democrats and is shifting campaign money to Republicans, who could recapture the Senate in the mid-term elections. In Europe as well as the US, concern about budget deficits is constraining ambitious clean energy agendas.

The resurgence of climate denial and the woes of the Obama administration are not unrelated. Like the global climate, the political, social and economic system is a dynamic system with complex feedback loops. The confluence of a few minor developments can cascade into a major shift in direction. The climate deniers and right-wing “tea-party” activists in the US are successfully tapping into populist anger rooted in economic insecurity and a perception that policy elites are out of touch. A recent study from Northeastern University pointed out that unemployment amongst lower income households is now higher that at the depth of the Great Depression of the 1930s. The ideological machine of the tabloid press, talk radio, and Fox News has successfully woven climate change into a populist cultural politics that fuses anti-government, anti-tax sentiment with a reassertion of masculinity. The Superbowl ads for Dodge and Audi perfectly capture this spirit, explicitly connecting environmental concerns with submissiveness to nagging women and the overreaching intrusiveness of the “green police” nanny-state.

It is against this backdrop of shifting cultural politics that Scott Brown’s unlikely victory in Massachusetts and developments in the oil industry can be understood. Back in August 2009, I suggested that there were three possible ways to understand the oil industry’s pullback from renewables and increasing hostility to cap-and-trade:

1. A “Back to Petroleum” product strategy needs a new political strategy. Political and product strategies need to be coherent and integrated. Corporate strategy resembles a multi-dimensional chess game, in which players seek advantage by repositioning themselves in product and political space. When oil companies were investing more heavily in clean energy, they also needed to invest in political strategies that would support markets for these technologies and products. Now that these companies are refocusing on their core products and competencies, they are returning to the corresponding political strategies they used in the mid-1990s to preserve the value of their fossil fuel assets and capabilities. The reputational value of proactive corporate action on climate is declining along with public support for aggressive climate policies.

2. A sectoral struggle over implementation: From this perspective, the Carbon Compromise is still on, but the current battle is about the allocation of costs and benefits across sectors. In many ways, Waxman-Markey and the proposed energy legislation are generally pro-business: a flexible market-based approach with plenty of offsets to help keep carbon prices low, 85% of carbon allowances are given away rather than auctioned to industry in the early phase, and there are plenty of subsidies to sweeten the medicine. The US oil industry, however, sees itself carrying an unfair burden. According to ConocoPhillips, the oil industry would receive just 2% of free allowances, while the electric power sector would receive 35%. The New York Times cited Gerry Waldron, the former staff director of the House select climate panel, arguing that groups like USCAP representing industries with different interests have a hard time finding common ground on the details of legislation. “They’re very effective at the framework level, at the 50,000-foot level,” Waldron added. “But when you get down to the messy business of making laws and the sausage making, it’s going to be hard to keep those people together.”

3. The Carbon Compromise was only a second best option: The preferred course for energy intense industries during the 1990s was voluntary measures. Mounting regulatory and public pressure, the strengthening of climate science, and the need to operate in carbon-constrained markets in Europe have led US business to acquiesce unenthusiastically to mandatory emission controls. A growing number of firms are waking up to opportunities in clean energy, efficiency, and carbon trading, but these are still niche markets. The shifting political winds and public sentiments have opened a window of opportunity to weaken or delay regulations for several years.

BP’s public statement regarding its exit from USCAP supports the second interpretation, that the oil industry is seeking a better deal rather than to kill carbon regulation outright:  ”We will continue to work for passage of federal legislation that . . . is environmentally effective, reduces emissions across the US economy in a measured and affordable way and which treats all energy consumers and producers in a fair and equitable manner. We don’t believe legislation currently pending in the Congress achieves these objectives.”

But the reality is that all three factors are playing something of a role, and business can sense the shifting winds, even if it cannot yet know the endgame. Just as the US Chamber of Commerce and its climate stance survived the exit of several high profile companies last year, so USCAP could survive the exit of three companies. Indeed, several new companies, including Honeywell, have joined USCAP in recent months. Yet surely BP’s action signals deeper tectonic shifts taking place in the cultural, economic and political spheres, with deeply unsettling implications for climate action and for the planet.

On January 27, 2010 the SEC voted to issue interpretive guidance on disclosure requirements of climate risks in SEC filings. The SEC stressed that the interpretive releases do not create new legal requirements but are intended to provide clarity and enhance consistency on existing requirements. Nonetheless, the issuance of guidance indicates the growing focus of the SEC on climate change disclosure and the need for companies to expand and improve their environmental disclosure.

Till now the SEC had not called for any specific disclosures regarding climate change nor provided interpretative guidance regarding the application of existing disclosure requirements for “material risks” to climate change-related matters. The SEC sent a signal that it was preparing for future action when in a briefing released July of 2009 it included “Environmental, Climate Change and Sustainability Disclosure” on the list of possible refinements of the disclosure regime for the Investor Advisory Committee.

As the SEC explains in its release, existing regulations require a company to disclose information related to risk factors and call for management discussion and analysis. The new guidance on those rules emphasizes that when assessing potential risks, companies should consider the impact of existing climate change legislation and regulation, international accords or treaties on climate change, indirect consequences of regulation or business trends, for example new risks for the company created by legal, technical, political and scientific developments, and the physical impacts of climate change. This appears to be an impressively comprehensive assessment of investor risk associated with climate change.

Ceres proclaimed this action to be the “the first economy-wide climate risk disclosure requirement in the world”. The guidance follows a petition sent to the SEC in 2007 by a group of investors, state agencies and environmental advocates, led by Ceres, urging the SEC to issue guidance on climate-related impacts. Ceres has long pursued a strategy of exerting leverage on companies by institutionalizing information disclosure of value to investors. Ceres initiated the Global Reporting Initiative and, more recently, the Investor Network on Climate Risk. The Carbon Disclosure Project (CDP) mechanism has become the most prominent mechanism for corporate carbon disclosure, though the value of the information to investors is unclear.    

Moreover, CDP-style data has not been integrated into formal SEC reports. According to two major studies released last year by Ceres, Environmental Defense Fund (EDF) and the Center for Energy and Environmental Security (CEES) climate-related disclosure “continues to be weak or altogether nonexistent in SEC filings of global companies with the most at stake in preparing for a low-carbon global economy.” The SEC initiative responds to repeated investor requests for formal guidance on the climate-related disclosure companies should be providing in securities filings.

SEC Commissioner Elisse Walter commented that the decision “is designed to improve the quality of disclosures filed by U.S. public companies for the benefit of investors.”. She mentioned that she does not consider “that public companies today are doing the best job they possible can do with respect to their current mandated disclosures.” The SEC guidance thus represents an endorsement for more stringent and meaningful carbon disclosure, and moves it beyond a voluntary “social responsibility” type of activity into the regulatory realm.

Some critics have argued that the guidance will not lead to meaningful change in corporate reporting. Zac Bissonnette from DailyFinance writes that “the absolute best thing that will come of this policy is that some public companies will add a few lines of boilerplate that no one reads to the risk factors section of the 10-Ks they file with the SEC.” Others argue that some of the terms used are unclear. As an example, the guidance states that “when assessing potential disclosure obligations, a company should consider whether the impact of certain existing laws and regulations regarding climate change is material.” Jane Wells of CNBC questions “what constitutes material”. Julie Gorte, a senior VP for sustainable investing at mutual fund company Pax World Management LLC, suggested that corporate officers would still have considerable discretion in deciding what constitutes a “material risk” that must be shared with investors.

The guidance is likely, however, to prompt companies to increase climate disclosure or face the threat of legal action for failure to disclose required information in light of the 1933 Act. In his blog, John Shideler makes the case that “the SEC’s action should prompt more companies to collect, analyze and report on climate change information. Companies that do not do so face added risks of litigation or regulatory action if future developments show that management failed to disclose material financial impacts linked to climate change.”

Even though this SEC initiative provides “guidance” rather than create new legal requirements, its impact could be very far reaching. SEC enforcement and legal challenges will gradually clarify the detail and form in which companies have to assess and disclose climate-related risks in their filings and improve their climate related disclosure.

By David L. Levy

(This is an updated version of an earlier posting)

President Obama’s decision to speak at the COP-15 climate summit in Copenhagen in December 2009 cannot have been easy. Obama surely did not want to invest his shrinking political capital in backing the doomed international conference, but at the same time wanted to reassert US leadership after decades of denial and obstruction have cost it dearly in international credibility and influence. President Obama announced his decision to attend Copenhagen just as I was leaving the city after attending a conference on business education and climate change. Perhaps the President was inspired by our effort at Copenhagen Business School to infuse climate change into the business school curriculum, but I surmise that he had other strategic calculations.

Copenhagen was rebranded from a somewhat sleepy European capital to Hopenhagen,  the shiny new star on the global climate stage, showing off its clean tech sector with Vestas ads on every metro train. The conference I attended was, of course, also timed to cash in on the climate cachet of the city. I met a staff person from Copenhagen Capacity, whose organization is trying to attract clean tech investment to the region, and hoping for a boost from the media-grabbing climate conference. The city’s green credentials do not just rest on high tech renewables but on decidedly low-tech bicycles – Copenhagen is the biking capital of the Western world, with nearly 40% of commuters, many dressed in suits, pedaling to work through cold and rain. Whether they are motivated by environmental enthusiasm or the 200% tax on cars is hard to say.

Unfortunately, the Copenhagen brand is looking tarnished and, as the talks collapsed, many observers quickly renamed it Brokenhagen. The estimated 40,000 delegates, observers, and assorted groupies who descended on Copenhagen were unable to produce a binding treaty, despite the cost of more than $62 million borne by the Danish government, according to the Guardian in a special 10-page Copenhagen supplement. The Guardian noted that the delegates would emit more than 40,000 tons of CO2 during their travels and travails, which now looks like a rather bleak investment from a climate perspective. At least it must have been boom times for the retail carbon offset business.

Despite last minute by Obama and Chinese premier Wen Jiabao, the conference only generated a vague declaration of principles the Copenhagen Accord, which sets a goal of limiting global temperature rise to 2°C and recognizes that all nations need to work to that goal. A key part of the draft, a pledge to cut carbon emissions by 50% by 2050, was removed at the last minute, apparently under pressure from China. Yet even this watered down accord didn’t win broad endorsement (Click here for a Dr. Seuss-style satirical summary from the BBC).         

The Copenhagen debacle has been endlessly dissected and analyzed. Many blame the Chinese for thwarting an agreement, while some blame the US for lack of leadership and bullying developing countries. Both countries are wary of multilateral agreements that might infringe on sovereignty. The main stumbling block was the distribution of economic costs and benefits, with the axis of contention being the divide between rich and poor countries. Developing countries demanded emissions cuts in the industrialized world of around 40% below 1990 levels by 2020, while the “offers” were in the 15-25% range with various baselines (not to mention flexibility from offsets). Developing countries also argued that any new regime maintain the Kyoto principle that only industrialized Annex I countries have legally binding emissions targets, while the US and Europe demanded that a new agreement include binding and verifiable targets for the larger developing countries, especially China and India. China’s total GHG emissions edged past the US in 2008, to reach 6.1 GTonsC02e. Developing countries also demanded up to $200 billion a year in aid designated for mitigation and adaptation. Industrialized countries did finally promise short term funding of $30 billion over the next three years, mainly for adaptation in vulnerable developing countries, as well as longer term funding of around $100 billion a year from 2020.

Observers are not optimistic about the prospects for completing a binding treaty at COP-16 in Mexico at the end of this year. Most countries are filing their GHG targets by the Jan. 31 2010 deadline, though some are vague ranges. The problem is that country negotiators more closely resemble corporate managers concerned with “competitiveness” than adverse impacts from climate change. Moreover, the financial crisis has weakened national treasuries and resource constraints are stark. Fundamentally, collective action is very difficult when there are so many actors with divergent interests.

What might happen in the absence of a binding global deal? The failure to achieve a binding treaty could well send a negative signal that stalls momentum on climate action. The prospect of a strong global emissions agreement has provided the political and economic context for the beehive of climate activity in recent years, from carbon footprinting to voluntary offsets, from Walmart’s supply chain initiative to BP’s investments in renewables. According to the Financial Times, “The private sector investment needed to tackle climate change will not be made without a binding international deal on carbon emissions.” Lars Josefsson, chief executive of Vattenfall, a Swedish power company, and chairman of Combat Climate Change, a group of 60 large companies that includes BP, GE, and Unilever, stated that: “The necessary investments will only be made when you have a binding treaty and legislation. Of the money required to implement a deal, the vast majority – about 80% – will come from the private sector. That can only come when there is a stable legal framework….It is very important to get business more engaged, because they have the knowledge of the market economy and how investment decisions are made.” Wulf Bernotat, CEO of the power company Eon, has made it clear that accelerating emission reductions requires a strong global framework.

The more optimistic camp argues that the climate bandwagon will lumber on regardless. Just as a weak Kyoto, without the US or China, was not the primary motivator for a host of corporate, NGO and governmental initiatives, so a non-binding Copenhagen declaration of good intentions will have little relevance. Mat Hoffmann at the University of Toronto is researching how decentralized local initiatives can evolve into effective forms of governance even in the absence of global authority (see his blog). Climate change science remains a key driver; NASA just announced that 2000-2009 was the hottest decade on record. Action will continue to bubble up from a host of organizations, and business will pursue low-carbon investments because they recognize the longer term strategic dynamic and will be seeking profitable new markets and efficiencies. Concerns about the rise of China in clean energy technologies appear to be driving a new dynamic of competitive investments and incentives, as states strive for national competitiveness in the rapidly growing cleantech economy.

One positive sign is that the stalemate at Copenhagen did not appear to dent the value of cleantech shares. The chart below shows the value of PBD, a clean energy ETF from Powershares (in blue) over the last two years, through Jan. 12. 2010. It clearly tracks the NASDAQ closely (red line) but is also influenced by the price of oil (yellow line). The collapse of talks in Copenhagen at the end of December had no noticeable impact.

In the US, climate regulation is moving forward even without a national cap-and-trade system. The EPA has mandated that suppliers of fossil fuels, manufacturers of vehicles and facilities that emit 25,000 metric tons or more per year of CO2e are required to collect data and submit annual reports to EPA. The new rule, effective in 2010, will apply to nearly more than 12,000 facilities which account for about 85% of US emissions. The EPA also ruled in December 2009 that greenhouse gases pose a threat to human health, which enables the agency to use the Clean Air Act to regulate GHG emissions directly without legislation. This “endangerment finding” eases the path to stronger regulatory control of emissions from autos, power plants, buildings, appliances and factories. Finally,in late January, the Securities and Exchange Commission announced that publicly held companies should warn investors of any potential effects from climate change on their bottom lines.

Increasingly, business is realizing the dangers of the proliferation of multiple regulations, and standards emanating from various regions and states, and is lobbying for simple, transparent, predictable, and coordinated frameworks. General concern with the cost of carbon regulation has been replaced by fears of the compliance costs and uncertainties of trying to cope with a chaotic and fragmented climate regime. Energy intense business sectors are particularly concerned at the prospect of EPA regulation of GHGs – they would much prefer the flexibility and low carbon prices of a cap-and-trade regime. The Financial Times reported that large US-based companies are warning “that they will face a heavy regulatory burden should US Congress fail to pass climate change legislation,” as EPA and individual states develop a patchwork of regulations and measures. Peter Molinaro, head of government affairs at Dow Chemical, the largest US chemicals group, told the Financial Times that the proliferation of such initiatives would present “an enormous administrative burden” for companies that operate across different regimes. “Manufacturers are having enough trouble in this country competing with foreign companies,” Mr Molinaro said. “We’d be adding administrative and cost burden where we shouldn’t.”

The concerns regarding patchwork regulations are even more acute at the international level: Alison Taylor, vice-president of sustainability for the Americas at Siemens, the German engineering group, said businesses needed to know the price of carbon for planning reasons. “How do you have one price of carbon if you’ve got four or five different regimes?” she said. These concerns have played an important part in building corporate support for an international agreement and driving the recent defections from the US Chamber of Commerce. A string of high-profile companies including Coca Cola, GE, Microsoft, Cisco, DuPont, Johnson Controls and Nike tried to make the case at Copenhagen for a global agreement. But the business community is still far from reaching a consensus view, and the Chamber of Commerce and National Association of Manufacturers remain opposed to pending US climate legislation. Until mainstream business organizations become more coherent in their support, the prospects for meaningful national regulation in the US or for an international treaty remain dim.

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.

The Financial Times reported some intriguing new McKinsey data this week on carbon mitigation costs across sectors and countries. The data indicate that there are substantial differences in costs, and predictably, that building efficiency, lighting, and HVAC are the low-hanging fruit available at negative cost. The implication is that US companies should look to efficiency measures at home before buying international offsets, though international offsets might be preferable to renewables in the US.

The surprise in the data is that mitigation costs for most efficiency measures in the US appear to be substantially below those in Europe, China, and India. The cost per (metric) tonne of CO2 saved approaches €50 (Euro) in the US for these efficiency measures, while in Europe the saving is about €25 Euro. In India and China, there is a positive cost to these measures. The exception is lighting, for which the cost saving in Europe, China, and India is €60-90/tonne. Even more surprising is McKinsey’s estimate of mitigation costs from cleaner vehicles (hybrids and pure electrics), at negative €79 in the US and about €35 in Europe (i.e. net savings).

The Financial Times does not give the basis for these calculations, and the estimates are projected for 2030. It’s unclear if McKinsey is estimating real resource costs, or the costs as viewed by consumers or manufacturers, taking subsidies and taxes into account. Perhaps McKinsey is factoring in much higher fuel prices and lower battery costs by 2030, but these values are highly speculative. I looked at buying hybrid Prius last year, which cost about $6000 more than the Mazda 6 I finally settled on. I would have to drive about 15,000 miles a year for 10 years, with fuel at $3/gallon, to break even (and that ignores discount rates for future savings). My actual mileage is only around 7,000 miles a year, which is why I don’t feel too bad about not buying a hybrid. It’s also unclear why the savings in the US, with it’s cheap gasoline, are more than double those in high-cost Europe. Perhaps its because Europeans are already driving lightweight high-efficiency diesels.   Another mystery is why renewable power is so much cheaper in China and India compared to Europe and the US. Most of the cost in solar and wind is in manufacturing, which is already dispersed through a complex global supply chain. So those costs should be the same wherever the renewables are installed. Installation and maintenance will rely on local labor, which is much cheaper, of course, in developing countries (but might be expected to rise quite sharply over time).

The availability of free carbon lunches has been discussed before on Climate Inc. Mark Sarro and Jurgen Weiss urged caution regarding the hidden costs of energy efficiency, while I noted that the low-hanging fruit might be locked up or hidden away behind misaligned incentives, inertia, and market barriers. Indeed, he fact that negative cost (i.e. profitable) opportunities to reduce carbon are not being exploited points to the importance of these hurdles. Because these barriers are frequently organizational, behavioral, and institutional, putting a price on carbon is not the best way to move ahead: a price high enough to be effective would be politically infeasible.

To repeat what I said in the earlier post: Most companies have traditionally paid little attention to potential energy savings because nobody was paid to do so. Once companies assign managerial responsibility for the task, measure the savings, and evaluate performance accordingly, they start finding a lot of low-hanging fruit. Many of the barriers are more complex, and require restructuring markets and institutions – California is famous for paying utilities to save energy, not sell it. Utilities are also finding that they can nudge consumers in the right direction with non-price signals, such as comparisons with their neighbor’s bills. The booming field of behavioral economics points to all sorts of low-cost ways of shifting behavior.

Of course, these solutions are not cost free – they involve managerial time, some capital, and transaction costs. Some of the barriers are complex and would require large scale institutional restructuring, requiring government-business collaboration. But one person’s transaction costs are another’s business opportunity (the transaction costs of carbon markets will keep financial firms smiling). The key point here is that there are creative organizational and managerial approaches to unlock the doors to low-cost or even negative-cost carbon reductions. The carbon price is, by itself, an inefficient and ineffective tool.