Why Russia is the Land of Opportunity for Climate Action

Managers who want to lead on climate and energy should be looking carefully at Russia, where President Dmitry Medvedev has decreed a 40 percent reduction in energy intensity over the next decade.

The potential for scale is immense: Russia is one of the most inefficient countries in the world, the third-highest emitter of greenhouse gases (GHG) — both by traditional measures and in terms of exports for consumption — and its per capita emissions are on a path for the top spot by 2030. Yet Russia receives far less attention than its GHG-emitting peers, such as China and tropical rainforest countries.

Why is it overlooked? There are several reasons: Russia’s list of sustainability challenges, from nuclear waste to governance, is long, so climate change gets lost in the shuffle. Commentators focus on Russia’s struggling economy, asking things like whether “BRIC” really needs an “R,” signaling that attention is better paid where business is growing more predictably. Furthermore, non-Russians are perplexed about operating in what seems like too foreign a place — one that is European, Asian, and most of all, its own category altogether — and so give it wide berth.

Nonetheless, there are growing reasons for companies invested in Russia to proactively manage and reduce energy use in operations, by suppliers, and for customers.

The first is that Russia’s climate challenge is one that business is uniquely, and profitably, good at solving: audacious inefficiency, stemming from outdated equipment and obsolete management practices. Russia is the most energy-intensive (PDF) of the world’s 10 largest countries. Few, regardless of size, score higher, and many that do are Russia’s neighbors. Cost-effective efficiency measures could cut Russia’s energy use by as much as 45 percent (PDF), with prime opportunities in industry and manufacturing. One study has identified 60 measures representing more than $200 million in investments that can be made profitably.

Second, the government is showing increased willingness to incentivize action. In 2008, Medvedev signed presidential decree No. 889, a commitment to cut energy intensity by 40 percent by 2020. Last year he committed Russia to growing its renewables portfolio from less than 1 percent to 4.5 percent in that period. Medvedev then developed Russia’s first executive climate doctrine and began calling for action on climate change — a reversal of Vladimir Putin’s stance, symbolized by Putin’s infamous quip that climate change would be beneficial because it would mean fewer fur coats.

Now an innovation center is under development near Skolkovo, where companies such as Google and Intel are setting up research and development centers, similar to special business zones in China. In sum, there has been a change in the terms of debate in Russia, with climate change being taken more seriously by the government and productivity now a priority.

Another reason is that the drama of climate change is clearly unfolding in Russia, and so people are starting to appreciate the benefits of managing energy for sustainability. This summer, the hottest in 130 years, led to 27,000 wildfires and burning bogs, sending global wheat prices through the roof. Meanwhile, global warming is melting the arctic, where the government is leading a high-profile exploration, turning the most iconic imagery of climate change into a point of local news. Climate change is increasingly seen as real and important, making conversations more natural.

A fourth reason is Russia’s natural assets. The world’s most geographically expansive country, Russia is a storehouse of some of the world’s most significant natural assets and threats, from the greatest reserves of fossil fuels and forests to vast volumes of methane ominously locked up in tundra. If environmental markets are able to take hold in Russia — though it will be some time before the prerequisite monitoring and verification frameworks are instituted — business will have an opportunity to benefit from effective resource management on a vast scale. Heading in that direction in July, the government endorsed 15 clean-energy projects to start making use of its carbon credits.

Finally, Russia holds the key to a bigger puzzle: its 15-plus neighbors with similar ecological impacts and business environments, including burgeoning Ukraine and Kazakhstan. Succeeding in Russia also means opening possibilities for the whole region, which connects the markets of China, Europe, and the Middle East.

While these trends are encouraging, companies interested in managing climate and energy matters in Russia still must confront significant issues. Following are three key challenges that companies are likely to face and suggestions for addressing each of them.

Challenge #1: Low Awareness

Despite Medvedev’s efforts and the impact of this summer’s wildfires, there is still little social momentum for action on climate change in Russia. Many people still think that global warming will help this cold country. There is also generally a low appreciation of the impacts, risks, and opportunities that climate change creates for business. The Carbon Disclosure Project (CDP), reflecting on 2009 reports from Russia’s top 50 companies, found that climate change is often misunderstood (PDF) in the country as a purely environmental, rather than strategic, topic.

Solution: In working with Russian partners new to the subject, emphasize the links between climate action, energy management and modernization, a political priority likely to draw more government resources. Medvedev has said that his country’s subpar economic influence is due partly to the fact that “energy efficiency and productivity of most of our businesses remain shamefully low.” He has made becoming “a leading country measured by the efficiency of production, transportation, and use of energy” the first of his five pillars of modernization.

With that in mind, connect with partners on the ways that energy hits the bottom line and discuss opportunities to modernize. This can lead to discussion of how action on climate change can create other benefits, from carbon credits to attracting more international investors.

Challenge #2: Governance Obstacles

A second challenge is that energy waste in Russia is rooted in systemic, sometimes dysfunctional governance, and companies will typically find government difficult to engage because if is needed on larger projects.

For example, IKEA was recently stymied by Lenenergo, the electricity utility, in simply hooking up to the grid, and has thus tabled new investments in Russia. This is a problem not only for companies, but the government itself, since it is unlikely to effectively address climate change without policies that instill confidence and encourage investments.

Governance obstacles also come in the form of entrenched non-transparency in companies. After China and Hong Kong, Russia has the largest share of Global 500 companies that don’t disclose to the CDP. Of the mere six firms among Russia’s top 50 that did respond to the CDP last year, only two reported emissions or energy reduction goals. Low transparency is a substantial constraint, since measurement and governance are considered cornerstones of effective climate and energy management.

Solution: Focus in the near term on capacity building rather than precise data disclosure. Given BSR’s experience in China, there should be substantial opportunities to help companies identify energy-saving opportunities and train energy managers, and to assist them with developing action plans and understanding their economic decisions.

Although these activities don’t address transparency directly, they can build trust with suppliers and create results that they will want to be transparent about. Even if you don’t start with a discussion about disclosure, companies that succeed on climate and energy management will have an incentive to communicate their results over time. For those that are ready, show how the process of disclosure can lead to learning about risks and opportunities and create a basis for management. For projects connected with government contracts, encourage standardized, effective processes on how the government will decide tenders by doing an integrity pact with bidding peers.

Challenge #3: Slow Going in the Policy Realm

Although Medvedev appears serious about leading his government toward modernization, he is the first to admit that progress will be gradual. Ultimately, the challenge of modernization is to cultivate, unleash, enable, and protect the innovative potential of the Russian people — and that will take time.

On climate in particular, there is no unifying policy, and the government does not appear motivated to curb emissions soon. The country’s climate negotiator, Alexander Bedritsky, says Russia should be judged on progress since 1990, like other countries. The problem with that, however, is that emissions plummeted with the economy in the 90s, and when it bottomed out in 1998, emissions were far below the 1990 level. Russia’s current proposal (PDF) to reduce emissions by around 20 percent from 1990 actually means letting them rise today until they are fully 20 percent higher than their low point. Therefore, even if energy intensity decreases under Medvedev’s plan, total energy use and GHG emissions are likely to rise.

Solution: Focus on voluntary business actions that generate tangible savings in the near term. Improvements in energy efficiency offer direct and virtually immediate cash savings, give companies a better view of their processes, and enjoy support by the government. In the context of other CSR issues, this is a relatively straightforward starting point. In doing so, watch other organizations that are invested in energy modernization, such as the World Bank, the European Bank for Reconstruction and Development, and the International Finance Corporation, which may be able to offer signals and even more direct support.

To summarize, Russia holds vast potential for business action on climate change and should start to become a higher priority in managers’ minds. Doing sustainability work there is difficult because of low awareness, governance obstacles, and slow going in the policy realm.

Yet these challenges are surmountable, and conditions are increasingly favorable for climate and energy management. Companies have opportunities to start on practical initiatives that can make big impacts now, growing their efforts as policy and consumer behavior evolve.

First posted at GreenBiz.

3 Surefire Steps to Bring Climate Transparency to Your Supply Chain

With the release of guidance on supply chain reporting by the Greenhouse Gas Protocol just around the corner, companies will soon have more clarity on how to manage “Scope 3” emissions. 

At the same time, companies such as HP and others in BSR’s Energy Efficiency Partnership are working with a growing number of suppliers on climate change. As a result of these developments, minimum expectations for climate reporting on the supply chain are rising.

Now is the time for your company to embrace transparency, if it hasn’t done so already. It will help investors and partners, who increasingly see transparency as an indicator of a company’s competence, perceive your business as trustworthy. It will make outstanding achievements more credible, and it may even soften potential criticism, which is valuable in an environment where just about everyone, from journalists to employees, is inclined to write, blog, and tweet about your business.

But such transparency doesn’t come easily.

For one, almost every interest group, from consumers to investors to governments, has different information requirements, making reporting on climate impacts less about creating a single, comprehensive document and more about sharing granular information. The differences are growing. Consumers, for example, are using the Good Guide to screen for criteria that are most important to them, in effect creating their own “personal” certification.

Another challenge is the increasing demand for more specific information about companies’ suppliers — and their suppliers — when there is a lack of standards on what should be reported, when, and how.

A third challenge is the sheer expense of transparency, which takes substantial time and effort to effectively monitor and communicate.

To overcome these hurdles to transparency, we recommend a practical, three-part approach that involves monitoring your impacts, translating that data into actionable information, and promoting governance standards that catalyze progress.

1. Monitor in Order to Measure

Satisfying demands for granular information about climate impacts requires good measurement. Fortunately, most greenhouse gas (GHG) impacts boil down to energy, which is easy to measure.

Unfortunately, many suppliers whose impacts you want to report don’t have the monitoring equipment that’s needed to do so. It is unusual for suppliers in many countries, especially China — which matters most for many companies — to manage their energy use at all, both because they perceive it as a way to keep overhead low and because they don’t see other suppliers doing it.

Therefore, working with suppliers to install portable energy meters can be one of the most cost-effective ways to get more data. 

The basic versions of these monitors are available for less than US$10; more sophisticated options offer remote sensing and allow the uploading of data for analysis with software elsewhere. Over the course of a few months, companies can use a handful of meters to triangulate the most energy-intensive processes and pieces of equipment, and in doing so, show suppliers how they can take control.

In 2008, Nike was one of the first companies to report using remote energy meters (PDF). Today, Walmart is working with EDF to install energy meters in China, and BSR has recommended using energy meters to the 80 China-based suppliers who attended the recent launch of our Energy Efficiency Partnership.

In addition to enhancing transparency efforts, monitors open up new doors to companies in search of finance options. One of the main things holding up loans for the many energy-saving projects in China is verifiability. Monitors can potentially provide this assurance and therefore help companies in their efforts to gain finance from capital markets or private investors.

2. Count What Matters Most

Gathering granular data of the type provided by energy meters is useful in responding to the varying demands of different stakeholders, but it also creates a challenge in itself, often overloading you with information. To zero in on the important issues about your company’s climate impacts, it’s necessary to prioritize.

There are two ways to do this: Invest in intelligence tools that will help you glean more from the data, and use the right proxies to indicate how successful your company will be in meeting its quantitative targets.

Let’s look at intelligence tools first: Companies should consider how they can go beyond spreadsheets — the traditional mechanism for tracking GHG information — to using tools such as climate software packages (PDF) to glean more from data.

These tools complement energy metering equipment by allowing you to compare energy use at different points in time and on different time scales, which can help you identify cost-reduction opportunities and situations requiring maintenance. They also contextualize the energy meter information by putting it in terms of production output volume or other indicators your company is already managing. This helps embed analytics into existing business processes and continuous improvement initiatives.

Using proxies can also help you focus on the most important information. When starting energy management, it can be challenging in the short run to find a pattern in the most obvious and easily measurable data — energy actually used. That’s because things like weather and business variability make it difficult to see improvements in energy efficiency through electricity bills. However, you can use proxies as good predictors of success. These include, for example, whether a supplier has developed an energy action plan, what kind of target (say, to achieve 30 percent energy reduction) it has committed to, and how many energy meters it has installed.

Similarly, shortcuts are available with verification. For BSR’s work with Walmart, we designed a tiered approach to gathering data about suppliers’ energy impacts that included requests for narrative descriptions of energy projects and the names of team members working on energy efficiency. Those types of questions are easier to verify than accounting numbers themselves, and company representatives can use the information gathered to look for physical evidence of these things when they conduct supplier site visits.

3. Promote Action with Better Governance

Even when you have done your diligence to gather granular data and translate it into actionable information, one of the biggest barriers to progress in transparency remains: a lack of governance standards used by your peers. These shared systems are needed both to give stakeholders confidence in claims, and to create more clarity on where companies should focus their action.

What follows are some areas that are likely to present development needs for some time to come: 

Technical standards on how measurements are made: Even with more requirements, such as the Environmental Protection Agency’s mandatory reporting rule (PDF) and the U.S. Securities and Exchange Commission’s (SEC) interpretive guidance (PDF), many conventions are undefined, such as how to characterize progress on energy management, how to cost-effectively verify such results, and how to convert many local energy sources to GHG impacts. (See sidebar below for a more descriptive list.)

How Corporate Energy Managers Can Champion Better Technical Standards
One of the key challenges to improving business transparency on climate change is the development of technical standards that are shared across industries. Company energy managers have the opportunity to encourage the development of these standards, which are lacking in the following areas: 

•  Conversion factors: In much of the world, there is a lack of common measures for deriving GHG from energy sources. For example, in China, the government has published energy-carbon conversion factors for its seven grids, but there’s not yet an accepted standard for more local applications. A leadership opportunity exists for business to create open platforms that house much more specific and trustworthy conversion factors.

•  Supplier energy performance factors: In all but the most energy-intensive industries, there are few performance standards for energy use with suppliers in countries such as China. Managers can look for ways to identify and disseminate information about thresholds (e.g. best, average, minimum acceptability) with energy consumption and the type of equipment being used.

•  Management progress: There is a lack of agreement about how companies can state they have reduced or improved energy use for a group of diverse suppliers. Issues that need resolution include defining the scope and drivers of energy to account for changes to energy owed to operational changes, to describe how energy use is expressed (absolute or in terms of revenues or material inputs), and to determine rules for sampling (what minimum time period is allowed).

•  Cost-effective verification: There are few generally accepted alternatives to traditional energy audit processes like the International Performance Measurement and Verification Protocol, which are very expensive. Companies have the opportunity to work with stakeholders to create a system with sufficient accountability, while still being practical enough to apply to large sets of suppliers.

Shared systems: The process of interacting with suppliers and other partners to obtain information takes a commitment of people and resources. Suppliers and partners, in turn, are under pressure to respond to greater numbers and types of requests, meaning they have less time for your company’s request.A pioneer industry group, the Electronic Industry Citizenship Coalition (EICC), was formed in part to develop a central repository for suppliers to report into and buyers to read from, significantly cutting down on administrative expenses. This and other kinds of “cloud computing” solutions offer important opportunities for sharing information.

Communication among diverse stakeholders: The development of new governance requires participation by a range of stakeholders, including technical experts, civil society representatives, and industry peers. In addition to observations being made and analysis done, subjective issues matter.

These issues include the types of people who want the climate information (e.g. whether they are customers or project financiers), what action the measurement is meant to encourage (e.g. energy management decisions or something else), and how much “uncertainty” is tolerated and how it is accounted for (e.g. what disclaimers are used for making estimations).

With this in mind, companies that want to improve the impact and recognition of climate transparency should join existing programs or groups such as the EICC. If such groups are not available, consider starting a new one with industry peers by sharing metrics, publishing useful internal studies, and sharing insights about the efficacy (or lack thereof) of a certain key performance indicator. Companies can also suggest that their existing working groups and associations facilitate standards.

In summary, more climate transparency will be good for business. It can improve credibility, win trust, and make discussions about climate change more meaningful. While the solutions provided here will take work, they are likely to lead to better incentives to find efficiencies and lower costs, and ultimate progress on climate change.

First posted at Greenbiz.

BSR Kicks Off New Energy Management Collaboration…and Just in Time

I’ve just returned from China where I attended the launch of BSR’s Energy Efficiency Partnership (EEP), a working group of 11 member companies working with 80 of their suppliers on energy management.

Participants discussed the many reasons why this is an important—and urgent—issue for their companies. Starbucks’ Director of Ethical Sourcing Kelly Goodejohn explained in an opening presentation that climate change poses a substantial threat to coffee, the company’s core business, and that energy management is the most direct thing they can do to stop greenhouse gases (GHG).

Felix Ockborn, a member of H&M’s Far East CSR Program Development team, relayed that working with suppliers to mitigate climate change impacts is vital to H&M’s CSR strategy because the issue is important to its customers. He also said that it is a fundamental part of working toward sustainable use of natural resources in H&M’s value chain.

The one issue, however, on everyone’s mind was the recent pressure from the Chinese government to curb energy waste, which resulted in the mandatory closure of more than 2,000 factories and the shutdown of power to companies in major manufacturing provinces like Jiangsu and Anhui. This obviously has a major impact on companies: An auto-components maker reported that it had to slow production, and a cement factory said it would have trouble meeting orders and likely lose work in progress.

The shutdowns are part of China’s efforts to meet its current five-year plan commitment to reduce energy intensity by 20 percent from 2005 levels. All signs indicate that such pressure will increase: The next five-year plan (due out soon) is likely to include even more stringent targets, and last year’s goal to reduce GHG emissions by 40 to 45 percent by 2020 will also warrant additional measures.

EEP member, HP, has been keeping a close eye on these kinds of developments. Ernest Wong, Manager of HP’s Social and Environmental Responsibility Supply Chain program, said it’s important for factory managers to have tools for energy management so that they can understand their exposure and communicate their situation. In turn, explained Wong, it’s important for companies like HP to have a good picture of how suppliers can have better energy-saving plans and use energy management to minimize their carbon footprints.

We have a lot of exciting work to do. From helping executives in the board room understand the impacts of and options for energy efficiency to enabling managers on the shop floor to take action, I look forward to working with EEP to explore how companies can get the most out of energy management and raise awareness about the importance of working with suppliers to conserve energy.

First posted at BSR.

Five Lessons from Walmart’s Supply Chain Work in China

Late in 2008, following Walmart Vice Chairman (now CEO) Mike Duke’s announcement that the company would improve the energy efficiency of its top 200 China-based suppliers by 20 percent by 2012, Walmart enlisted BSR to help launch its first supply chain energy-efficiency efforts in China.

From our post in Walmart’s Shenzhen global procurement headquarters, we started by studying how the successes of Walmart’s U.S.-led Supplier Energy-Efficiency Project could be adapted to China’s unique environment. We then led a launch meeting, trainings, and the development of measurement tools to connect suppliers with energy-service companies.

In its first year, the program recorded an increase in efficiency of more than 5 percent in more than 100 factories, and revealed that suppliers had the capacity to do much more. That success emboldened Walmart to announce it would eliminate 20 million tons of greenhouse gas (GHG) emissions from its supply chain — about 40 percent of the collective annual commitment of the nearly 200 companies (PDF) in the U.S. Environmental Protection Agency’s Climate Leaders program, as of late 2009. That’s progress as far as sustainability is concerned, but it’s also good business sense: Walmart, a relentless cost-saver, sees it as a way to make suppliers leaner, more resilient, and more competitive.It’s time for more companies to follow Walmart’s lead. By expanding energy-efficiency efforts into their supply chains, companies can quickly and substantially decrease supplier costs, substantially reduce greenhouse gasses, produce satisfyingly quantifiable results, and provide a gateway for further sustainability initiatives. There’s never been a better time to start: With the long-awaited GHG Protocol guidance on “Scope 3” GHG accounting scheduled for release in December, an era of more comprehensive supply chain reporting is imminent.

Companies whose supply chains lead to China should start there, because the opportunity is profound. On average, Chinese supplier factories are five times less efficient than factories in the United States, and the country is the No. 1 emitter of GHGs. By cutting energy waste in China, it’s possible to reduce the world’s energy demand by 5 percent.

Fortunately, energy-efficiency investments in China are cost-effective (PDF) compared with similar initiatives in industrialized countries. In spite of this, improved energy efficiency has not taken off in China because the country suffers from an inefficient market. Factory managers and other energy users often don’t have meaningful diagnostics about the price of energy, government subsidies make it cheap to waste energy, energy-management contracts are hard to implement, and people in positions to improve efficiency — building owners, investors, and tenants — often aren’t the ones paying the bills.

The problem is vivid when considering that neighboring Hong Kong, one of the world’s most energy-efficient regions, has a thriving industry of energy-service companies (known as “ESCOs”) that identify energy-saving opportunities and then install and locate funding for energy-saving equipment.

On the bright side, this shows that the challenge for companies is not one of engineering, equipment, or even finance. Instead, it’s about taking pieces of the puzzle that are already there and putting them together. For these reasons, China is one of the best places for companies to start scaling up knowledge about climate-related supply chain risks and opportunities, communicating results to investors, and improving climate performance by leveraging business networks.

The job of international companies in supply chain energy efficiency is to keep China’s specific challenges in mind and build bridges between ESCOs and suppliers. What follows is a series of steps based on our recent experiences working with Walmart that can help companies effectively engage suppliers in China on energy efficiency:

1. Establish Common Ground

Often in China, suppliers see productivity as a distraction from growth (PDF), and by extension they can be skeptical about consulting services and the value of pursuing savings versus top-line sales. Such suppliers may agree to participate in a company’s program but are unlikely to make significant progress over time until their culture rewards enhanced managerial productivity in general. Therefore, companies should begin their engagements on efficiency by surveying suppliers’ views about continuous improvement broadly and then educating them on that subject early and often.

2. Show the Road Map

When it comes to labor compliance, companies like Nike have famously warned (PDF) that demanding conformity on its own is not likely to yield sustained and honest results. On the other hand, sustainability initiatives are likely to take hold only if the specific action requirements include goals, timelines, and rules that are made clear at the outset.

Ensuring that suppliers head in the right direction means showing them clear pathways, with options, in a road map. This was confirmed for us at Walmart’s first launch meeting, where suppliers and ESCOs agreed that Walmart’s 20 percent goal, five-year timeline, and detailed participation guidelines enabled the suppliers to get traction.

Sharing the road map with suppliers is also a good way to make action seem urgent, which is a strong additional motivator. Finally, providing a road map is a good way to encourage suppliers — which may be reticent to make long-term commitments without good prospects for continued business — that the program is meant to drive long-term collaboration.

3. Require Accountability

Just like with sustainability efforts more broadly, suppliers are best positioned for progress when senior management sponsors the initiative, and then teams are instituted to execute objectives with clear roles, responsibilities, and substantial performance consequences. At our Walmart launch meetings, we included both operations managers and senior leaders, and we emphasized to executives the ease and benefits of participation. Another ingredient for accountability is open communication between suppliers and companies. On one level, companies should review suppliers’ progress frequently (ideally quarterly) to ensure continued momentum. On another level, companies should make a help line available to quickly answer suppliers’ questions. Companies should also pay close attention to demonstrated commitments to management systems like named teams and action plans, because these programs can predict whether the supplier will succeed.

4. Build Capability

Next, companies should integrate into their programs efforts to help suppliers understand where and how to focus tactics. This includes teaching factories how to identify low-hanging fruit, and understanding expected inefficiency hotspots and challenges to implementation.

According to surveys we have taken during BSR’s China Training Institute events, operations managers consistently identify training as the top need in successfully starting energy-efficiency programs. Many don’t have a strong energy or efficiency background, in part due to the prevailing focus on growth, so providing insight and resources through trainings, call-in lines, and diagnostic tools are often critical resources.

5. Solve the Problem Itself

A final step is for suppliers to identify and deploy efficiency solutions, such as retrofits with better lighting and cooling systems, by tapping into the ESCO industry. However, many ESCOs aren’t arranging deals in China because the lack of infrastructure makes energy savings difficult to verify, and contracts can be hard to enforce (PDF). Companies can help efficiency projects take hold by making the cost of doing business easier for ESCOs. For example, companies can host forums gathering both ESCOs and suppliers, and inform them of possible opportunities by sharing statistics and needs revealed in the suppliers’ reports.

First posted at GreenBiz.

Postcards from the climate negotiations in Copenhagen

I chose Thunderbird for my MBA largely because I knew that it was ahead of the game on two megatrends: globalization and sustainability. As a student, I found that the school delivered, preparing me for a career to take on these issues and the broad, difficult managerial decision making needed for research and innovation in sustainability consulting.

Since finishing in 2007 and then starting with BSR, I have learned a lot more about how those topics interact. Global management is essential for leading on sustainability because value chains go across cultures, and so engaging suppliers effectively calls for a softer hand than just demanding compliance. Also, starting with a global framework is essential for understanding the world’s myriad regulatory environments and consumer markets, in order to translate what’s coming to your company, and to know where to lead.

This week I am representing BSR at the “COP15” climate negotiations in Copenhagen, and here I find that these themes have never been truer. Ultimately, an effective global climate deal that’s good for business and the world will require a balance between asking the countries which have historically emitted the most greenhouse gases (industrialized countries, led by the U.S.) to change the most, versus those expected to emit a much larger amount in the future (developing countries, led by China). In reality, this is not an objective question, but a highly charged emotional one which raises deeper questions about equity and values, which are in turn based on enormously varied essential assumptions across cultures.

Such vexing cross-cultural problems are also found in the details. Currently, a chief barrier to a global climate deal looks to be China agreeing to its emissions being independently monitored and verified. The country is reticent to leave inspection to outsiders—it says out of principle—yet assurance of environmental effectiveness is needed globally. This need for robust auditing highlights a major challenge that is especially thorny when done across cultures like between the China and the U.S., where there are different tastes for ceremony, relationships, and formality when important issues are at stake.

If you want to do more on sustainability, you are in the right place at Thunderbird. Within its community, you have an opportunity to be at the forefront global management of the most difficult questions we face–and decisions companies address today about how to engage policymakers in order to best incentivize a more profitable and durable future for companies.

Originally published at Thunderbird School of Global Management.

A Green Supply Chain Starts in China

As companies work to reduce their carbon footprint, the easiest steps to take are often the closest to home.

Yet for companies with global operations or supply chains, the biggest practical wins are likely to be found in improving energy efficiency of owned and supplier facilities overseas, where they have the ability to multiply impacts across tens, hundreds, or even thousands of sites through relatively simple central coordination.

For companies looking to increase their supply chain’s energy efficiency, China is a good place to start, for a number of reasons:

• China is a top location for energy-intensive manufacturing and a key node of many supply networks.
• As the No. 1 emitter of greenhouse gases, China is likely to face more regulatory pressure to improve its performance.
• Due to its size, China is an ideal place to take energy-efficiency programs to scale.

BSR has spent the last several months helping Walmart establish its supplier energy efficiency program in China, where the company has set a target of improving the energy efficiency of 200 factories by 20 percent over the next three years. Working with Walmart, we have seen firsthand how initiatives from other countries can be adopted and adapted to the Chinese context.

This is BSR’s guide to starting energy efficiency programs at company operations and in company supply chains in China.

First, the Basics of Building a Successful Program Anywhere

Be Flexible. Effective energy-savings programs, particularly for owned operations, often focus on a specific goal but leave significant flexibility for how corporate targets will be met. Rather than taking a strictly top-down approach that regulates specific changes in technology and behavior, BSR recommends developing an initiative based on strong leadership and a clear mandate for change. This allows internal business units to find their own solutions and strategies for meeting targets.

The need for flexibility and autonomy is even more pronounced when companies deal with suppliers. Companies often have limited visibility into where the most significant energy savings might be in supplier operations. The best approach is therefore to provide specific tools or approaches that suppliers can use to discover and implement customized solutions for themselves.

Focus on the People and Systems, Not Advanced Technology. Companies usually gain more by investing in existing people and systems rather than expensive new technologies. For example, Swire Beverages, a major Hong Kong-based bottler, has created energy-management committees composed of production, engineering, environmental health and safety (EHS), and facilities managers who meet regularly to explore possible opportunities for reducing waste and increasing the productivity of manufacturing and logistics processes.

Get Buy-in From Senior Management. This is essential to establish a clear direction and goals for people within the company. Many of the most successful initiatives have been started by executives who challenged employees to reduce energy use or carbon emissions, and then charged each department with determining how to do it. In this way, management can solicit opinions from employees and reward those with innovative ideas. Inter-departmental competition can make the process fun and increase employee engagement. These management techniques can turn employees into an asset rather than a barrier to energy efficiency and waste reduction.

Management buy-in is also necessary when working with suppliers, even if they are small factories. In this situation, while you may target facilities or EHS personnel with trainings and tools, the general manager or other central decision-maker should be your direct liaison.

Don’t Wait to See the Data Before You Act. Good data can help you justify new programs and is important for evaluating progress toward goals, but program development can be unnecessarily slow if the initial focus is on assessment of current energy usage. During start-up, while you are building the system and processes for data reporting, most information should actually be flowing toward suppliers, in the form of trainings, tools, and ongoing support. With this approach, suppliers are more likely to align with the emphasis on action, which subsequently can be supported by trustworthy reporting.

Managing from Afar

The lack of hands-on operational control can present challenges — especially for companies with a large supplier base. To ensure that your program is creating the right incentives, invest time and resources in designing the appropriate system for reporting, monitoring, verification, and communicating the right message to suppliers.

Here are some tips for an effective supplier program:

• Clearly communicate goals, progress, and incentives. Demonstrate your own commitment with clear, quantitative expectations, and then work closely with suppliers to monitor and track progress, and share successes and challenges with other relevant stakeholders.

• Focus on multiple benefits. Energy-saving efforts can provide significant financial returns for suppliers.

• Emphasize that you are building long-term relationships with suppliers. Suppliers will recognize the need to be in line with the company’s goals and values to maintain the relationship, and with an emphasis on long-term partnership, suppliers can make investments that require a longer payback period.

• Explore cost-sharing options. In one supplier program, a global furniture firm paid the program and consulting fees, while the factory paid for energy meters.

• Promote open communication. Frequent and transparent communication on progress is an important way to provide both support and resources, and to collect credible data to verify claims about energy savings and emissions reductions.

Second, What’s Special About the Chinese Context?

Many of the lessons from BSR’s energy-efficiency work in China are equally valid for other locations, but working with suppliers in China has specific challenges related to the regulatory context, economic incentives, and the availability of technical and financial resources.

When working in China, business leaders should:

• See the government as not just a regulator but also a resource. The Chinese government has become increasingly proactive in encouraging improvements in energy intensity (amount of energy used per unit of GDP), and the government’s new regulatory targets have been accompanied by resources and training support for manufacturers. Government can also provide advice on project implementation as well as clear direction on how energy-intensity targets are being applied and measured.

• Watch utility and fuel prices. Currently, water and electricity are heavily subsidized, which limits the return on energy-savings investments. The economic argument for energy efficiency will be stronger when utility prices rise in accordance with government plans. Some cities and provinces are already beginning to test price increases. Be prepared to take advantage of improvements in the economic argument for energy savings, but meanwhile look for other ways to strengthen the business case.

• Seek financial help. Many sources provide financial help for energy-efficiency investments, including local governments, energy service companies (ESCOs), the Hong Kong Productivity Council, the International Finance Corporation’s  China Utility-Based Energy Efficiency Program, the P2E2 program (a partnership between the U.S. Environmental Protection Agency and China’s State Environmental Protection Administration), and international and local banks.

• Use ESCOs to fill knowledge gaps. The ESCO market in China is young but growing rapidly, with both domestic and foreign service providers offering a range of consulting and project-management services. Some cheap, do-it-yourself methods such as installing energy meters can create useful data to help suppliers understand where the energy savings opportunities lie, so they can make an informed decision about when to call for external consulting expertise. BSR has also been working with ESCOs to provide low-cost technical training sessions for factory managers, as consultants are often willing to share basic information and tips on energy management at supplier forums and workshops.

Work on energy efficiency in China has been gradually building for a few years, and it is now expanding rapidly as an increasing number of global companies endeavor to improve supplier performance along with their own environmental impacts. This presents a real opportunity for global companies with operations and supply chains in China to make a bigger impact in emissions reduction.

First posted at GreenBiz.

Dispatch from Hong Kong: Will We Ever See Big-Picture Climate Accounting?

This week in Hong Kong, ASrIA held a press conference that covered two arenas of business climate action that, disappointingly, have yet to mix.

The first was Carbon Disclosure Project’s 2009 Asia report, which announced that the number of companies reporting on emissions has doubled from the previous year, up to 127. This study, much like Newsweek’s inaugural Green Rankings, emphasizes the micro-accounting of entities, and exudes optimism.

The second was the announcement of the Copenhagen Communiqué, a movement to re-gear the economic systems within which companies work. This signatory policy call—much like the Business for Innovative Climate and Energy Policy, the U.S. Climate Action Partnership, and the World Wildlife Fund’s Open Letter to the U.S. Senate, and Ethos’ similar letter to Brazil—emphasizes that in the big picture, greenhouse gas and clean energy trends are unlikely to change without legislation making the former more expensive and the latter less so. In this macro context, managing emissions has little overall effect if the regulatory systems are defunct.

Will these two arenas ever mix, with climate accounting incorporating performance against the big picture?

Originally posted at BSR.

A Business Guide to Managing U.S.-China Climate Relations

Earlier this year, we noted several factors that are key to staying on the critical path to an effective climate treaty: The U.S. must enact serious climate legislation, both China and the U.S. would have to ratchet up their respective commitments, and the U.S. Senate needs to ratify the international treaty produced by negotiations in Copenhagen this December.

There is movement forward. On June 26, the U.S. House of Representatives approved the American Clean Energy and Security Act, the nation’s first-ever cap-and-trade bill that is also known as Waxman-Markey. China and the U.S. have held numerous climate policy talks, and the U.S. has exerted more leadership in U.N. negotiations than it has in more than a decade. At the recent G8 summit, U.S. President Barack Obama and Chinese President Hu Jintao joined other heads of major economies in agreeing that they should not allow the world to warm more than 2 degrees Celsius.

Yet China still has not committed to specific emissions cuts and targets, a step not only essential to the fight against global warming, but one that will also influence whether the U.S. Senate passes Waxman-Markey. Whatever happens in the Senate, it is clear that climate will remain a dominant trade theme between China and the U.S., the world’s No. 1 and No. 2 greenhouse gas emitters. For business, this means that a new policy landscape on emissions will take shape, with potential impacts on regulatory regimes in both countries as well as transnational issues, such as supply chain emissions.

The following guide offers insight into what you can do to ensure that your company is positioned for success in this rapidly changing climate.

Anticipate: Understand the Emerging Landscape

Upcoming legislation has the potential to reshape the way U.S. businesses use energy resources, both at home and abroad. Two key issues will determine whether China and the U.S. move toward meaningful cooperation on climate issues in the near future. The first is whether China accepts emissions-reductions targets; the second is whether the U.S. Senate passes a Waxman-Markey bill that China does not perceive as overly restricting Chinese imports.

China’s current climate programs are limited to the promotion of energy efficiency, and the country’s leadership shows little sign of moving toward carbon-dioxide emissions caps, despite pressure from the U.S. On the U.S. side, domestic manufacturing lobbyists are creating pressure for an eventual cap-and-trade law to contain measures to protect the U.S. from inaction by China. Watch these relationships as the bill goes through markup by July 31 and through committee by September 18, in preparation for a fall vote.

If Waxman-Markey passes, the Senate likely will vote in December on a global climate treaty brought back from Copenhagen by chief U.S. climate negotiator Todd Stern. To secure ratification, perceived leadership by China will be even more important. According to Sen. John Kerry, D-Mass., the 60 votes required for cap-and-trade are within reach, but the 67 votes needed to ratify a treaty will be nearly impossible without more significant commitments than China has signaled so far.

China — which has consistently positioned itself as a developing economy that cannot afford to cut emissions — even as it pushes other countries to make sharp cuts — knows that as the largest global emitter, no climate treaty will work without it. And while negotiators undoubtedly will continue to take a tough line in the build-up to Copenhagen, there already have been signals that a deal can be reached. After his June trip to Beijing, Stern said he expects China to commit to stabilization of long-term emissions around 450 parts per million, as well as a target year for peak emissions.

To stay apprised of possible new commitments by China, follow China’s evolving 2011 to 2015 five-year plan, watch ongoing meetings this summer between Stern and China’s climate change envoy, Xie Zhenhua, and pay attention to whether coalitions of industrialized and developing nations are able to agree on reduction targets as the G-20 meeting in the U.S. approaches.

A thornier issue is how the two countries will manage emissions in value chains that cross their borders. In March, China’s head climate negotiator, Li Gao, famously asserted that the U.S. should take responsibility for emissions that happen in China due to the significant volume of goods produced in China for the U.S. market. Then in June, when the U.S. House of Representatives added mandatory carbon import tariffs for countries like China to Waxman-Markey, China’s Vice Foreign Minister He Yafei firmly stated that his country opposed that possibility. President Obama has said he prefers to avoid such measures, but others have pointed out that tariffs could strengthen the U.S. negotiating position as the Senate tries to develop a politically feasible bill.

Assess: Know Where Your Company Stands

Regardless what happens in the near-term with U.S. legislation, bilateral relations with China, and the Copenhagen negotiations, companies should assess how their markets, operations and supply chains will be impacted by potential new policies and regulations, which may include price and market mechanisms, financial incentives, and technical requirements.

All signs indicate that over the long-term, climate change and related policy responses will push prices up for carbon-derived energy. The key question for global companies is whether climate policy will evolve in a smooth and comprehensive way, or whether pockets of local opposition will spark balkanized schemes. The former scenario is most conducive to efficiency and low-transaction costs, the latter more likely to lead to gaming and continued erosion of public trust. So, when considering your company’s exposure, think not only about the direct cost of carbon, but also overall market stability and the risks of an uncertain policy regime.

A related issue is the establishment of border measures, which are aimed at addressing cross-border emissions or “leakage,” while applying even trade pressures to both sides. If border measures are passed through Waxman-Markey or other legislation, don’t count on a trade war, but do expect the World Trade Organization (WTO) to permit them. The WTO is likely to treat cap-and-trade the same way it treats value-added taxes, with border taxes allowed if they reduce distortions. When assessing your exposure, make sure you are aware of where your supply chains cross borders, especially those associated with energy-intensive production.

Act: Take Informed, Decisive Action

It is in the interest of business to promote strong climate policy, both to insure against potentially disastrous long-term consequences and to support innovation and entrepreneurship. An informed analysis should include a full picture of potential policy impacts, including the costs of inaction. Economists agree that, in net present value terms, the costs of ignoring climate change are much worse than those expected to arise from mitigation efforts, such as short-term spikes in energy prices (which will be temporary as companies invest in low-carbon alternatives). Also, be wary of analyses that use overly simplistic calculations of policy costs to assess climate policy. If and when you do decide to influence Waxman-Markey’s undecided senators (PDF), you may be most influential if joining forces with existing groups, such as U.S. Climate Action Partnership or Business for Innovative Climate and Energy Policy — or by working with BSR and other players in the field to create other kinds of momentum.

Waxman-Markey in the U.S. Senate: Will It Pass?
Passing the Waxman-Markey bill through the U.S. Senate requires 60 votes, and as of early July, there were 45 supporters and 23 undecided voters, mostly industrial state Democrats and Republicans. Winning over the 15 voters needed to reach 60 will be no small task, and there are a number of perspectives on what it will take.According to U.S. climate expert Joseph Romm, the key is portraying the bill as the single most important vote that senators, who see themselves as historic figures, will ever cast. New York Times columnist Thomas Friedman says the solution is threefold: Obama must hit the speech trail, young people must organize public events, and ultimately Republicans must understand that conservation and conservatism are related.

In more practical terms, it will also help if flexibility is built into the bill, as was done to aid its passage in the U.S. House of Representatives. In addition, issues that go beyond cap-and-trade, such as nuclear energy and the potential impacts on agriculture, may need to be addressed.

In the end, the Senate is likely to be a more challenging environment for this bill than the House because rural voices, which so far have been un-supportive of cap-and-trade, are amplified. Also, given the highly partisan nature of the dialogue and rhetoric so far, Republicans may be wary of lending their support.

On the other hand, says Sen. Jeff Bingaman (D-N.M.), most senators are at least persuaded that the science is clear and requires a policy response. The political analysis website the Daily Kos has published a preliminary vote-by-vote assessment that predicts failure, so the one sure thing is that the next few months will be a difficult test of the political skills of Senate leaders and President Obama.

Companies with operations in China should take the time to share with employees, partners, and other members of the business community why climate change is material to your business, and the importance of the U.S. and China making joint commitments. You can help take a lead in transparency by supporting and joining a regional or national climate registry (PDF). Finally, given the upward price pressure of carbon-based energy, consider collaborative opportunities to work with facilities and suppliers to increase energy and carbon efficiency.

Increased awareness of the direction climate policy is headed in both the U.S. and China is beneficial for business planning, as changes in energy subsidies or incentives and cross-border emissions regulation all carry significant financial implications. Understanding the international dialogue and positioning by each side will help you predict upcoming regulatory shifts in both countries, and will create the opportunity for informed action to influence policy. As Waxman-Markey winds its way through the Senate en route to the White House, don’t lose sight of the effects this bill may have for your business far beyond U.S. borders.


First posted at GreenBiz.

Whose Carbon Is It? The ABCs of Counting Emissions in Your Supply Chain

Many companies have started scrambling to understand their indirect emissions — specifically, emissions in their supply chain — and for good reason.

According to a report by McKinsey that examined consumer goods makers, high-tech players, and other manufacturers, 40 to 60 percent of their total carbon footprint resides upstream in their supply chain. Knowing about the emissions in your supply chain can help you prioritize opportunities for reduction and understand the risks if carbon emissions are regulated.

But as the dialogue around carbon accounting increases, so does our awareness of the challenges and limitations in measuring indirect emissions and distributing the burden among multiple parties.

Take the Carbon Disclosure Project’s (CDP) 2009 supply chain report. The CDP’s supply chain initiative is one of the few global attempts at collecting primary data from companies in an effort to understand climate risks in a supply chain. Yet only five of the 100 companies in China contacted by the CDP fully responded to the CDP’s basic questions about climate management. Clearly, there is a gap in knowledge and data necessary to successfully accomplish this goal.

This raises many questions about accounting for indirect emissions: What are the emissions hot spots in a supply chain? Will companies downstream be held responsible? How much “ownership” should they claim? What should they be doing about it?

Effectively managing and reducing the total carbon footprint of your products and operations ultimately means getting answers to these questions.

Accounting for Supply Chain Emissions

To understand where we are in answering these questions, consider the two emergent methods for determining a company’s total carbon footprint: observed emissions accounting and model-based accounting.

The first method involves counting the observed emissions in a company’s supply chain — emissions that the company can arguably impact through its business decisions. This method typically requires tallying the measured emissions of a company’s direct suppliers, at the “point source,” and having those suppliers tally the measured emissions of their direct suppliers, and so on up the supply chain.

The second method is to count emissions based on the materials and processes used as a product moves from raw material extraction to manufacturing to end-use. This method is typically based on a lifecycle analysis of the product and uses models to estimate the embedded emissions.

Both methods can produce useful measurements, but neither provides a comprehensive picture based on primary data from the actual companies in a given supply chain, and neither provides information in a format that is comparable and cheap to produce.

Both of these methods will need to evolve to address what we call the ABCs of effective supply chain carbon accounting: allocation, boundary-setting, and the complexity of supply chains.

The ABC Framework

Allocation
Companies and their stakeholders need common systems for acknowledging their role in creating the emissions in their supply chains — or “allocating” emissions between different businesses and individuals.

Assigning ownership of emissions is a challenge at many levels. For example, China’s climate negotiator, Lia Gao, recently suggested that countries that import goods created in Chinese factories should be accountable for the related emissions. While this viewpoint is subject to international debate, it emphasizes the need for understanding the interconnectedness between producers and consumers, and all the actors in between.

Emissions allocation can be based on many things, like percentage of business your company does with a supplier compared to the supplier’s overall revenue, or units your company purchases as a share of the supplier’s overall production volume. Each method of allocation has benefits and drawbacks, and no single method makes sense for all business types.

Boundary-Setting
As the McKinsey report indicated, the emissions occurring within a company’s four walls are likely to be the tip of a much larger iceberg. The chain of supply goes on continually upstream and downstream, and it even becomes circular as products and materials take on second lives. This presents a significant challenge for accounting methods that prescribe the size of a footprint, as it’s nearly impossible to pick a clear beginning and end for a supply chain.

At a company level, you must decide which business units to include in your carbon footprint. For example, drawing your boundaries based on operational control can produce a very different result than using boundaries based on the amount of equity you hold in different entities. If companies in a supply chain are taking a different approach to boundary-setting, their footprints can’t be meaningfully allocated or aggregated among companies because there is a good chance emissions are being double-counted or going unclaimed.

Complexity of Supply Chains
Supply chains are more like webs than linear chains of activity, and the lifecycle of facilities in the network can be short and intermittent — both characteristics that make emissions accounting complex.

In consumer products and electronics industries, for example, brand-name companies procure from similar supplier bases, and the goods those suppliers provide come from different sources around the world that can change every day based on market conditions. It’s even likely that one company is both a buyer from and supplier to the same company.

Neither of the most common accounting methods can credibly deal with these complexities. Even the most progressive uses of the observed emissions accounting method would be challenged to factor in all the variables of the dynamic landscape, and the time it would take to track down the necessary information from suppliers makes it infeasible. Similarly, model-based accounting methods, which often rely on macro-level data that is several years old, are not designed to register operational changes or discrepancies among facilities.

A Way Forward

While the hurdles are significant, we believe that companies should start working immediately to understand their supply chain emissions for two reasons.

First, discussions on emissions ownership and the field of supply chain footprinting are gaining momentum, and business will be well-served by taking its place at the table. The World Resources Institute and World Business Council for Sustainable Development, for example, have kicked off a two-year process to develop the Greenhouse Gas Protocol’s “Scope 3” accounting standards, including a methodology for supply chain emissions accounting.

Companies that are taking the steps to collect data will be in a much better position to influence the global dialogue on topics like boundary-setting and allocation methods. Ultimately, the decisions that flow from these conversations will have significant cost implications for whoever is deemed “the owner.”

Second, this doesn’t have to be painful! Based on our work to date, we offer the following tips to reduce the burden and improve the outcome of your efforts:

  1. Be aware of the challenges and limitations described here.
  2. Be transparent about your calculation methodology and the extent to which you use primary data in calculating your indirect emissions.
  3. Engage directly with suppliers and establish a dialogue, enabling them to provide ongoing information as standards emerge.
  4. Collaborate with other companies to more efficiently gather data in your supply chain and share best practices.
  5. Participate in global discussions on these issues and continue to question whether the methods created provide a credible system for helping to manage carbon emissions around the globe.

First posted at GreenBiz.

Looking for Signs Along the Road to Copenhagen

The path to a new international climate change treaty is filled with potential twists and turns that will impact how businesses operate in a carbon-constrained economy.

United Nations climate negotiations are planned in Bonn later this month, a U.S. House of Representatives climate bill is expected by May, a U.S. Environmental Protection Agency Greenhouse Gas Reporting Rule is due to be published by June, and an additional climate bill from the U.S. Senate is possible at any moment.

Each of these theaters of emerging climate policy has the potential to impact business in several ways, including raising the cost of energy, imposing new production process requirements, and changing competitive dynamics all around.

We’re taking this opportunity to look at which developments businesses should monitor over the next several months on the road to the U.N. Climate Change Conference in Copenhagen in December. In the second part of this series we’ll explore how climate policy is likely to affect the business community, and how companies can engage in the discussion and help shape future climate policy.

1. Sealing Leaks: Negotiations for an International Treaty

If advocates have their way in Copenhagen this December, negotiators will close the deal on a global treaty for greenhouse (GHG) gas emissions. Such a treaty, which is essential (PDF) for combating the critical problem of “leakage” (when sources of emissions migrate to the places of least regulation), would outline common but differentiated responsibilities—holding all countries responsible to protect the global climate, but taking into account their different historical contributions and relative capacity to act in requiring commitments.

In practice, such an agreement would require developed countries to make significant reductions to their aggregate, absolute, point-source emissions, and would require developing countries to reduce their intensity of emissions and abide by new sector-specific standards. It would also aim to promote innovation by creating positive incentives for low-carbon energy and activities all around.

Key Climate Policy Events in 2009
Feb. 26: Western Climate Policy Forum  (Denver, Colo.)
March 10-12: Research Congress on Climate Change 2009 (Copenhagen, Denmark)
March 11: Midwest Climate Policy Forum (Columbus, Ohio)
March 29-April 8: U.N. Climate Change Conference  (Bonn, Germany)
May 24-26: World Business Summit on Climate Change (Copenhagen, Denmark)
June 1-12: U.N. Climate Change Conference (Bonn, Germany)
July 8-10: G8 Summit (La Maddallena, Italy)
Aug. 31–Sept. 4: WMO World Climate Conference (Geneva, Switzerland)
Sept. 28–Oct. 9: U.N. Climate Change Conference (Bangkok, Thailand)
Dec. 3-6: Copenhagen Climate Exchange (Copenhagen, Denmark)
Dec. 7-18: U.N. Climate Change Conference (Copenhagen, Denmark)
Dec. 15-17: Copenhagen Climate Conference for Mayors (Copenhagen, Denmark)

What this means for business:
A global treaty will establish parameters that shape domestic legislation, as well as border measures enforceable (PDF) under the World Trade Organization — creating many layers of price and risk for companies that use, produce, or manage value chains that rely on carbon-intensive energy.

Specifically, the treaty is expected to outline regulations and incentives related to not only reducing emissions, but adaptation, technology transfer, finance and international development, a global carbon market, and deforestation.

In spite of these concrete subjects, the Copenhagen meeting itself (known as “COP 15”) is largely symbolic. The real action will take place at the various United Nations Framework Convention on Climate Change (UNFCCC) meetings leading up to Copenhagen (see sidebar), and also afterward.

As the Economist has pointed out, Kyoto, Copenhagen’s 2001 predecessor, was a “bust up.” The actual deal wasn’t completed until another meeting the following year. Thus, Copenhagen is just one stop — albeit one with a big agenda — along a road of continuous negotiations.

What to watch:
A key area to watch is interactions between country coalitions.

The most influential is the relationship between developed and developing countries—what the UNFCCC calls “Annex 1” and “non-Annex 1” countries—which has reached a stalemate over who should act first.

Other coalitions, known as “party groupings,” include the Alliance of Small Island States, the Least Developed Countries, the European Union, the Umbrella Group and Environmental Integrity Group, OPEC, CACAM, the League of Arab States, and the Agence Intergouvernementale de la Francophonie.

To stay close to the global negotiations related to Copenhagen this year and onward, follow the UNFCC press headlines, COP 15 News, UN News Centre, Earth Negotiations Bulletin, Climate Action Network, and Third World Network.

2. Critical Path: The United States Senate

In order for a treaty to work, the U.S. must ratify it — and for the first time, this is possible. U.S. President Obama wants to reduce emissions by 80 percent by 2050, is committed to vigorous diplomatic engagement, and has called on Congress to enact a market-based cap. More generally, there is growing evidence that clean energy is not at odds with jobs, and consensus among economists (PDF) that now is the time to act.

Nonetheless, ratification requires a two-thirds vote by Congress, where politics, not policy, rules. This will take two steps.

First, explains Al Gore, who failed to get the U.S. to sign the Kyoto Treaty in 1997, the Senate needs a clear picture of how the U.S. will actually meet its targets, which will almost certainly depend on both the Senate and the House approving a centralized cap-and-trade system. Second, in addition to the 60 Senators needed to support regulation, a full 67 are required to ratify the international treaty. The critical path, therefore, is winning over “brown state” Senators, who are concerned about unemployment.

What this means for business:
Centralized emissions regulation is likely to happen during this Congress and maybe even this year. But ratifying the treaty, while possible, is not likely to happen in time for the Copenhagen meeting in December. Elliot Diringer of Pew Center on Global Climate Change and Joseph Romm of Climate Progress fall generally in this camp. Others expect a treaty, albeit a watered down version.

As an optimistic way forward, Senate Majority Leader Harry Reid is planning to strategically sequence legislation in 2009, beginning first with a renewable energy bill, before introducing a measure to improve grid transmission. Once those foundations are laid, he will tackle a cap-and-trade.

What to watch:
As Congress negotiates the details of international competition, technology, cost containment, and offsets, energy and climate bills will develop in both the House and the Senate. Watch for markup on a climate bill by Memorial Day in the House, where 55 of 126 fence-sitters — which include fiscally conservative “blue dog Democrats” — need wooing to achieve a 163-vote majority. In the Senate, Reid aims to hold a floor debate on a climate bill by the end of the summer, when Senate supporters will need to win over 13 of the 21 senators now undecided. 

If and when discussion turns to ratification, the collection of moderate Democrats from the Midwest, the Rust Belt, and the West (known as the “Gang of 15”) will be critical to achieving support from the additional seven senators that are needed. Given the rocky economy, the central issue will be whether a commitment represents an investment or a cost, especially for U.S. manufacturing.

Watch how opinion leaders like the 17 players most influential to cap-and-trade affect the discourse, as well as influential climate change skeptics such as Senators Joe Barton and James Inhofe, in part with the help of contrarian scientists.

3. Game Theory: The U.S.-China Axis of EmissionsBut the real theater to watch, says Jonathan Lash, director of the World Resources Institute, is the interaction between the United States and China — the No. 1 and No. 2 greenhouse has producers that emit more than 40 percent of the global total — which Lash refers to as the “axis of emissions.”

“If the U.S. and China find agreement, the world will move,” according to Lash. Romm, of ClimateProgress, goes further, saying that Obama’s entire presidency and the fate of the planet depend on it.

Getting the 67 U.S. Senate votes needed to ratify a treaty, says Romm, will not happen without binding commitments by China to cap emissions by 2020. In response, Obama is taking negotiations with China seriously. Secretary of State Hillary Rodham Clinton visited China as part of her first diplomatic mission last month, which included a two-day stop in Beijing devoted to climate. She was accompanies by  new climate change envoy Todd Stern, who believes “nothing is more important for dealing with (climate) than a U.S.-China partnership.”

So far, however, China firmly opposes binding commitments, resists the need to act in advance of the U.S., and instead calls on developed countries like the U.S. to provide financial support and a transfer of technologies. Chinese leadership has taken this stance because it believes the country should be as unrestricted in industrializing as the U.S. was under the Industrial Revolution. Clinton’s retort? Everybody knows better today.

Regardless of this debate, much of China’s emissions come from manufacturing goods headed to the West, and deciding whose emissions are whose and what constitutes progress is far from settled.

What this means for business:
Diplomats will look for every opportunity to build common ground, and reports by the Pew Center, the Asia Society (PDF), and Brookings Institution provide roadmaps. One big opportunity is for the two governments to share investments in R&D: China wants help with technology and finance but most cleantech in the United States is owned by private companies and the U.S. Congress is unlikely to make major appropriations.

Among investments, two technologies are wildcards: carbon capture-enabled coal and nuclear. Although evidence shows that they should be the low-carbon energy choices of last resort, coal is enticing because each country has such huge deposits, and public attitudes in the face of climate change are evolving more favorably towards nuclear.

What to watch:
For both the U.S. and China to commit to an international climate treaty, the U.S. will need to lead the way with binding commitments and each country must show successive signs of good faith.

If it happens, it’s most likely that China will sign “process-oriented” commitments, such as adopting emissions-per-GDP (or “intensity”) targets, renewable energy requirements, sector-specific emissions limits, plant- and building-efficiency standards, and possibly carbon taxes.

After that, U.S. Congress might approve a cap-and-trade scheme in anticipation that China would follow. A key event to watch is the April meeting in London between U.S. President Obama and Chinese President Hu Jintao.

There, the leaders intend to reveal more about their “strategic dialogue,” which Clinton’s visit initiated.

First posted at GreenBiz.