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.

Field Notes: Helping Guide GHG Protocol’s “Scope 3”

As BSR goes to press with “Looking for Signs Along the Road to Copenhagen,” the debate about whose emissions are whose and what constitutes progress is heating up. It is going to get hotter, because it looks more likely that the WTO will enforce prospective border measures on carbon.

Hopefully, the Greenhouse Gas (GHG) Protocol’s emerging guidance for “Scope 3 Emissions” will be useful toward spotlighting risk.

The GHG Protocol, which is the global standard for organizational greenhouse gas accounting, recently embarked on a 2-year process to develop detailed guidance for calculating emissions for Scope 3—the infamously ambiguous designation for emissions outside a company’s direct ownership and control, but which they still have meaningful influence over.

As a participant in the Technical Working Group developing new Scope 3 guidance, I recently visited New York for an in-person meeting. The event was one in a multi-layered series of research collaborations bringing together perspectives from various sectors and locations.

What will Scope 3 guidance eventually look like? It is early to say, but what is clear is that that developers will wrestle seriously with the following issues:

1. How comprehensive. Some want measurement areas to focus on straightforward activities like flights and hotel stays. Others, such as some companies in the Electronics Industry Citizenship Coalition, want rules and principles that will allow propagating a measurement scheme through multiple tiers of suppliers.

2. How to measure. There are various methods of possible measurement, such as prescriptive calculations for commonly purchased services (like flights), predetermined conversion factors for emissions-intense materials (like aluminum), and descriptive protocols for counting observed emissions from suppliers (potentially, multiple tiers) based on rules for overhead allocation.

3. How to stay relevant. The current basic guidance on Scope 3 from the GHG Protocol assumes end-user consumers at the end of a value chain. This life cycle analysis-based depiction is easy to envision and practical for many so far. Yet, producers are also consumers, and the “linearity” and “endpoints” that tradition suggests are not so hard-and-fast absolutes, as a rapidly decentralizing and service-orientated global economy suggests.

Each conundrum illustrates huge trade-offs. The real challenge, therefore, is not technical perfection, but guidance that will have the maximum benefit for the most situations around the world. The ideal result? Catalyzing a transition from debating about the data of carbon to ratcheting it down.

First posted by BSR.

A-B-C-Design: Engaging the Whole Company in Developing Sustainable Products

Given the sheer number of items we purchase, use and throw away every year, it’s no surprise that consumer products are the ultimate drivers of carbon emissions. In that context, product design is critical for addressing climate change. As the concentration point for a large set of decisions about human and material resource flows, product design can influence emissions throughout the value chain, with the potential to yield significant results: According to the U.K.-based Climate Group, during the next decade, developments to information and communication technology products alone could reduce global GHG emissions by 15 percent, while saving the industry more than $900 billion. 

Ironically, the shortest path to better products is often found not inside the design team, but throughout the rest of the company.

At Business for Social Responsibility (BSR), we worked with the design and innovation firm IDEO to produce the report “Aligned for Sustainable Design: An A-B-C-D Approach to Making Better Products,” [PDF] which shows that sustainability introduces a range of factors into organizations that require the engagement of people throughout the company. Indeed, the real bottleneck to design problems is often low organizational capacity. Rather than looking to the designer to lead product sustainability strategies, managers need to coordinate conventionally unconnected parts of the organization and promote dynamic organizational learning.

The four main ways to do this can be described as the A-B-C-Ds of sustainable design:

A: Assess the climate impacts of your company’s projects and evaluate your organization’s capacity to address these impacts. Some companies, like Sony and Philips, do this by pursuing formal lifecycle analyses and materials assessments of their products in order to ensure that they understand where impacts really come from. Others, like Intel, also focus on understanding the impacts of first-tier suppliers. Still other companies are experimenting with new methodologies entirely: BT, for example, has developed a “Climate Stability Intensity” method that conveys the company’s global emissions normalized by expected atmospheric levels needed for climate stability.

B: Bridge functions and people needed for making valuable, tractable product redesigns. Often, this means making unconventional cases for commitments and resources. For example, Procter & Gamble, recognizing that energy-efficiency projects have important benefits that outweigh traditional return-on-investment hurdles, has bridged sustainability and finance by earmarking 5 percent of its budget ($5 million) for energy-saving projects. Hewlett-Packard has developed an energy supply chain function, which creates a formal, cross-functional bridge between traditional procurement and environmental responsibility teams.

Three Approaches to Sustainable Design
Given the demand for greener products, many companies are incorporating sustainable design into everything from cars to computers. They are employing three main approaches to designing low-emissions products:
• Reducing lifecycle emissions in existing products through new design specifications and features: Toyota has started equipping its hybrid electric car, the Prius, with rooftop solar panels that power the air-conditioner, and companies with energy-using products like HP and Dell are developing better power-saving and idle modes. Even companies with products that don’t use energy are designing specifications for lower-impact maintenance and disposal. Apparel companies, for example, are providing cold-water wash instructions for clothing.
• Linking existing products to restoration: Tyson is eliminating emissions from waste by turning animal byproducts into biofuel. Other companies, like Nissan, are linking products with restoration by automatically buying carbon offsets with automobile purchases.
• Deploying new product and service concepts: With videoconferencing, companies such as Cisco and Skype are fulfilling the need for live communication with an alternative to emissions-intensive air travel. Other companies have focused their business plans around products aimed at saving emissions: One such business is Liftshare.org which uses a simple database platform to bring people and organizations together to carpool.

C: Create internal and external learning projects that enhance knowledge of product sustainability and support necessary changes in the design process. Nike, for example, has launched a number of projects, such as one that reduces production scrap and diverts worn-out shoes from disposal, and another that phases out industrial greenhouse gases from the bladders of shoes’ air soles. It also remotely monitors the energy efficiency of its suppliers. Marks and Spencer has launched a range of projects, including one aimed at in-store energy reduction, another to source food regionally and label food transported by air freight. Another program targets consumers with educational and inspirational messages.

D: Diffuse lessons and accountability mechanisms that build sustainability literacy and affect better decision-making throughout the organization. This puts information in the hands of the right people at the right time, and creates accountability for product outcomes. Wal-Mart, North America’s largest private user of electricity, has developed a comprehensive, companywide sustainability mandate with six broad priorities and 14 cross-functional teams. As part of the effort, Wal-Mart uses what it calls “Personal Sustainability Projects” to train employees on ways to incorporate sustainability into their lives. Toyota has a number of initiatives to diffuse sustainability lessons: It formally mandates environmental action in its “Earth Charter,” it is developing local systems that streamline complex ISO 14001 and OHSAS 18001 methods in North American facilities, and the company uses green supplier guidelines that emphasize collaboration.

To enhance product sustainability, more consumers and policymakers are pushing companies to reduce carbon emissions throughout their value chains. Remember the cardinal rule: The crux of sustainable product design is generally not found within the design team, but rather in the information flow throughout the rest of the company.

First posted at GreenBiz.