Tag Archives: emissions calculator

Incubating Environmental “Black Swans” In the Nest

Our last entry discussed the concept of “Black Swan” events, a term created by noted author Nassim Nicholas Taleb to describe an event that is (a) so low in probablility that it is unforeseeable and (b) so catastrophic in impact that it changes history.

Certainly, risk assessments are predictive in nature and no one can predict the future with complete certainty.  But in our view, one of the best tools available for risk assessments is an open mind.    This can be a challenge in the EHSS world as we generally have engineering and other technical backgrounds.  We have been trained to seek absolutes and eliminate uncertainties.  At Elm, we believe that involving external support helps to identify and explore events (and their related exposures) that are relevant but get “technically rationalized” by internal staff.

With the BP oil spill and the December 2008 Kingston, Tennessee coal ash pond failure, we began thinking about some of the Black Swan events discussed with clients in the past.  Below are a handful of EHSS Black Swan risk events that we have discussed with clients over the past years – and some that are currently on our mind.

  • Radical change in EPA’s regulation of coal ash management (discussed several years before the Kingston event, and vehemently opposed by the client)
  • Catastrophic failure of GHG emissions trading market
  • Dramatic failures/errors in GHG footprint calculation methodology
  • Nationalization of privately-owned CO2 emissions assets
  • Regulation and class-action level public concerns over chemical content of consumer goods
  • Waste disposal liability for and public pressures about exporting electronic wastes
  • Dramatic increase in OSHA/EPA enforcement – frequency, severity and targeted industries/sites
  • Major expansion of pollution exclusions/limitations in insurance policies
  • Increased success of US-based NGOs in successfully obtaining US venue for lawsuits concerning EHSS allegations for non-US sites/projects/activities
  • Unprecedented shareholder and SEC pressure on public companies related to EHSS matters
  • Increased importance of EHSS in supply chains and procurement decisions

Perhaps these seem far-fetched to you or your company.  But if that is the case, the egg of that – or another – Black Swan is quietly incubating somewhere in your organization.

“Surprised and Concerned” About Illegitimate Government-Sponsored CER Trading?

Environmental Leader has reported

that the Hungarian government sold 2 million previously used CERs, the market became tepid. Then when prices fell from more than 12 euro per credit to less than one euro, trading was suspended on two exchanges, Bluenext and Nord Pool.

The NYT provided more details of the transaction, stating

The credits appear to be part of massive blocks of CERs awarded to Eastern European states and Russia after the collapse of Soviet-era industry.  This created a loophole used by Hungary to reintroduce used CERs back into the market…

Carbon traders said countries like Hungary were exploiting the loophole to earn more money from the carbon trading system than they could by selling the credits that they had previously earned under the Kyoto system…

The traders said at least one other E.U. member state had acted similarly earlier this year.

The EU said they were “surprised and concerned” about the situation.  BusinessWeek quoted others who expressed more urgency about the matter:

“The supply and demand dynamics have been changed,” said Paul Kelly, chief executive officer of JPMorgan’s EcoSecurities unit. While the scope of the problem has yet to be determined, buyers are “questioning the authenticity” of what they are buying.

Unfortunately, this isn’t the only recent development that may cause market participants concern.  This is just the latest in a barrage of credibility and financial damage for GHG emissions trading, including:

  • Last year swindlers robbed governments of about 5 billion euros in revenues — about $6.8 billion — by selling carbon credits and disappearing before paying the required Value Added Tax on the transactions.
  • In January, swindlers used faked e-mail messages to obtain access codes for individual accounts on national registries that make up the bloc’s Emission Trading System, and then used the stolen codes to gain access to electronic certificates that represent quantities of greenhouse gases.
  • In Australia, recent fraud enforcement involved forcing a green power company, Global Green Plan, to purchase carbon credits it had promised to buy on behalf of customers, but never did.  The government is currently pursuing action against carbon capture company Prime Carbon over allegedly misleading claims made by the firm.
  • In Belgium, authorities have charged three Britons suspected of value added taxes (VAT) fraud on CO2 emissions permits.

In the U.S.,  the Regional Greenhouse Gas Initiative (RGGI), a group of Northeastern U.S. states that have a cap-and-trade program for utilities, faced its own demons.

  • The New Jersey government reallocated about $65 million in funds raised in the RGGI auction. The funds were intended for use in developing renewable energy projects, but instead are going to the state’s general fund, Reuters reports.
  • Last year, New York similarly took $90 million from its carbon fund.

So Now What?

Companies with a major stake in the GHG emissions game must conduct a detailed risk assessment of their GHG programs, solutions and exposures.  Given what has developed in the trading market in the past six months, it would be wide to carry out exposure identification, failure analyses, contingency planning and desktop exercises.

Such analyses and assessments may be critical for publicly traded companies in the United States due to SEC’s recent announcement and the newly effective EPA rule requiring reporting of greenhouse gas emissions from fossil fuel suppliers and industrial gas suppliers, direct greenhouse gas emitters and manufacturers of heavy-duty and off-road vehicles and engines.

Lawrence Heim, Director of The Elm Consulting Group International’s Atlanta office, said

Close to 10 years ago, I began posing the question ‘what if the GHG emissions trading market collapses?’  Assuming cohesive legally-enforceable emissions standards existed, the cost proposition presented by emissions trading in comparison to capital expenditures for pollution control equipment was quite attractive.  The impact of a material failure of the trading framework was significant.  This line of thought became incorporated into client risk assessments even back then.

In the US, we can look at the pollution control expenditures related to EPA’s New Source Review (NSR) enforcement initiative to provide insight into GHG control equipment costs.  Of course, NSR enforcement involves pollutants for which there are well-established and commercially-viable emissions control technologies.  We don’t have that luxury with carbon dioxide, which will likely translate into dramatically higher costs.

Further erosion of the viability of GHG emissions trading could have a significant impact on your company.  Please contact us if you would like to understand more about climate business risk assessments and potential risk mitigation options.

Walmart’s Supplier Sustainability Squeeze Starts

The Financial Times reported that the retailer has announced an initiative to eliminate 20 million metric tons of CO2 emissions from its supply chain over the next 5 years.  All but 10% of the reductions will come from Walmart suppliers rather than direct Walmart operations.  The article stated that:

Mike Duke, chief executive repeated Walmart’s view that its efforts would ultimately lower prices for its customers, chiefly through resulting savings in energy use.

The company is in the process of developing GHG emissions/reduction quantification standards.  What remains to be seen is the extent to which the methodology will align with existing – and regulatory – calculation standards.

Clearly, suppliers will be expected to pass emissions-related cost savings on to Walmart, while concurrently addressing the additional administrative requirements related to the sustainability/emissions reduction programs.  The company has stated that vendor sustainability will become incorporated into its buying decisions.

As we mentioned in an earlier post, some suppliers may choose not to take on the additional efforts and costs associated with implementing Walmart’ sustainability and CO2 emissions requirements.  But before making such a decision, suppliers should conduct a thorough assessment of it environmental profile to identify where the opportunities and risks lie.  This information will assist in making more informed decisions, especially in the context of being a supplier to the largest retailer in the world.

Legal Community Begins to Weigh in on SEC Interpretive Guidance

Now that SEC’s Interpretive Guidance has been published, legal experts are beginning to comment publicly about the Guidance, its meaning and implementation.  The legal analyses generally agree that publicly-traded companies will need to significantly change their current environmental risk assessment practices and/or should look to outside experts on risk assessment techniques.

Some of these comments were recently published in an article in Law.com.  Excerpts from that article are below:

Jane Kroesche, head of the West Coast environmental transactions practice at Skadden, Arps, Slate, Meagher & Flom:

… meeting the new requirements will not just be a matter of “plugging language” into the business discussion or legal proceedings section, where companies usually make environmental disclosures.

“It is a very broad-reaching guidance.  It’s important for companies to understand that it’s not just about disclosing the impact from emissions regulations. It goes way beyond that.”

Robert O’Connor, head of the clean tech practice at Wilson Sonsini Goodrich & Rosati:

… the challenge for corporations under these new guidelines will be twofold. Companies must have the infrastructure in place to know whether there is something to disclose. And, they must find out if they are responsible for carbon emissions along their whole supply chain, or just some of it.

“It is very early. For many companies, it will not rise to the level of materiality, but I do think that all companies need to ask the question, ‘Do I have the procedures and systems in place to know one way or the other?’”

Other leading firms have issued client alerts on the SEC’s action.

King & Spalding stated

… companies should ensure that they have sufficient controls and procedures in place to process relevant information. Most companies in the energy and insurance industries have in-house professionals that are well versed in climate change related issues and will be able to quickly make an assessment of whether additional disclosure is required in light of the guidance. However, the guidance could impact companies in a range of industries, some of which may not have regularly monitored these issues in the past. All companies should consider whether additional in-house training or periodic consultation with outside advisors is advisable to supplement existing controls.

McDermott Will & Emery made the following comments:

Under previous SEC guidance… known trends and other uncertain events do not need to be disclosed if they are not reasonably likely to come to fruition.  However, if management cannot make that determination, disclosure is required unless management determines that the occurrence of such known trend or other uncertain event would not be reasonably likely to have a material impact on the registrant’s financial condition or operations.  Registrants should also address in the MD&A, when material, the difficulties involved in assessing the effect of the amount and timing of uncertain events, and provide where possible an indication of the time periods in which resolution of the uncertainties is anticipated.

Elm is unique in our risk assessment experience and capabilities.  We have conducted environmental risk assessments in the past that included detailed reviews of climate risk exposures that are aligned with the SEC’s new guidance.  Please contact us with questions about how we can assist you.

Dark Clouds on the Climate Horizon

In 2009, there was a general sense in the US that some regulatory and economic certainty would finally be established relative to greenhouse gases, and CO2 in particular.  The current administration made highly public moves and statements to that effect, which were mirrored by action in Congress and the Senate.  EPA issued its finding of endangerment.  And there was significant optimism that the COP15 Copenhagen meeting would bear fruit.

Fast forward to February 2010.  There has been quite a shift in direction and now there is arguably more business risk related to CO2/GHG than there was going into 2009.  Among recent highlights:

  • Nike formally announced that they are abandoning the use of carbon offsets and Renewable Energy Certificates (RECs), citing, among other concerns:

there is substantial scrutiny of the use of RECs, in particular related to whether they in fact help create new renewable power, or whether they are simply payment to a project that would have existed anyway. … Moving forward, however, our preference is to achieve climate neutrality through a combination of energy efficiency and the purchase of more direct forms of renewable energy, through on-site applications and other means.

  • The German Emissions Trading Authority (DEHSt) computer system was hacked and fraudulent European Union carbon allowance transactions were completed.  Read a report here.
  • Europol, the European law enforcement agency, reported on December 9, 2009 that

the European Union (EU) Emission Trading System (ETS) has been the victim of fraudulent traders in the past 18 months. This resulted in losses of approximately 5 billion euros for several national tax revenues.

As an immediate measure to prevent further losses France, the Netherlands, the UK and most recently Spain, have all changed their taxation rules on these transactions. After these measures were taken, the market volume in the aforementioned countries dropped by up to 90 percent.

  • The Copenhagen meeting failed to achieve the concrete results that had been expected.
  • The accuracy and veracity of data published by key climate scientists was called into question, creating the “Climategate” scandal.
  • The UK government published a report supporting a fixed price or auction reserve on carbon emissions over the current market-driven cap and trade.
  • National-level climate bills in the US are no longer getting the support they enjoyed in 2009.  Read more.
  • Arizona declined to participate in a regional GHG trading program, citing the difficult economy.

However, in contrast to the overarching trend, the US did see two important developments.  First, EPA promulgated its CO2 emissions reporting regulation in October 2009, which is effective calendar year 2010.  Second, SEC issued Interpretive Guidance on the inclusion of climate risks in financial disclosures.

There continues to be significant  uncertainty related to the financial value/risk of climate-related activities.  And that is not likely to change in the near future.

SEC Votes to Require Public Disclosure of Financial Risk of Climate Change

The Securities and Exchange Commission (SEC) today voted to require public companies to disclose the financial risks they face related to climate change.

In her opening remarks, SEC Chairman Mary Shapiro emphasized that

we are not opining on whether the world’s climate is changing; at what pace it might be changing; or due to what causes. Nothing that the Commission does today should be construed as weighing in on those topics.

The Commission is also not considering amending well-defined rules concerning public company reporting obligations, nor redefining long-standing interpretations of materiality.

The vote requires that the SEC develop and issue an “interpretive release” – guidance that can help public companies in determining what does and does not need to be disclosed under existing rules.

Specifically, the SEC’s interpretative guidance highlights the following areas as examples of where climate change may trigger disclosure requirements:

  • Impact of Legislation and Regulation: When assessing potential disclosure obligations, a company should consider whether the impact of certain existing laws and regulations regarding climate change is material. In certain circumstances, a company should also evaluate the potential impact of pending legislation and regulation related to this topic.
  • Impact of International Accords: A company should consider, and disclose when material, the risks or effects on its business of international accords and treaties relating to climate change.
  • Indirect Consequences of Regulation or Business Trends: Legal, technological, political and scientific developments regarding climate change may create new opportunities or risks for companies. For instance, a company may face decreased demand for goods that produce significant greenhouse gas emissions or increased demand for goods that result in lower emissions than competing products. As such, a company should consider, for disclosure purposes, the actual or potential indirect consequences it may face due to climate change related regulatory or business trends.
  • Physical Impacts of Climate Change: Companies should also evaluate for disclosure purposes the actual and potential material impacts of environmental matters on their business.

Although the Commission ultimately voted in favor of the mandate, The NYT reported that Commissioner Kathleen L. Casey said it made little sense to issue such guidance “at a time when the state of the science, law and policy relating to climate change appear to be increasingly in flux.”

The SEC’s interpretive release will be posted on the SEC Web site as soon as possible.

Once the guidance is available, companies will need to review and evaluate the current risk assessment and reporting framework to determine if it is robust enough to comply with the new SEC action.  With our substantial experience with EHS risk assessment and management that extends well beyond basic regulatory compliance, Elm is uniquely suited to assist companies with this.  Please feel free to contact us to discuss further.

Debate Over Bolivia Carbon Project Spotlights Risks

The New York Times published an article highlighting questions surrounding a major forest preservation project in Bolivia sponsored by American Electric Power, BP and PacifiCorp, known the Noel Kempff Climate Action Project.

Greenpeace claims it found that from 1997 to 2009, the estimated reductions from the program had plummeted by 90 percent, to 5.8 million metric tons of carbon dioxide, down from 55 million tons. It also questioned the “additionality” of the program, which says that a specific forest area would not have been preserved without the program.

What is striking about this matter is not the debate of the project’s effectiveness (given the on-going controversy surrounding the use of forestry in climate risk management).  The surprise was a comment made by Glenn Hurowitz, a director of Avoided Deforestation Partners, a small nonprofit organization that claims to “advance the adoption of U.S. and international climate policies that include effective, transparent, and equitable market and non-market incentives to reduce tropical deforestation”:

In the proposed climate legislation, you can’t get credit for conservation or any other type of offsets until you’ve delivered the offsets. So inaccurate projections would not affect the issuance of credits.

This statement clearly demonstrates a critical business risk in using forestry for carbon management.

While “inaccurate projections” may not impact the issuance of credits, the sequestration calculations/projects have a significant impact on the upfront project support and financing.

It is reasonable to foresee that a failure of forestry to deliver on its projections will have a severely negative impact on the perception of forestry projects as a financially successful and viable carbon risk management tool.

As with any business investment, financial analyses are based on projections about what an investment will deliver in terms relevant to the investment.  In the case of forestry projects, calculations are completed to determine the amount of carbon that is projected to be absorbed and therefore generate the amount of credits/offsets.  These offsets create a financial return in terms of both cost avoidance and potentially revenue.  Financial analyses may be completed for different carbon management options and an investment is made in accordance with the option judged to be the “best” as defined by the criteria applied by the investor.

So what happens if the projections are inaccurate?  Sure, some offsets will likely be delivered by the project.  But will the investment deliver the anticipated return?  Will a shortfall trigger the need for pollution control investments and/or non-compliance penalties?

There continues to be a critical need to reduce risk in forestry-based carbon management investment.  As we have discussed before, it is advisable to take a deep dive into to uptake calculation methodologies, delivery milestones and scenario planning in advance of such investments.

Word Resources Institute Report: Financial Institutions Should Improve Environmental Risk Identification and Mitigation Efforts

Word Resources Institute (WRI) recently published a new issue brief titled Accounting for Risk.

This publication focused on the myriad issues confronting financial institutions (FIs) when determining and evaluating greenhouse gas (GHG) emission inventories and related risks.  The study concludes that there are a number of benefits to FIs for implementing well-thought out processes for assessing GHGs beyond their direct emissions.

Key risks discussed include:

  • GHG risk impact on new investment opportunities.  This risk may be most prevalent in the power generation sector.  WRI noted

Investments in carbon-intensive projects are no longer a safe bet. Companies, under pressure from shareholders, have been pulling support and cancelling plans to construct new coal plants.

  • Appropriate scope for emissions measurement. WRI contrasts two different scoping approaches – the Operational Control approach and the Equity Share approach.  To illustrate the potential differing results between the two, WRI provided an example.

In 2007, Citi reported its total environmental footprint (scope 1 and 2) at about 1.4 million metric tons of CO2, but estimated its share of CO2 emissions from financing just two thermal power plants to be almost 200 million metric tons of CO2 (~3.3 million metric tons on an annual basis based on a 60 year life). That’s a big difference, and, like Citigroup, most other financial institutions’ traditionally reported scope 1 and 2 emissions will be tiny when compared to their share of emissions from investments.

  • Comparability and reliability of emissions calculation methodologies.  Elm has commented several times on the issues of emissions calculation risks here, here and here.  In its report, WRI echoed our earlier comments and quoted Eliza Eubank, Assistant Vice President of Environmental and Social Risk at Citi:

“If everyone is finding their own way and designing their own methodology, then you really don’t know how to compare different numbers that different people are putting out there.” Without guidelines, deciding what and how to report, “can be a very dicey issue.”

In its summation, WRI stated:

To satisfy internal users (i.e., financial institutions) and external users (e.g., investors, clients, NGOs, regulators), more definitive and standardized [GHG inventory] guidance is needed.

Business Risk Climbs with Climate Activity

At this time, there is no federal requirement in the US either from EPA, SEC or FASB for quantification, liability analysis or disclosure specific to GHG emissions.  Yet there is a growing tidal wave of such corporate disclosures.  But in developing the reports and emissions quantities, the corporate internal PR and environmental functions appear to be diverging from risk managers and insurers.  More information is available to highlight concerns that companies should evaluate when considering calculating and publicly reporting greenhouse gas (GHG) emissions.

Dan Reynolds, senior editor of Risk & Insurance,® wrote a piece July 6, 2009 on insurers view of and developing responses to recent events in the US surrounding GHG regulation.

Along with the Environmental Protection Agency’s April ruling that greenhouse gases are pollutants that endanger public health, the climate change bill passed by the U.S. House represents new ammunition for plaintiffs’ attorneys, and those companies they target better have insurance policies that can absorb or fend off the legal salvos.

Reynolds compared the GHG developments to how tobacco liabilities evolved, but that GHG liability is likely to occur “ on a far larger scale”.  Although a legal case concerning GHG would probably require that a scientific connection be established between emissions and climate changes, there is a significant amount of research underway right now to bolster the connection and support the legal argument.

In the article, David Orleans, a San Francisco-based vice president for Willis Group Holdings Inc. stated

A lot of people are paying a lot of experts today, engineers and environmental scientists, to provide better connections and show what they believe (to be) the direct causation between the emissions and the incidents of natural disasters.

Further, he indicated that the carriers are close to coming out with policy exclusions for GHG/climate related potential claims.

Yet in the face of the developing liabilities and insurance exclusions, many companies appear to be rushing to publicize their GHG emissions in the absence of technical emissions measurement consensus or legally established parameters.  CNN ran a story on a few well-known companies who are on the cutting edge of assessing and disclosing their CO2 emissions.  Previous articles on Elm’s blog have discussed potential emerging liabilities associated with CO2 emissions/climate change reporting and quantification, while highlighting other studies and company reports.

What should companies do about GHG emissions calculations and reporting?  There is no single solution, and the business context of each is critical to determining the best strategy.  However, a few key items PR and environmental staff who are involved in developing the reports should do include:

-       Assess the wide array of potential risks associated with disclosing GHG information as well as not doing so

-       Work closely with Risk Management departments to determine how insurance coverage may respond or be impacted in various liability scenarios

-       Carefully evaluate contractors used for emissions calculations and evaluate the technical aspects of their methods

-       Investigate what liability may exist in the event errors are made in the calculations or reporting.

Variance and Risk in GHG Emissions Calculators

WSJ published an interview with Ken Parker, the global head of Deutsche Asset Management, a unit of Germany’s Deutsche Bank AG.  The interview focused on Mr. Parker’s views on climate change and his leadership of related investment management activities within Deutsche Bank.

Mr. Parker, a member of Deutsche Bank’s group executive committee, oversees $613 billion of assets under management. Four years ago, he launched what are thought to be the first investment products focusing on businesses that will help mitigate the effects of climate change. Those funds currently have about $4 billion in agribusiness, clean technologies, energy efficiency, environmental management and water.

A believer that information breeds action, Mr. Parker’s next project is to raise awareness about the daily greenhouse-gas emissions around the world by setting up a second-by-second counter in New York City.

An interesting idea.  However, there is no standardized method for calculating CO2 or other GHG emissions.  Numerous studies have been conducted in recent years comparing the popular on-line “carbon footprint” calculators, including EPA’s.  These studies (links to two of them are posted below) consistently demonstrate the significant variation in results from the same inputs. Further, the major engineering trade associations in the US have only now recognized the need for their direct involvement in bringing impartial, independent and technically valid scientific rigor to the development of GHG/CO2 emissions calculations.

But until such a consistent and valid calculation methodology exists, numbers generated from the current calculators may create potential risks to those relying on them.  Especially in the litigious US.

http://www.climatebiz.com/files/document/EIARVol28Issue2-3pgs106-115.pdf

http://www.seattlepi.com/local/372284_carbonfootprint26.html?source=mypi