Reading the Tea Leaves of Evolving Climate Change Policy

It promises to be an eventful year in the development of climate change policy, both internationally and at the domestic level. But with so much potential movement on several different fronts, what should businesses be monitoring and how can they move from the sidelines to take an active role in shaping future climate policy?

To answer some of these questions, we have Ryan Schuchard joining us. Ryan is a manager of environmental research and development at Business for Social Responsibility. Known as BSR, the organization works with companies to develop and promote sustainable business strategies and is also a partner with ClimateBiz.com.

Ryan is the author of "Looking for Signs Along the Road to Copenhagen," an article appearing at ClimateBiz.com that explores the developments businesses should watch in the months leading up to the U.N. Climate negotiations in December. Today he’ll give us a snapshot of all the action and offer advice on how companies can position themselves ahead of future climate change policy.

Tilde Herrera: Thanks so much for joining us today. How would you characterize 2009 in terms of climate change and potential impacts on business?

Ryan Schuchard: Well, it’s a pivotal year. First of all, we have a president that’s committed to reducing emissions by 80 percent by 2050 and vigorous diplomatic action. We have an incoming Congress that has (more than) 20 more Democrats, more evidence that clean energy is not at odds with jobs, and more consensus among economists that we need to act now. So, it’s a pretty big time for climate policy.

TH: On the international front, I know that a lot of people are looking forward to the U.N. Climate negotiations in Copenhagen in December. Can you talk a little bit about, in big picture terms, why should businesses in the U.S. care about what happens in Copenhagen?

RS: Well, generally speaking, with global climate policy there’s the United Nations Framework Convention on Climate Change process and that’s the big process leading towards an international treaty. It’s important to address leakage, which is emission sources moving from one place to a place of less regulation. Many are concerned that if we don’t address leakage the whole system would be undermined.

So, this is a global treaty that we’ve been working on since the ’90s with Kyoto, and many hope and some expect that we’ll see some treaty in the next year or couple of years signed.

TH: O.K., that’s happening in December. Can you offer us sort of a thumbnail sketch of the events leading up to the talks in Copenhagen that businesses should be paying attention to?

RS: There’s a series of events leading up to Copenhagen, and like Kyoto, there will be meetings afterward. So the big event this year, the symbolic one, is Copenhagen in December. Before that, we’ll have a meeting in Bonn next month in March. There will be another meeting in Bonn in June and then a meeting in Bangkok in September and October, and those are the U.N.-focused events.

There are also some other important ones. There’s a World Business Council meeting on climate change in Copenhagen this May, which is a gathering of corporate leaders that will ideally play into the process. Then, of course, the G8 summit in July is also going to be influential. Climate change is one of four big items on their agenda.

TH: What sort of developments do you expect to come out of those two meetings?

RS: Well, the general thought is moving towards agreement by countries on the basis for a treaty, and both the U.S. and China are two of the big players that need to agree, in particular. So, it’s holding the hands of the U.S. and China, in many ways, to agree and to make them comfortable with the process.

TH: O.K. you talked a little bit about leakage. What are some of the other issues that businesses need to be following at the international level and why?

RS: Well, it’s a good question because global policy can seem kind of esoteric. Ultimately, there’s probably at least two main ways that policy is going to affect companies from the treaty.

One is domestic legislation that companies will take on in order to meet the commitments, so those are things like direct regulation, which could be cap-and-trade or carbon tax. Also product standards and technology incentives -- those are some broad things. That’s on the domestic legislation side.

And then also border measures. We haven’t seen much in the way of border taxes or border tax adjustments or things like that yet, but as the global market mechanisms form, we would expect probably some measures at the border.

TH: And what’s a border tax? How would that impact your average business owner?

RS: There are different proposals for a border tax. A border tax would be relevant if a country has a tax itself, as opposed to a cap-and-trade system, in which case, a border permit would be more likely. A border tax would probably be relevant for some of the heavy-emitting industries like aluminum, steel, maybe glass, paper products.

So, imports would likely be taxed or could be taxed if they were from a country that didn’t have adequate regulations by the view of the importing country.

TH: O.K. So, for instance, raw materials coming out of China might be subject to a border tax.

RS: Yes, that’s a good example. Another one is U.S. exports being taxed (by) the market that they would be exporting to.

TH: So, Ryan, in what sort of scenarios would U.S. exports be subject to a border tax, and what types of exports are we talking about?

RS: Well, you might see border taxes or border permit measures when we have countries with their own domestic regimes. Specifically, you would see the most energy-intense or emissions-intense sectors getting likely caught there, and those would be things like aluminum, cement, steel, paper, glass, chemicals, iron -- these sorts of very intense industries.

When countries like the U.S., Canada, China and other large countries have more serious taxes or caps on carbon, they would want to keep out or at least put constraints on imports.

TH: Mostly for competitive reasons?

RS: That’s a good question. It’s both competitive and environmental reasons, so you can see both. But environmental leakage is one of the big issues, in addition to competition problems.

Those are two of the broad ways the companies will ultimately be affected -- domestic legislation and border measures -- so those have a lot to do with mitigation. The U.N. Framework process is also taking on some broader issues like climate change adaptation, technology transfer, finance, and ultimately developing systems for global finance, or market mechanisms in general, to lead investments to their lowest cost location.

TH: So, you gave us a good primer on what to look for on the international level. What about the national level? What about closer to home? What’s going happen this year and what are the signs that businesses need to be paying attention to?

RS: Well, a lot is going to happen and is already happening, starting with EPA expected to give out more guidance on the greenhouse gas reporting rule that the Clean Air Act outlines.

Of course, both the Senate and the House are developing bills right now on energy, on transmission, and ultimately, on a climate bill. Obama and a number of senators are thinking it seems more like a cap-and-trade is the best or most likely, so it’s not clear that a tax will happen. Cap-and-trade looks more likely. So, those are some of the different levels that they’re happening.

TH: This debate between cap-and-trade vs. a tax -- in recent days it seems like more businesspeople -- CEOs -- coming out in favor of a carbon tax. What’s your take on that?

RS: Well, I’m not an economist and it gets technical pretty quickly, but ultimately a cap fixes the amount of emissions and the tax fixes the price, so a tax might seem easier to manage from an economist’s view and a financial manager’s view, but there is also some back-end work that needs to be done to make sure that we’re getting to the targets, the emissions targets we need.

TH: So, we have all of this action taking place on that policy side, but what can businesses do to engage in the discussion?

RS: Well, there are different standards groups that always make sense to participate in at the industry level and the company level, especially as we talk about supply chain and how carbon footprinting is measured in the supply chain.

One of the big ones is the greenhouse gas protocol developing new guidance on their Scope 3 -- or essentially supply chain -- emissions footprinting. I’d advise companies to go to the WRI website – the World Resources Institute website -- and check that out and there might be some opportunities to get involved with that.

There’s also, depending on the industry -- if it’s the electronics industry, the Electronics Industry Citizenship Coalition, for example, is developing their own suggestions on how their industry ought to be regulated or at least measured in terms of footprinting. So, for most industries, there’s an opportunity to be a part of developing what policies make sense at the sort of measurement accounting level, but it’s very much still being developed all around.

TH: Aside from sort of observing all of these developments taking place and getting involved with their sector, what can businesses do to position themselves favorably ahead of all of these pending regulation?

RS: Well, there’s a lot of different layers of looking at it and possible risk. For some companies, they expect to be regulated soon and so it’s not even so much about risk but about preparing and learning what emissions trading looks like and how that works for their company.

For others, it’s understanding what’s happening in their supply chain, and are there going to be regulations upstream that would likely create more pinches, more price hot spots in their supply? It really depends on the industry, but there are a lot of different levels of analysis that companies should be doing.

TH: So, Ryan, what are the big takeaways here? What’s the single biggest piece of advice you could offer businesses?

RS: Well, it’s that no matter how you slice it, there’s increasingly pressure for the use and propagation of lower carbon fuel and energy. So being on the right side of that makes sense and that is true both in terms of the direct price on energy and carbon associated with the energy, as well as indirect effects, like how suppliers might be affected, about products that you’re selling. So in very many ways, indirectly and directly, there is increasingly a premium on using and propagating low carbon energy and fuels.

TH: You just proposed that businesses get on the right side of low carbon fuels and energy. How do you propose they do that?

RS: Well, it depends on what kind of situation they’re in. If companies have supply chains that rely on emissions-intense or energy-intense production, those that basically have higher emissions coming from the supply chain face more risk. So it’s having a handle on where there are opportunities for lower emissions in the supply chain – that’s one.

For those that are large energy users in production, both efficiency and renewable energy will be a lot more valuable. Also then also for companies that make energy using products, those that are more efficient obviously make more sense. So if the auto industry had been doing this a long time ago, they’d be in a lot better shape now. That’s just going to hold more and more true in the future.

TH: How do you foresee events happening this year, if you can make a prediction?

RS: Well, there’s a lot of speculation about whether the U.S. will ratify a treaty in Copenhagen this year, and if it does, if that’s even a good idea at this point.

There’s a lot of sequencing that needs to take place in order for it to be ratified, and ultimately for policies that the U.S. implements to be durable. So, I don’t know if it’s going to be this year or next year. It’d be too early to say, but in the next one to two to three years, you would expect to see something pretty robust.

TH: Thank you for joining us today.

RS: Thank you, Tilde.