The International Resource Journal: Carbon Management for a Carbon Constrained Economy

Carbon Management for a Carbon Constrained Economy
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admin on 03 September, 2009 07:48:00
 
As governments prepare for the United Nations Framework Convention on Climate
Change in Copenhagen this December, attention is concentrated squarely on both
global and national carbon policies. Cap and trade schemes feature prominently
in these policies, with significant impacts for business. While enormous
regulatory uncertainty remains – perhaps as much as there has ever been
– it now seems likely that this uncertainty will resolve itself in the
coming months. As such, companies should be focused on developing carbon
management capabilities and getting ready to comply with regulation.
Inside the nutshell
Simply stated, carbon management capabilities will enable companies to comply
with regulatory requirements in a cost effective manner, while managing carbon
related risk. The wider business implications are numerous and complex.
Businesses that are significant emitters of greenhouse gas (GHG) can expect
substantial incremental costs in regulated carbon markets as well as the need to
factor the price of carbon into their overall business strategies.
There will be new risks, including price risk, credit risk, operational risk and
regulatory risk. A risk management approach should, therefore, be adopted for
developing the compliance strategy. The accounting and tax implications of
compliance options also need to be considered.
In particular, a structured approach to risk identification should be considered
so that significant risks are managed appropriately.
Along with fundamental reporting, pending legislation will mandate emissions
reductions over time. For many businesses, these cannot be met only through
internal emissions abatement. Developing a compliance strategy will require a
solid understanding of carbon markets and their risks and opportunities.
Contracting and capital allocation decisions will be impacted by the price of
carbon and the fact that carbon as a new commodity will impel some organizations
to develop a hedge strategy.
Governance and organizational design will need to incorporate the requirements
of carbon markets. For those companies already in the process of designing
infrastructure and selecting IT systems for GHG monitoring, involvement of their
CFOs and controllers is a must to ensure that internal control and data
integrity issues can be addressed. High emitting companies in particular should
act now to put their governance in place. Many companies, for instance, have
“working groups” addressing carbon; actions (such as buying offsets)
are carried out on a “pilot study” basis. Roles and responsibilities
for carbon management need to be both determined and included in job
descriptions. Board and senior management roles in oversight need to be defined
and documented in risk management policies. Business processes, related to GHG
monitoring and reporting, as well as transacting allowances and offset credits,
need to be documented.
Furthermore, regulatory uncertainty may warrant a scenario planning approach to
estimate potential exposure and potentially granted allowances. The questions
are many, but there are indeed answers, and those answers will not only clarify
but multiply as regulations become law. In the meantime, businesses should begin
with the following elements as they prepare to build a viable carbon management
strategy:
1. Identify compliance requirements, looking at options for developing a
compliance portfolio
2. Meet reporting requirements by translating raw inventory into appropriate
measures and reports
3. Design appropriate governance and organization structures specifically to
deal with carbon management
4. Assess the relative impact of carbon legislation on corporate strategy
5. Identify and address any issues of accounting and tax related to carbon
markets
The sooner you begin, the better prepared you will be when the deadlines come
– and the cheaper it will be to meet the requirements. Five years ago,
there was no carbon market. Today that market is valued at $100 billion and is
projected to reach $1 trillion by 2020. Carbon is set to potentially become the
most widely traded commodity in the world.
Unfortunately, uncertainties abound, mainly surrounding the specifics of
regulations which are still in the early stages of their articulation. The
nuances remain largely speculative, absent the hard legal requirements of passed
legislation and regulation. And where regulations requiring reporting already
exist, the supporting infrastructure may need to change: carbon regulation
creates a financial liability on GHG emissions; carbon data will therefore need
to meet the standards of financial data.
So, the big picture is clear: companies are facing ever stricter climate change
compliance and reporting measures in both the near- and longterm. And they need
to address it sooner rather than later. Companies that wait for regulation to be
in place may end up paying a higher price for compliance.
By Pat Concessi, Deloitte
Pat Concessi is Deloitte’s Global Carbon Markets Leader and a partner in
its Canadian Enterprise Risk Services (ERS) practice. She can be reached at
pconcessi@deloitte.ca.