COP15: Cold, Flat and Crowded (by Karl)

After spending another six hours on Tuesday waiting in a handful of lines while doing calisthenics to fight the near-freezing temperatures, we are thrilled to announce that we actually made into the conference! Unfortunately, I use the term “we” quite loosely. That is because only five out of ten people in our group were permitted to enter – the UNFCCC had issued required “secondary passes” to control the number of entrants, and we only received five of these. I could spend the rest of this blog writing about how dysfunctional the conference has been and questioning how the UN is in a position to broker a deal among hundreds of countries when it can’t effectively manage a two-week conference, but I won’t. And why not? Because Thomas Friedman was far too entertaining yesterday.

The Climate Consortium Denmark hosted a panel focusing, in part, on what the role of government is in a green growth economy. The panel featured the renowned author, Thomas Friedman, as well as The Danish Minister for Economic and Business Affairs, Lene Espersen, and the CEO of the international shipping company Maersk, Nils Smedegaard Andersen. What was refreshing about the group as a whole is that all three of them wholeheartedly agreed that the government should put a price on carbon emissions. This was especially surprising coming from the CEO of Maersk who claimed that such policy would only encourage his company to further lower costs and innovate while distancing themselves from their competition. I simply didn’t expect to hear this from the CEO of the largest shipping container company in the world.

As for Thomas Friedman’s comments, if you have read his book “Hot, Flat and Crowded”, you probably wouldn’t have gotten anything out of the panel. That said, he made several points throughout his talk that seemed to resonate with both the audience and the other panelists. One comment of particular interest was how China is going green not simply from an economic perspective, but out of necessity. Given the country’s huge population growth, high level of air pollution and dwindling water reserves, human survival in China is certainly more at risk than, say, that of the United States. According to Friedman, “they get it.” And as an American citizen, this worries him. Friedman wants America to be the country that develops the new and innovative technologies that will mitigate climate change and keep America at the forefront of economic dominance. But he doesn’t appear confident that this will happen. Issues surrounding the environment are much more immediate to the Chinese than they are to the United States, and American citizens continue to be more focused on their immediate needs (i.e. health care reform). China is in a position to “clean our clocks,” something that I don’t necessarily disagree with.

The other point that Friedman made that solicited a round of applause from the audience was his rant about price signals. His point was simple, but effective (and very animated). Fifteen years ago, people (some, anyway) were willing to pay $2,000 to own a cell phone. Why? Because it changed their lives and made life more convenient. Are individuals willing to pay a similar price premium to put solar panels on their rooves? No way. That is because solar panels do not change a person’s life. They deliver the same thing that a electric utility delivers: electrons. As such, the only way that people are going to pay for solar-generated electrons is if they are relatively cheaper. And the only way to do this is by instituting a price signal: either make solar cheaper by offering incentives, or make fossil fuel more expensive by placing a price on carbon. This might be an obvious point, but it is truly critical to climate change policy. People’s behavior won’t change unless doing so saves them money.

The second panel that we attended was sponsored by ICLEI and featured a handful of federal, state, and local elected officials. They included Nancy Sutley, Chair White House Council on Environmental Quality; Jim Boyle, Governor Wisconsin; Michael Bloomberg, Mayor New York City; and Patrick Hays, Mayor North Little Rock. In general, the panel sounded like a handful of political pitches (Bloomberg 2012, anyone?). In particular, Sutley looked and sounded like she was making a speech to Congress, constantly looking down at her notes and thanking a variety of people and organizations. While the other panelists made some good points about the role of local governments in implementing change in cities which contribute to a whopping 80% of all carbon emissions, they focused primarily on their own accomplishments. It would have been more refreshing to hear them speak their opinions and real ideas to affect change. Perhaps the only truly unique idea from that session came from an audience member, Carl Pope, who is the former Executive Director of the Sierra Club. Mr. Pope quoted Bill Clinton, saying that private banks around the world hold $9 trillion cash that they would like to lend, but can’t find the right opportunities to do so. He claimed that there exist lots of local municipal projects (e.g. energy efficiency programs) that are not only provide better services to the community, but are actually profitable. If banks lent a fraction of this money (say a mere $3 trillion) to municipalities for such projects, the municipalities would receive much needed capital, banks would earn a reasonable return on their investment, and carbon emissions would be reduced as a result. To quote my good friends in the consulting industry, this is what I call a real “win-win”!

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On the Outside Looking In (by Adam)

Due to capacity constraints, only part of our group was able to gain entry to the COP15 conference today.  Unfortunately, I will have to wait until Wednesday but all was not lost. I did a quick search of side events occurring in Copenhagen today and found one that sparked my interest – The Copenhagen Climate Summit for Mayors taking place at Copenhagen City Hall.

I was able to make it through security to the registration desk, but it turns out that attendance at the event is by invitation only. I decided to head back to the Bella Center to try to get into COP15 for the 3rd time in two days and hopped on the bus.  A few stops later, the bus was filled with COP15 participants. A fellow Midwesterner, Frank Cownie, Mayor of Des Moines, Iowa, plopped down next to me.

The mayor spent the next 10 minutes speaking candidly about the conference and Des Moines’ environmental initiatives.  He expressed some frustration with the lack of power that local municipalities have in this country-level bureaucratic process.  With nearly 80% of the CO2 emissions coming from cities, he has an excellent point.  It made me wonder what would be the result of the climate negotiations if they occurred at a different level.  What would the outcome be if instead of delegates from 170+ countries, leaders from the largest 200 cities in the world took collective action to address climate change?

From an American point of view, urban politics are dominated by the Democratic Party.  If cities are the main culprit for emissions and they are Democratic strongholds, could they circumvent Congress and take quicker action to address climate change? I’m sure there a several reasons that put a damper on this idea, but I’ll leave the counterargument to the “non-jet-lagged”.

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Is standing 6 hours in line a sign of things to come? (By Itamar and Steve)

We arrived at the Bella Center this morning to discover a line over 500m long of people waiting. We were able to discern that the line for everybody who hasn’t checked in to receive their official UN credentials required to attending the conference.  Temperature was near 0 degrees (C) and the line was moving incredibly slow. No UN official was in sight and there was no formal explanation for why the line was so long or how long we would wait.  After about four hours of standing in the cold a guy announced over the bullhorn that whoever is not within the fenced perimeter (i.e. us) should expect an additional waiting period of 3-6 hours. At this point, our delegation split with some of us heading to town and some staying in line, only to give up about 3 hours later when no progress was made.  A rumor circulated that no more people were admitted because the venue has reached capacity.

To put this in context, admittance to the conference was not supposed to be on a “first come, first serve” basis. Tuck submitted a formal application back in August specifying the number and names of all delegates attending. Therefore, one would assume that the UN would not “oversell” the conference and have a better process in place for which to allow the delegates to sign in. We wonder whether this incredible gap between logistics “policy formulation” and “policy execution” should also raise questions about a similar gap in the conference’s content subject matters.

We see the need for efficient and quick action as a key component of any agreement on climate change trying to successfully deal with this challenge.  Is the incredible lack of efficiency we’ve experienced thus far a sign of what’s to come?

PS (added by Prof. Sundaram): I am told — by someone in the know — that 40,000 conference registration slots were handed out for a venue, the Bella Center, that has 15,000 max capacity. Hmmmmm. It leads me to think: we’d better not to put these folks in charge of handing out emissions allowances in a cap-and-trade world.

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Tuck team meets Dr. Steven Chu (by Bennett)

Last night, Prof. Sundaram, Steve, Manoj, Itamar, Pat, and I were able to attend an event co-hosted by the Pew Center on Global Climate Change and the US Climate Action Partnership, two organizations through which business leaders are working with regulators to establish legislation that will significantly reduce greenhouse gas emissions. It was an interesting atmosphere, with a big group of people meeting each other for drinks and food.

The highlights of the event were short speeches by Yvo de Boer, the executive secretary of the UN Framework Convention on Climate Change, and Dr. Steven Chu, the Nobel Laureate and United States Secretary of Energy. Both speakers were excited to address the business community present at the event and stated their belief that business has a huge role to play in addressing the climate change problem.

Mr. de Boer began his address saying that he was “not sure whether he was on a roller coaster in a house of horrors or floating around in a balloon shaped like a pink elephant.” This was in reference to the changing state of the negotiations to date and the uncertainty of eventual outcome of COP15. Mr. de Boer was excited by the fact that developing nations are very involved in the negotiations and that they want to be a part of the solution. He was also excited about the fact that a large number of heads of state would be present for the final days of the event, but cautioned the audience about being blinded by the hype around their arrival.

The main takeaway from Mr. de Boer’s speech was in what he stated was a “lack of reference to markets in the proposed solutions.” He said that the private sector would be required to deliver 95% of the investment required to solve the climate change problem and stressed that market based solutions are essential to incentivize this investment. His final challenge to the members of the business community present was to help define an architecture that would work in varying political and economic climates.

Dr. Chu spoke next, starting by saying that “given the fact that we have to act, and that developing and developed countries are on board with the actions that need to be taken: we will live in a carbon constrained world.” He stressed the opportunities of building new infrastructure in the developed world and of incorporating the newest technologies in the developing world, saying that the solution to the problem that we face will require use of technologies in use today, nascent technologies, and new inventions.

Dr. Chu concluded his remarks by saying that “necessity is the mother of all invention, and we have the mother of all necessities”. His final charge to the audience was to “take the inventions [that come from this necessity], save the world, and make lots of money doing it.”

We had a unique opportunity to speak with Dr. Chu on the sidelines during the event. He was very happy that students at Tuck are interested in studying the impact of climate change and had made the trip to Copenhagen. He opined that this is the next big opportunity after the industrial revolution and said he believes that businesses who are proactive in adapting to the carbon constrained environment will be the ones who will come out as winners.

It was great to hear both of these gentlemen make optimistic remarks when the outcome of the conference is uncertain. It was also good that their remarks show that both Mr. de Boer and Dr. Chu understand the significant role of business in making any solution to the climate change problem a reality. With our whole delegation interested in technology development and the markets created to aid the climate change solutions, these marks were exactly what we wanted to hear.

Prof. Sundaram and the team are very grateful to Tim Juliani of the Pew Center on Global Climate Change for inviting the Tuck team to the event.

Note: A picture of the Tuck team with Dr. Chu will follow this post.

 

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On Our Way (by Manoj, Steve and Bennett)

Manoj, Steve and Bennett just met at Logan International Airport (Boston) for our flight to Copenhagen.  We met an official protester in the check-in line for our Icelandair flight.  We’ve also been reading the news reports about significant protests at the Bella Center.  According to the protesters, there were over 100,000 people marching on the Center.  The police version differs, with only 40,000 protesters attending.  We are anxious to see what it is going to be like on the ground.  This certainly sheds a different light to the story so far.  Perhaps naively, we expected a proactive environment where world governments would work to solve the climate change problem.  Our initial experience at the airport, plus what has been in the news, reflects a different undertone.  We are hopeful that the constructive process will prevail. 

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Why should MBAs care about climate change? (by Professor Anant Sundaram)

This is the second of two initial blogs on the links between business and climate change. The previous one (see the blog just prior to this one, below) addressed the issue of GHG emissions as an externality, and the question of whether and why businesses should care about climate change.

The Emerging Climate Economy

It is quite apparent now that the careers of MBAs graduating today will unfold in a world in which there is a carbon price.

What will that mean? I think that it will be a game-changer in the same way that the internet or the economic ascendance of the BRICs was. Just as we take for granted a ‘digital economy’ or an ‘emerging economy’ today, we will soon be talking about the ‘climate economy.’ Much of what we do in this arena is going to be correlated with innovations to create greater efficiencies, to eliminate waste, and to find new sources of clean energy in managing a company’s value chain, and consequently, the larger economy.

Forward-thinking companies are taking climate change concerns head-on. Many are committing serious amounts of management talent, resources, and capital to address climate change. Over two-thirds of the S&P500 now measure their carbon footprints using globally accepted reporting guidelines and protocols. (The most widely accepted protocols split emissions into three categories – Scope 1, Scope 2, and Scope 3 – which, essentially, lie along a continuum of direct emissions from operations to those that are indirect, e.g., from the life-cycle use of their products). Many companies have initiatives in place to manage this footprint, via investments in energy efficiency, renewable energy, and incentive-based, time-bound abatement goals.

Consider a few examples. Scotch-tape maker 3M, across its global operations, has reduced its carbon footprint by 69% between 2002 and 2008. Apple measures and reports the life-cycle carbon footprint for each one of its products. This analysis was central to the company’s innovations on product and process design, e.g., their decisions to shift to ‘unibody’ aluminum Macbook Pro laptops.

UPS tracks and incentivizes employees on the basis of the metrics such as ‘GHG emissions per 1000 Kg. of packages delivered.’ Staples today has become one of the largest (non-utility) producers of solar energy in the US, with solar panels on the roofs of most of their retail and warehousing outlets. Walmart has instituted aggressive carbon targets for its suppliers worldwide, where they have been put on notice that those suppliers achieving those targets get to the front of the line in doing business with the retailing behemoth. PepsiAmericas has become one of the biggest investors in highly energy-efficient, low carbon-footprint, ‘Platinum LEED-certified’ buildings.

The list of such forward-thinking companies runs into the hundreds, today.

New Career Opportunities

Two-fifths of the S&P500 companies today have an e-level officer, with titles such as a ‘Chief Sustainability Officer’ or ‘VP: Sustainability & Environment’ to manage climate change concerns. A study by the Carbon Disclosure Project – the world’s biggest repository of data on companies’ carbon footprint – reports that one-fifth of the S&P500 companies now link employee incentives and goals related to climate change.

Many firms in finance, consulting, private equity and venture capital are positioning themselves for the emergence of the climate economy. Every major bank or asset management firm in the US and the EU now has climate initiatives, often in partnership with NGOs. Firms such as HSBC and Deutsche Bank are leaders. New financial products will be created or equity research will develop around the carbon footprint of portfolios, or around the market for GHG emissions allowances, pioneered by the likes of Goldman Sachs. We will see the growth and development of new financial instruments such as climate derivatives and ‘catastrophe’ bonds.

Advice on coping with climate change (as well as energy efficiency and renewable energy) is emerging as a vital area of practice for consulting firms. Leading firms such as McKinsey & Co. and PriceWaterhouseCoopers come to mind. There are now a half-dozen climate change-related scorecards and rankings produced by major media outlets and NGOs to which companies are having to pay attention (including one that I developed for CFO magazine, called the ‘Fossil Fuel Beta,’ or FFß). Investments in renewable energy (‘clean-tech’ and ‘green tech’) have already become significant in private equity and venture capital, led by companies such as Hudson Clean Energy Partners and Khosla Ventures.

A Hard-Nosed View on Link to Business Value

MBAs graduating today should ask – even better, be prepared to offer views on – a few simple questions related to their future employer (and the industry to which their employer belongs): Should the CEO, CFO, and members of the Board of the company care about climate change? If so, why? How? What they can learn from others that are getting in front of the issue?

My view – perhaps a controversial one for those who look at this solely through the lens of ‘corporate social responsibility’ – is that it is crucial to be hard-nosed on whether and how something, indeed anything, ‘matters’. In a world of competing priorities and limited resources, an issue will get the attention of CEO only if we can articulate that it has a meaningful impact on the value of the business (or at the very least, its continued viability).

Value, in turn, is a function of just two things: cash flows and cost of capital. Our actions increase value only when they increase cash flows or decrease cost of capital. In turn, ‘cash flow’ comes from revenues, costs, and investment spending. ‘Cost of capital’ is determined by the risk of our actions or, equally, inaction.

Thus, when we attempt to link climate change-related initiatives to value creation, we should be attempting to make a connection to specific financial metrics – i.e., we should be seeking to anchor our initiatives on answers to the following questions:

• What is the impact, if any, of the initiative in increasing revenue?
• What is the impact, if any, of the initiative on
decreasing costs?
• What is the impact, if any, of the initiative on the
investment spending practices and processes that the company uses to achieve its future growth – e.g., capital budgeting practices, new product introduction or new market entry, product and process innovation, M&A, supply chain configuration?
• What is the impact, if any, of the initiative in
reducing the risks of future cash flows, i.e., on our cost of capital?
• Finally, even if we are measuring and managing all these links well, how do we communicate it to key corporate constituencies so as to ensure buy-in and ongoing support?

These are the specific questions that today’s MBAs will need to be thinking about, and getting front of, in relation to whether and how climate change will affect their careers.

I believe passionately that those that do not inform themselves to answer such questions run the risk of falling behind in the emerging climate economy.

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What is the link between businesses and climate change? (by Professor Anant Sundaram)

This is the first of two initial blogs. The next one is on why MBAs graduating today – more generally, business schools – should care about climate change.

An Externality

Few issues will loom larger in the next few decades than climate change. Science says that greenhouse gases (GHGs) – of which carbon dioxide CO2 is the biggest one – linger in the atmosphere for decades, and that higher GHG concentrations will lead to significant surface warming. The consequence is potentially grave and irreversible impacts on a wide range of earth systems. Much of this impact is the result of human-caused GHG emissions, primarily from the burning of fossil fuels, land use (in particular, mining and deforestation), and agriculture (especially, rice farming and meat production).

This imposes an externality: i.e., our private actions that produce GHG emissions impose a potentially serious cost on the rest of society. This cost will be felt in two ways. One, from preempting or mitigating the likely impacts of climate change, and two, where mitigation is too expensive or not feasible, from adapting to its consequences.

At some point, society will then ask emitters to internalize the cost of their actions, by putting a price on GHG emissions, either via a carbon tax or a system of cap-and-trade. Colloquially, people refer to this as a ‘price on carbon.’ Thus, it is quite likely that, in the next few decades, economic growth will unfold in a world with a price on carbon.

Because carbon is omnipresent in our energy chain, and energy is embedded in every economic transaction, the implications are enormous.

What is the Business Link?

Unlike other major global issues – such as, say, hunger or global poverty – climate change is one where businesses have the most significant cause-and-effect relationship. Companies are the largest emitters, and in the final analysis, they will be the ones to commit resources and develop technologies to solve the problem.

As a result, there is a potentially sizeable ‘climate economy’ emerging in two key areas: energy efficiency from existing (fossil fuel-based) operations, and new sources of non-fossil fuel based energy. The challenges and opportunities for businesses from the ‘climate economy’ are vast. Large amounts of wealth will be created (or preserved) by companies that get in front of this issue. Equally, large amounts wealth may be lost (or not captured) by those that fall behind.

Consider this. Just the companies in the S&P500 emit between 3 and 4 billion metric tons of GHGs annually. If the costs associated with this are required to be internalized, the impact will be significant. Using a market price of $20/ton of CO2 as a benchmark, companies would be collectively required to sign a check for $60 billion to $80 billion annually. The present value of this liability could be as high as one-tenth of the market capitalization of all the companies in the S&P500 stocks today.

To preempt such a cost, we will likely see major investments in technologies for emissions abatement and increased carbon productivity – e.g., in areas such as energy efficiency, low-carbon and non-fossil fuel-based energy (renewable sources such as solar and wind, and nuclear), carbon capture and storage, geoengineering, and agriculture, land use, and forestry. Such investments could run into many trillions of dollars across the globe.

Similarly, the market for emissions allowances could become sizable – conservative forecasts put it at a $1 to $2 trillion market within the decade.

The next blog will address implications for MBAs and business schools. (See above).

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