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Responsibility

Financial crisis prompts climate change wake-up call

Rahilla Zafar |

The financial crisis offers an opportunity to jump-start environmental innovations in the US. That’s according to Eric W. Orts, Director of the Initiative for Global Environmental Leadership at The Wharton School.

After learning harsh lessons from the financial crisis, the importance of tackling climate change has taken centre stage.

The Stern Review on the Economics of Climate Change released in 2006 estimates that in order to avoid an environmental crisis, in 2050 carbon emissions must be reduced by some 80 per cent.

The report estimates that tackling the problem today would cost one per cent of global GDP, while inaction would cost at least five to 20 per cent.

“The next crisis is climate change and you can’t fix it like the financial crisis. If businesses wanted to seriously tackle this problem, reducing their emissions by five or six per cent each year isn’t enough. There needs to be a reduction in the range of 60 per cent,” says Eric Israel, a Managing Director of KPMG.

Despite a lack of leadership at the federal level, many US states have begun forcing businesses to address the problem. The state of New York, for example, sued five utility companies for releasing emissions.

The US lags behind Europe in alternative energy, conservation methods like retrofitting and infrastructure repair, and in innovations such as high-speed trains.

“There is a huge amount of innovation occurring in the environment and energy-related areas of business. This innovation will continue and I believe it may even receive a ‘silver lining’ boost from the financial crisis,” says Orts.

While the US has a strong tradition of federalism, Orts believes that for some problems such as climate change, it makes sense to regulate at a higher level.

“In this case, I think there is a good argument for federal legislation that would preempt or at least coordinate state and municipal regulations,” he adds.

In fact many corporations say a lack of leadership at the federal level has kept their companies from going as far as they could to reduce emissions.

For example, Mitch Jackson, Director of Environmental Affairs and Sustainability at FedEx says his company surprised politicians by going to Congress and asking for outdated fuel efficiency standards to be raised.

In 2000, the logistics company began to invest in hybrid vehicles when petrol was just $1.30 a gallon.

At 172 vehicles, FedEx owns the largest fleet of hybrid vehicles in North America and in the transportation industry – far fewer than what they would want to own.

“With vehicles like the Toyota Prius, other companies don’t buy that many and they aren’t being produced at commercial values,” he explains.

Among the failures is there has not been any US lead in the development of battery storage technology needed for hybrid vehicles. Instead, companies have been forced to buy batteries from Asia where suppliers are few and prices are high.

“You have to do something about the market penetration of this technology,” says Jackson who adds that despite the financial crisis, FedEx would buy more hybrid vehicles if they were available.

Another sector lagging behind is the automotive industry where air traffic management still uses 1960s technology.

While the US Department of Energy provides funding to develop new technology, no steps have been made to commercialise new innovations.

Climate change though is not just a US problem, but rather a global issue that has to be addressed by other major emitters, including India, Brazil and China.

“Kyoto standards do not even dent the problem,” says Orts, who agreed with the Bush Administration’s initial argument that all major greenhouse gas-emitting countries, even in the developing world, must be included in order to have an effective international effort to deal with the problem.

“Unfortunately, there was a total lack of leadership to move these discussions forward,” he says, “and it became clear that the true policy of the Administration was obstructionist.”

A handful of multinational companies have done their part in taking leadership roles in greening their supply chains.

David Refkin, Director of Sustainable Development, at Time Inc admits that just two and half years ago, the company’s former CEO could get away with saying the firm did not manufacture very much, if asked about the environmental impact of its products.

The world’s largest magazine publisher recently spent seven million dollars on a recycling campaign in New York City that helped reduce paper waste by nearly 30 per cent.

“We are a few months away from seeing legislation on measuring carbon footprints, once there is a dollar sign on carbon, everything will change,” says Refkin.

Diversion rates from landfills vary drastically among US states.  In most major cities in the west coast where there are government incentives to develop recycling centres, the rate ranges between 60 and 80 per cent.  In Houston, where no such incentives exist, it is just 3 per cent.

“We have to recreate our economy and do things that are unthinkable.  In a financial crisis, you cannot put these things aside, the earth isn’t going to wait, otherwise we’re heading for another crisis,” he says.

Geoffrey Geist, Manger of Global Responsibility for Gap Inc, says that only through industry-wide collaboration can effective change occur.

The apparel company has shifted towards using organic fibres and water-based dyes.

“I have been in the field and seen the downstream effect of denim pants that require excessive washing and what it does to the local environment,” he says. 

But energy is one area in the US economy where more environmentally-friendly innovations will likely be delayed by the financial crisis. 

Helen Howes, Vice President of Corporate Environment Health & Safety at Exelon Corporation, one of the nation’s largest electric utility companies, says in tough economic times, many energy companies are seeing a sharp rise in delinquent payments.

While the firm is investing in renewable energy products such as wind, solar, landfill gas and hydro assets, it is unlikely that any energy company will be in a position to invest in multi-billion dollar ventures such as new nuclear or integrated gasification combined cycle power plants that capture CO2 without loan gurantees from the federal government that would make these projects economically viable.

No one has built the next generation of nuclear plants in the US and there is uncertainty about the costs and timing of such plants especially in the current financial climate.

Two proposed ways to encourage companies to reduce emissions are a cap-and-trade system or a tax on carbon emissions. Under a cap-and- trade scheme, the government sets a limit on the amount of pollutants that companies can emit.

Because nuclear plants produce virtually no CO2 emissions, they would incur no compliance costs as compared to coal-fired plants which would have to incur costs through the purchase of carbon credits in order to operate.

Originally President-elect Barack Obama’s campaign proposal was to conduct a general auction for emissions credits as opposed to Senator John McCain’s campaign plan to allocate credits without an initial charge. In today’s difficult economic circumstances, most expect a compromise where McCain’s allocation approach will be adopted with the plan to move towards an auction system later.

One thing agreed upon is that the promise to address climate change will not be forgotten as it was in the Bush Administration.

“I predict that an Obama Administration will be much more prominent and forward-thinking at the international level – which is in fact the necessary level which any meaningful climate policy must be established,” says Orts.

 

The 2008 Net Impact North American conference was held recently at Wharton Business School.

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