Cleaning Up Carbon

Pressure to curb carbon emissions is mounting. How companies respond will affect much more than their bottom lines.

In January, the United Nations’s Intergovernmental Panel on Climate Change — a group of scientists and government officials from 113 countries — issued its much-anticipated fourth report on global warming. In it, the panel not only indicated that global warming is worsening, but that the rise in temperatures is likely caused by human activity. How likely? The panel said it’s at least 90 percent sure humans are responsible.

In the contentious battle over global warming, 90 percent may be as close to a dead-certain lock as you can get. Equally as certain is that businesses — the primary generators of greenhouse gases — will be held accountable for what the report calls the “unequivocal” change in the planet’s weather.

The reckoning has already commenced. In the 2007 proxy season, investors filed 42 global-warming resolutions with U.S. companies — nearly double the number filed three years ago. At the same time, coalitions of eco-minded institutional investors have started to confront corporations considered slow to address their own carbon emissions. In February, a group of powerful institutional investors posted a list of 10 offending businesses, including ConocoPhillips, ExxonMobil, and Wells Fargo — then sent the dishonor roll to various news outlets, including CFO.

Such lists can harm reputations and trigger expensive campaigns to counter the attack. Risk consultants believe these shareholder complaints are merely the opening shots in a coming war on corporate CO2 emitters. They point out that Congress, after years of inaction, finally appears ready to tackle global warming. The most likely outcome? A federally enforced limit on the amount of CO2 companies can emit. Businesses that fail to make their numbers could pay a steep price. Under a cap-and-trade system — the centerpiece of many current bills — laggards would have little choice but to buy costly offsets from companies that have exceeded their emission-reduction requirements. Under other proposals, excessive emitters would be hit with a penalty, known colloquially as a carbon tax, that will prove difficult to pass along to customers.

Businesses face other regulatory pressures as well. The European Union now appears ready to impose its own carbon tax on imports from industrialized countries that have failed to ratify the Kyoto Protocol (read: the United States and Australia). In a recent interview, French president Jacques Chirac described a carbon tax as “inevitable.”

Closer to home, a growing number of states — notably California, New Mexico, and Massachusetts — are setting aggressive greenhouse-gas reduction targets for utilities and other sizable producers of CO2. “Each company is going to have to deal with some sort of [CO2] regulation,” says Peter Breitstone, managing principal and CEO of Aon’s Environmental Services Group. “We know that it’s coming.”

Indeed, it appears that corporations will be grappling with their carbon output for decades. In some cases, product lines may need to be altered. Automakers, for example, claim it could cost as much as $3,000 per vehicle to build cars that will meet California’s expected emissions requirements. Other businesses will end up selling operating units that generate excessive greenhouse gases. Corporate officers will also have to deal with increasing numbers of climate-related lawsuits and the unsettling prospect that damages may not be covered by general liability or directors’-and-officers’ policies (see “Up in Smoke” at the end of this article). Dan Anderson, professor of risk management and insurance at the University of Wisconsin, goes so far as to say: “Greenhouse-gas emissions will be one of the critical business risks of the 21st century.”

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