Designing a GHG Management Strategy for Operational Advantages



For U.S. companies, much has evolved over the past few years concerning the regulatory treatment of greenhouse gas (GHG) emissions.  New air permitting requirements have emerged under the Clean Air Act, provisions for energy management have also been established, large-scale customers are driving carbon reductions and disclosure, and a cap-and-trade program is being launched in California.  Now more than ever is a prudent time for establishing an effective GHG management strategy.

Benefits of such a strategy include:

  • Integrated efforts to address multiple regulatory and market pressures simultaneously
  • Cost savings associated with GHG and energy reductions
  • Early GHG reductions and offsets to hedge against more costly and stringent requirements in the future
  • Coordinated planning for possible carbon offsets and renewable energy credits as a means for financing GHG and energy mitigation efforts
  • Enhancing brand name and marketshare with proactive GHG and energy management efforts

This article describes a useful framework for developing an effective GHG Management Strategy.  The framework is derived from Trinity's recent GHG advisory work – particularly, a GHG strategy project Trinity completed for an international energy company.  This strategy was developed after a detailed analysis of regulatory factors potentially impacting the company along with a benchmarking assessment of the company's competitors.  The overall framework provided in this article can be adapted and used by any organization seeking to improve the way it addresses GHG management challenges now and into the future.

Highlights on the GHG Strategy Framework

An effective GHG Management Strategy provides a framework for determining the optimal pathways for managing GHG emissions, risk and opportunities, and then executing actions to accomplish GHG management goals.  The strategy described in this article consists of a coordinated vision, commitments, components (areas of focus), initiatives, action items, and a long-term GHG implementation plan – as described below:

  • Policy and Governance – Overarching vision and approach for addressing GHG management challenges.
  • GHG Management Strategy Components – Components represent areas of focus for establishing objectives and targets in concert with a corporate GHG Policy.  Points of focus include:
    • Accounting and Reporting
    • Mitigation
    • Transparency
    • Advocacy
  • GHG Initiatives – Initiatives define how to translate strategy components into meaningful action.  GHG Initiatives highlight the primary targets and corresponding action items that will be pursued.  GHG Initiatives should be evaluated periodically and revised to reflect completed projects and changes in operations, regulatory pressures, or stakeholder concerns.
  • Action Items – Action items reflect the appropriate tasks, activities, and projects that are defined with detail in the long-term implementation plan.
  • Long-Term Plan – The plan identifies overarching goals, action items, responsible parties, and time frames for each element and initiative.

In moving from strategy components to a long-term implementation plan, an organization should consider the drivers for each area along with the available resources for accomplishing key tasks.  Drivers for the design and implementation of a GHG Strategy tend to include most of the following items:

  • Emerging regulatory requirements
  • Influence exerted by stakeholders
  • Corporate Social Responsibility commitments
  • Transparency (both internal and external)
  • Business operational efficiency
  • Cost effectiveness of options
  • Technological feasibility of options

Available resources generally include (a) interim or permanent process improvement teams (especially those focused on environmental or energy management), (b) existing organizational programs – such as formal environmental management systems, waste minimization programs, Six Sigma/lean manufacturing programs, along with corporate social responsibility programs, and (c) external consultants.

Additionally, the strategy must reflect a commitment from management, who needs to both lead and support the strategy and associated initiatives. This "tone-at-the-top" encompasses responsibility and accountability for actions of the company.

Policy and Governance

As a starting point for developing a meaningful GHG Management Strategy, organizations typically establish a GHG Policy to provide overall vision and direction.  For most organizations, the Policy sets forth broad, high-level commitments versus objectives with numerical targets.  [Specific reduction targets are commonly established under the Mitigation component].  Organizations often develop their policy as a stand-along often develop their policy as a stand-along document that addresses GHG issues only, but sometimes they integrate a GHG statement within a broader EH&S or Sustainability Policy.

Governance is also critical to the implementation of a GHG Management Strategy.  A corporation's "tone-at-the-top" dictates the culture and accountability of the enterprise. Leading companies often commission Board and/or Executive committees to address climate change/carbon management or sustainability/corporate responsibility. Elevating the leadership and accountability for these to the Board of Directors and executive ranks reflects the company's level of commitment to these as core business considerations, and integrates them into the fabric of their corporate strategy.

 

COMPONENT #1: ACCOUNTING AND REPORTING

The main goals of Component #1 are to estimate and document GHG emissions in accordance with prevailing requirements (regulatory or voluntary) and then manage emissions in conjunction with selected mitigation goals. Clearly, organizations can only manage what they measure, so it is important to have an accurate, well-documented GHG/energy profile in order to achieve any progress with respect to mitigating emissions.

Leading organizations frequently commit to quantifying emissions for regulatory requirements (e.g., EPA Mandatory Reporting Rule, CA AB32), as well as voluntary programs (e.g., The Climate Registry, Carbon Disclosure Project).  Accordingly, it is not surprising that the key initiatives under this component would likely include:

  • Voluntary reporting under selected programs
  • Mandatory reporting as required by applicable regulations
  • Organizational GHG management to achieve emission reductions

For each of these key initiatives the organization should consider relevant activities and then identify the best approaches for implementing them. The table above shows a few example activities and the thought process for determining how to translate initiatives into the long-term implementation plan.

SNAPSHOT: Managing A&R Data for Multiple Audiences

A North American energy company reports its GHG emissions to national regulators, as well as to several state and provincial authorities. It has also been disclosing GHG emissions and strategy/program data to The Carbon Disclosure Project. In order to ensure that data and disclosures were complete, accurate and consistent, the company developed a comprehensive GHG Management Plan and established a process for annual verification of the GHG inventory. This effort also supported GHG inventory verification that is required in selected states/provinces.

 

COMPONENT #2: MITIGATION

Key goals for Component #2 are to establish reduction targets and manage GHG reduction projects to mitigate GHG emissions while also improving both energy and operational efficiency.  This component is perhaps the most complicated of all four as it requires an analysis of existing and developing GHG regulations along with a cost and technical feasibility analysis of GHG mitigation options.

Best practice companies tend to establish specific GHG emission reduction targets and implement reduction projects.  The goal is to apply an integrated approach to GHG mitigation and emission reduction through establishing reduction targets (which may or may not be communicated externally), identifying potential reduction projects to achieve those targets, and realizing potential financial improvement opportunities.  Typical initiatives under Component #2 include:

  • Opportunity Assessment
  • Energy Efficiency
  • Carbon Trading
  • Carbon Capture and Sequestration

The Opportunity Assessment is the most important step and leads to other initiatives.  There are several levels of complexity that can be utilized to assess the spectrum of potential mitigation opportunities.  With a comprehensive list of potential projects specific to any mitigation sub-component, a conceptual approach to identifying, evaluating and screening options is described as follows:

  • GHG Mitigation Alternatives – Review various sources of information regarding potential options for mitigating GHG emissions.
  • Industry Applicability – Narrow list to those technologies that are applicable to an industry or a company's specific operations.
  • Technological Feasibility – While commercially viable alternatives need to be the focus, consider technologies that are still in the developmental or experimental stage and whether they should be revisited in the future.
  • Cost Effectiveness – Initial capital investments will ideally be balanced by reduced operating costs in the long term.  Even mitigation options that may be mandated should be implemented in the most cost-effective manner possible. Regardless of the economic criteria used. (e.g., payback period, ROI, NPV); any investment should contribute to improved operational efficiency and a more robust bottom line.
  • Achieving Mitigation Goals / Capital Allocation Requirements – Selected alternatives should achieve the desired GHG emissions mitigation and provide sufficient ROI.  In effect, the goal is to optimize the investment to achieve improvements in energy efficiency and reductions in GHG emissions. Because both maintenance and capital improvements are competing for investment funding, an ROI that exceeds a minimum hurdle rate may not be sufficient to justify implementing any specific project.

SNAPSHOT: Evaluating GHG Mitigation

An electric power producer is considering alternatives for improving the operational efficiency of its coal-fired fleet and reducing GHG emissions. By replacing a conventional coal-fired boiler with a Pressurized Fluid Bed Combined Cycle unit, it can generate 25% more electricity with the same coal consumption. While this improvement does not reduce the facility's GHG emissions, it does reduce its GHG emissions intensity. However, even though the project exceeds its minimum investment criteria, this is one of many such improvements that the company must compare for best overall investment of its capital budget.

 

COMPONENT #3: TRANSPARENCY

The main goal of Component #3 is to communicate with stakeholders to support the credibility and reliability of GHG management efforts.  Leading organizations generally have a vehicle for interaction with stakeholders in place via a Sustainability Reporting program. Under Component #3, a communications plan for stakeholders is prepared regarding all related actions.  The main elements included in the Communications Plan would generally include:

  • Corporate Social Responsibility Program
  • Performance Benchmarking
  • Voluntary Reporting
  • Scope 3 Emissions

SNAPSHOT: Maximizing Transparency

An international energy company presented information about its performance to stakeholders, reflecting the integration among the pillars of the corporate strategy. The purpose was to understand the stakeholders 'perspective compared to that of the company to identify issues that were a priority to both parties. The perspectives were mapped with the express purpose of informing the content of the sustainability report.

 

COMPONENT #4: ADVOCACY

Key goals for Component #4 are to engage with external stakeholders to communicate strategy elements and muster support, and to engage internal resources to champion the GHG strategy within the organization. The GHG Advocacy component includes all planning, dialogue, and financial support activity that an organization would deploy with internal as well as external stakeholders. Thus, it involves establishing mechanisms for better engagement with company shareholders, regulators, employees, the community, industry peers, and the public. Effective advocacy on GHG matters increases an organization's ability to understand external perspectives on its climate change risks and opportunities, provides a better mechanism for prioritizing these risks and opportunities, and ultimately improves the company's position for capturing opportunities.

The main initiatives under this component generally include:

  • Development of an advocacy plan
  • Regulatory participation
  • Engagement with various audiences including shareholders, employees, the community, NGOs, etc.
  • R&D support

As mentioned previously, the organization should consider key activities associated with each initiative and how these activities are best implemented.  The table below shows a few example activities and the thought process for determining how to translate.

SNAPSHOT: Regulatory Advocacy

Successful companies that maintain their competitive edge through engagement with stakeholders, often do so with their regulatory agencies. By working with the agencies, they often are able to streamline permitting timeframes and influence the rigor of developing regulations. If they are proactive and strive to operate 'beyond compliance', the new regulations can make better business sense and provide them with a competitive advantage, should the regulations reflect their enhanced environmental management approaches.



Developing the Long-Term Implementation Plan

The long-term implementation plan defines all action items to achieve organizational objectives and commitments.  The plan should contain the following features:

  • Strategy Component and Initiative - plan is organized by the four main GHG Management Strategy components and associated initiatives
  • Activities and Actions - consist of high level and general GHG Management System objectives (e.g., generate carbon credits)
  • Responsible Party - indicates which internal resources are responsible and accountable for  implementing each action
  • Timeframe for Completion - start and expected duration of an activity
  • Relative Budget
    • Low – costs are small relative to major capital/operational expense, and could include planning, permitting, management system development, reporting, advocacy and other comparable efforts
    • Moderate – costs would include feasibility or design/engineering studies, R&D, etc.
    • High – costs would include major capital or operational expense
  • Complexity - based on several dimensions including technical aspects, project management aspects, stakeholder interaction aspects
    • Low - lack of complexity across all dimensions
    • Moderate - complexity evident/likely in 1-2 dimensions
    • High - complexity evident/likely in 3 or more dimensions
  • Opportunity and Risk - Highlights opportunities and risks associated with each strategy,  component and initiative, and summarizes potential efficiencies, inefficiencies, benefits, costs, needed resources, and uncertainties
Conclusion

Given emerging regulatory requirements for GHG emissions and stakeholder concerns that are driving GHG reductions, many organizations are recognizing the need for a coordinated effort to address the challenges at hand.  Taking action to address carbon management is where the rubber meets the road.  Such actions should be informed by a thoughtful strategy that is integrated as a business imperative which reflects culture and commitment.