Climate Change Is Upon Us—Is Your Firm Up to the Challenge?

Analysis of News Events
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After spending a little time researching global warming and carbon emissions, I have concluded that the likely reason that the Bush Administration has been so notoriously reluctant to embrace the Kyoto Protocol is because our top guy probably just doesn't understand it. No fault there—I was scratching my head as well with the specialized dictionary of terms that have grown up around this phenomenon.

 

Somehow, because we have refused to go along with the European Union and the 172 Kyoto protocol supporters (as of June 2007) on how we should best address the problem of humankind's putting too much carbon into the atmosphere, we just blithely buy another SUV and think that we don't have to deal with the problem.

Well, my friends, the day of reckoning is drawing nigh, and it is the IT professional who likely will be in the thick of things before very long, trying to figure out how to collect all the data necessary to measure, document, and verify a company's carbon footprint. It will be Sarbanes-Oxley redux.

 

Writing this month in Forbes magazine, Associate Editor Andrew T. Gillies covered a recent gathering of the fledgling trade association known as the Carbon Management Council. Participants attended the meeting to try to gauge the impact on business as governments do the traditional knee-jerk in seeking to solve a problem that has been ignored far too long.

 

One of the implications of climate change is clear, he says. "Given the emerging regulatory response to global warming, all businesses should get their ducks in a row now when it comes to keeping track of their output of carbon dioxide and other gasses blamed for climate change."

 

Quoting one of the conference panelists, Jerry Schmits, director of product marketing for expense management consultancy Cadence Network, Gillies writes, "The assumption is going to be that, as an organization, you will already have your data in line. All this is going to almost act like the next Sarbanes-Oxley."

 

The time frame? It probably will be as early as the end of 2009, depending on how much arm-wrestling goes on in Congress between the free-market Republicans and the regulation-minded Democrats. The writing is on the wall, however, about industry having to come to the party. You will play, or you will pay—or perhaps both.

 

U.S. Rep. Jay Inslee, D-WA-01, the conference keynote speaker, said the major provisions for an energy bill regulating carbon emissions are already before Congress. Inslee outlined a system whereby permits to pollute are given away or auctioned and then traded by corporations and governments.

 

"We allow private actors—your company, me, my family—to put pollution into the atmosphere in unlimited amounts at zero cost," Inslee was quoted as saying. "We have a failed market in that regard."

Companies Earn Credits for Reducing Emissions

The accurate measurement of carbon and other harmful emission gases has been one of the stumbling blocks in the road to a successful universal market system for exchanging emissions or "carbon" credits. In very broad terms, the idea behind emissions trading that is a centerpiece feature of the Kyoto Protocol states that companies can earn credits for reducing emissions, and, alternatively, they can purchase credits instead of making expensive changes to meet emissions standards. 

 

The whole notion of carbon credits is offered in lieu of a tax on polluting, which people would likely resent. Although the idea gets rather complicated, the basic notion is that, as emission standards are tightened, it becomes increasingly difficult to meet the regulations, so the carbon credits become more expensive. Eventually, it becomes cheaper to buy a new high-efficiency scrubber smoke stack than to keep buying carbon credits. Those companies that take the initiative to reduce their emissions of carbon dioxide (and the five other harmful gasses) will be reimbursed for their investment through the sale of their credits.

 

The challenge ahead is a big one. As a 2006 report by the World Bank notes, "Reducing climate change risk and promoting investment in clean energy systems is a long-term venture requiring billions of dollars of annual investment…. In order for the (carbon) market to generate sustainable long-term capital at the scale required, the market needs a strong compliance system, more transparent and credible processes about formulating and releasing emissions data, and clear signals about future policy direction."

 

In other words, before you can sell a carbon credit, you need to know exactly what it is and how much it's worth. Let's face it: A dollar bill is only a piece of paper; it's worth something because people agree on its value, which is regulated. As IBM states in its release announcing the new emissions-measuring technology, "Until now, carbon emissions monitoring was a manual, multi-pronged process, lacking scientific validity and efficiency. With no centralized solution to provide the ability to adhere to standards, companies have been reluctant to invest in reducing carbon emissions."

GreenCert Is a Greenhouse Gas Meter

The solution announced this week comes from a small group of companies using IBM technology to develop a solution it calls GreenCert. Essentially, it's what developers call a "greenhouse gas meter" capable of accurately calculating carbon reductions across multiple industries and devices. The technology is expected to extend the global greenhouse gas reduction trading market to a much broader segment of industries than currently participate. Any organization—whether it is from the power industry, agriculture, even financial services, or government—now will be able to accurately measure its carbon footprint using GreenCert.

 

GreenCert provides an automated software tool to "gauge and document greenhouse gas management efforts." It then transforms the data it collects into certified carbon emission reduction credits, or CCERCs. Whereas organizations previously had to rely upon customized approaches to measure emission reductions before a credit could be monetized and traded, the job now is considerably easier with GreenCert. Forget the highly specialized labor-intensive methods of the past. Kyoto-related credits are issued through the Clean Development Mechanism (CDM) or the Joint Implementation (JI) mechanism. There are non-Kyoto related exchanges and authorizing standards as well. The hope is that this technology will standardize the certification process allowing for trading credits between different markets.

 

The need for such a tool has been building for some time. The signers of the Kyoto Protocol have been at this greenhouse gas measurement thing for more than five years now. One could argue that the U.S. is actually behind the times when it comes to measuring the greenhouse emissions of its industries and citizens. Interestingly, everything has a carbon footprint, from your fax machine to your coffee pot, and it's all measurable. When it comes to gathering data from large, complex organizations, the job can get tricky.

 

Ironically, it's not just private and public organizations that are facing a growing need to acquire cost-effective tools to quantify and manage their greenhouse gas footprint. Investors and those responsible for various physical operations or entities are increasingly demanding a full accounting of greenhouse gas-related assets and liabilities, according to IBM. Energy use is becoming a critical piece of data as converting emission reductions into carbon credits opens up a previously untapped source of revenue.

 

The technology behind GreenCert is somewhat of a mashup. The solution is a collaborative project among IBM Business Partner Enterprise Information Management, Inc. (EIM), Evergreen Energy, Inc., and Evergreen Energy's subsidiary, C-Lock Technology, Inc. The GreenCert infrastructure was designed and built by EIM based on an SOA architecture that uses IBM software. Multiple technologies were involved in the solution, including WebSphere Portal, Lotus Forms, DB2 UDB, Content Manager, Records Manager, WebSphere Process Server, and WebSphere Business Process Management. The engine that is at the core of GreenCert was designed by C-Lock and its chief technology officer Dr. Patrick R. Zimmerman, who patented the algorithm technology underlying the unique agent.

The Market for Carbon Credits

While the overall value of the aggregate carbon markets was more than $10 billion in 2005, according to IBM's figures, some believe it will be measured at three times that by the time statistics are compiled for all of last year's transactions.

 

In 1997, the American delegation to the United Nations Conference on Climate Change in Kyoto actually signed what later became known as the Kyoto Protocol, committing signers to an emissions reduction of 5.2 percent below 1990 levels. Though Vice President Al Gore signed the agreement in symbolic support, the Clinton administration was disenchanted with the absence of participation by developing countries. Yet it  was actually the U.S. Senate that refused to ratify the treaty. Senators believed that the reductions in emissions that were called for were so steep that to meet them would have precipitated an economic recession at home.

 

The idea of trading carbon credits continued to percolate in U.S. academia, however, and the concept began to take shape on its own, both in the U.S. and abroad. Three years after Kyoto , a grant from the Joyce Foundation, a leading Chicago philanthropic organization, given to the Northwestern University graduate school of management was enough to develop a model for a cap-and- trade market designed to facilitate greenhouse gas reductions. A follow-on grant in 2001 took the market concept to design phase and involved more than 100 professionals from the corporate, public, non-governmental, and academic sectors.

In 2003, the Chicago Climate Exchange, or CCX, commenced trading operations with 13 charter members. It was the world's first, and is today North America's only, active voluntary—yet legally binding—integrated trading system to reduce emissions of all six major greenhouse gasses (GHGs). Members of the exchange, which today includes IBM, are leaders in greenhouse gas management and represent all sectors of the economy. The commodity traded at CCX is the CFI contract, each one represents 100 metric tons of a given emission gas.

 

In 2005, CCX launched the European Climate Exchange (ECX), now the leading exchange operating in the European Union Emissions Trading Scheme (EUETS). CCX also launched the Chicago Climate Futures Exchange (CCFE), a regulated futures exchange for U.S. SO2 allowances and U.S. NOx Ozone Season allowances, the world's first environmental derivatives exchange. Other non-Kyoto related exchanges include England 's UK ETS and London 's Emissions Trading PLC, Australia 's New South Wales Greenhouse Gas Abatement Scheme, the northeastern United States ' Regional Greenhouse Gas Initiative, and various initiatives undertaken by individual states, such as California and several cities across the U.S.

 

While the price of carbon credits has dipped the past few months and Europeans are finding that their value has been depressed because the industrial emission standards have been set unreasonably high, the time may be right for a surge in carbon credits trading. Whether that flourishes or businesses simply are subjected to stricter government regulations, the need for measuring the carbon footprints of today's businesses is a foregone conclusion. Gathering the data necessary to meet the anticipated reporting requirements will surely involve computer technology and therefore will fall under the purview of IT programmers and administrators.

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