How to… prepare for a carbon cap-and-trade scheme

Business leaders are inundated with conflicting reports on climate change. With so much information and so little historical context, executives have been left to blindly navigate through this new "carbon-constrained" world in hopes of understanding how their own business will be affected. In some cases the decisions made or avoided, could be the most significant of their tenure.

Organisations of all sizes are engaged in developing coherent business strategies but are getting caught up in sorting through the science, propaganda, and greenwashing inherent in the climate change problem. Needless to say, this is not the ideal environment for making sound, strategic business decisions.

Many executives in North America have a basic understanding of carbon markets. Implementations of previous cap-and-trade systems have led many business people to believe that a compliance market will be implemented here: It is simply a question of when.

Unfortunately, most companies are limited in both their knowledge and resources for addressing this impending reality. They are further confounded by not knowing who in the organisation should do what, or what they should be doing. Many executives say they are waiting to see what the regulations will look like but in reality, they don't have a coherent strategy in place.

For top executives, all problems are disguised opportunities. In order to steer a company away from the pitfalls of a carbon market, leaders need to develop and implement effective strategies. These five steps can serve as a basis for developing such a strategy:

1. Get control over the greenhouse gas (GHG) inventory

Companies must have an accessible and auditable carbon inventory. The good news is that historical emissions data likely exists somewhere in the organisation. The bad news is that the data may be old, inaccurate or inaccessible.

When examining an inventory, ask the following questions: Is the inventory recent, accurate and auditable? Are there tools in place to analyse the data at the business level? And can it be shared and reported to all of the organisation's key stakeholders?

The ubiquitous spreadsheet has been employed judiciously for creating emissions inventories and has served its purpose well for organisations that need to simply record air emissions. But using spreadsheets to manage multiple emission points can in many cases lead to the much larger problem of unmanaged data growth propagating and compounding errors.

Spreadsheets are simply tables of data and require understanding and human knowledge to make them useful – knowledge that often leaves when employees depart. Today's executives are asking for the business implications of this spreadsheet data, not the data itself. This is an extremely important distinction that can directly affect corporate mandates around regulatory compliance, best practices, and ultimately, the company's financial health.

2. Understand your position

Elite organisations are adept at analysing and managing the risks and opportunities for their business operations. Very few, however, realise their carbon-related implications. Most executives are quick to recognise the "stroke of the pen" risk – the threat that new legislation will change their business environment on emissions. Few recognise other equally serious risks or the opportunities posed by emissions reduction plans that may be different even across business units within their own organisation.

Taking the lead in a new market can become a significant competitive advantage. The basis of the cap-and-trade system is to make organisations competitively reduce their emissions, yet few are taking the lead.

By acting now companies can realise a significant competitive advantage, enhance their corporate image, increase their perceived company valuation and access to capital, expose new business opportunities, and discover unrealised assets in a trading environment. These are just some ways companies can take problems and turn them into tangible opportunities that can benefit them financially.

3. Establish a financial perspective

Emissions trading is based on market mechanisms. As a result, carbon emissions are no longer merely a by-product of production but can have a direct impact on the bottom line of an organisation.

As such they must be: monitored and accounted for; inventoried and forecasted, planned and managed; and valued against some financial baseline

The key to success in this market is not compliance but rather performance, and learning how to leverage emission assets while mitigating liabilities.

Anything that affects a company's revenue and profitability must be reflected on the balance sheet, but until now carbon emissions have been absent. Companies need to put a price tag on their emissions, measure their output versus a cap or target over a time-line that extends into the future, and then use this to develop a strategy.

Familiar tools from other lines of business can be used to do this. Engage the financial experts from within the organisation to create a carbon balance sheet and other financial tools to see how a properly managed (and monetised) emissions inventory can influence the company's financial performance.

4. Build a strategy

The key to developing a carbon strategy is to look forward and move from compliance to performance-based standards. Explore all of the options available to the organisation before buying into the first mitigation strategy offered. Compliance-based carbon credits may prove to be a good financial choice, but will not be a panacea to your company's carbon problems. Search your organisation for potential unrealised assets that may mitigate your carbon risk. Both in advance of and following mandated targets, explore the options of pre-compliance offsets, energy efficiency improvements and partnerships. Finally, use the human resources you have in your company to find new ways to lower your carbon footprint and be competitive.

5. Execute and evaluate

With the multitude of options an organisation faces, it can be difficult to avoid 'analysis paralysis' when it comes to acting on an emissions strategy. Executives should ensure that once a strategy has been developed, the company has the resources available to execute and monitor the progress of the strategy. Many companies in North America and around the world have begun to create new positions specifically suited to strategic analysis and execution of an emission strategy.

Companies need to find a better way to track their emissions position. Some Fortune 500 companies have built their own emission monitoring and trading platforms but these can be costly to maintain. When shopping for a solution, look for software that can grow as needs grow and focus on strategy as well as compliance.

Window of opportunity

Across all sectors, companies have shown an interest and willingness to participate in the carbon market. Many have put together quality greenhouse gas inventories to meet proposed regulatory compliance needs. Unfortunately, rather than developing a coherent proactive emissions strategy, executives find themselves being reactive. As with any strategy, leaping before you look can be an expensive and risky proposition, and too often these organisations will jump straight into the carbon credit market, buy an unverified offset, or implement a well-meaning but ill-advised reduction project without fully understanding their own position.

It is important to examine a corporate carbon footprint the way an institutional investor would manage a stock portfolio – by understanding what they have, their risks, and what makes the best financial sense now and into the future. Remember, there is presently a window of opportunity where the competition views the emission market as a mandatory compliance game rather than a strategic opportunity.

There is a clear competitive advantage available to companies that realise this opportunity – the key will be to act while the window is still open.

Stephen Mooney is co-founder of Carbonetworks, a software platform that helps companies create effective carbon emissions strategies that reduce costs and capitalise on emerging global markets. He is also responsible for the company's global growth and strategic business development initiatives.

A version of this article first appeared at Climatebiz.com