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Are you missing the next wave of Innovation?


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TABLE OF CONTENTS

Executive Summary for Business.......................................................9

Management Report: Operating in a Carbon Constrained World......13

Section One: The New World of Carbon Trading: How Emissions ReductionsMake Sense and Make Money.................................................................14

Section Two: GHG reductions that achieve CFIs best practices ................18

On-site Direct Emissions (ODE).....................................................................18

Opportunities to reduce fossil fuel combustion ...............................18Non CO2 GHGs ..........................................................................21Efficient use of electricity............................................................. 24Onsite sequestration ..................................................................25

Off-site emissions, offsets and demand management.......................................26Mobile combustion...................................................................... 26Offset projects...........................................................................26

Exchange Methane Offsets (XMOs) .....................................................26Exchange Forestry Offsets (XFOs).......................................................27Exchange Soil Offsets (XSOs).............................................................27

Demand Management..................................................................................28

Section Three: Whole system design capturing multiple benefits.................29

Section Four: The Business Case for GHG Emissions Reduction Strategies....32

Cost Reductions........................................................................................... 32

Sector Performance of Companies Reducing GHGs ..........................................35

First Mover Advantage.................................................................................. 37

Good Corporate Governance.........................................................................39

Reputation Management............................................................................... 40

Insurance Access and Costs..........................................................................41

Legal Compliance......................................................................................... 42

Concerns Regarding Fiduciary Duty ...............................................................45

Shareholder Activism...................................................................................45

Access to Capital.........................................................................................46

Reduce Risks of Exposure to Higher Carbon Prices ..........................................46

Conclusion...........................................................................................47

Operations Report: Overview...........................................................49

Part 1: CFI Opportunities from reducing CO2 Emissions from EnergyProduction and Use...................................................................50

Reducing CO2 Emissions from Electric Power and Steam Generation............50

Reducing CO2 Emissions from Stationary Combustion: The Benefits of Co-Generation to Business, Universities and Municipalities..............................53

The Benefits of Energy Efficiency for Energy Utilities........................................54

Benefits of Fuel Switching ............................................................................63An Historic Shift in the Energy Sector: Small is Profitable ................................70


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Part 2: Reducing Process Emissions (including non-CO2 emissions) inHigh GHG Emitting Sectors........................................................75

Iron and Steel Production ......................................................................75

The Aluminum Sector ...........................................................................79Energy Efficiency.........................................................................................81Greenhouse Gases Reduction in the form of Perfluorocarbons (PFCs).................81

Improvements in Greenhouse Gas Emission Reductions from Recycling..............82

Waste Management ..............................................................................83

Contributions of the Manufacturing Sector to Greenhouse Gases .......................85

International Examples of Best Practice in Greenhouse Gas Reductions..............86

1. Small Manufacturer - Harbec Plastics Inc., U.S............................................86

2. Large Manufacturer: DuPont...................................................................... 88

3. Large Manufacturer: Intel Corporation........................................................89

Semi-conductor Wafer Production (PFC emissions)....................................90Cement Production................................................................................ 93

Case Study: CEMEX - leading global producer and marketer of quality cementand ready-mix concrete products................................................................. 97

Ammonia Production.............................................................................99

Organic Recycling: Case Study of the Multiple Benefits of Greenhouse GasReduction Strategies..................................................................................100

True Landfill Costs.....................................................................................102

Packaging for Community Profit................................................................... 103

Ensuring Carbon: Nitrogen Balance..............................................................104

HFC-23 Emissions from the Production of HCFC-22 and Conversion to CO2Equivalence........................................................................................ 106

N2O from Adipic Acid and Nitric Acid Production .....................................106

Electrical Transmission Equipment (SF6 emissions).................................. 109

Part 3: Transport Sector - Mobile Combustion...............................112

Universities and Municipalities .............................................................114

Feebates: Municipalities ......................................................................114

Part 4 - Offsets..............................................................................116

Capturing Methane from Coal Mines ......................................................116

Forestry Offsets Project .......................................................................117

Soil Offsets........................................................................................118

Farming Offsets .................................................................................119


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TABLE OF FIGURES

Figure 1: STMicroelectronics commitment to Carbon Neutrality......10

Figure 1: CCX Trading Interface.......................................................14

Figure 2: CCX CFI Vintage 2005 - Volume & Price............................15

Figure 3: Forward Pricing Curve......................................................16

Figure 4: The Million Solar Roofs Initiative, San Francisco..............19

Figure 5: Global GHG emissions for DuPont (1990 2002).............24

Figure 6: Onsite Sequestration........................................................25

Figure 7: ZERI Pavilion in Manizales, Columbia................................27

Figure 8: Percentage change in total return of environmental leadersvs. laggards in the forest and paper products sector 1999-2003...................................................................................................35

Figure 9: Percentage change in total return of environmental leadersvs laggards in the oil and gas sector 1999-2003.......................36

Figure 10: Percentage change in total return of environmentalleaders vs laggards in the EU electric utilities sector 2000-2003..................................................................................................36

Figure 11: Percentage change in total return of environmentalleaders vs laggards in the USA electric utilities sector 2000-2003

..................................................................................................37

Figure 12: A critical mass of enabling technologies and methods toachieve end use efficiency is creating a new wave of innovationin the energy sector..................................................................38

Figure 13: Economic insured and uninsured losses with trends.......42

Figure 14: Combined heat and power systems.................................52

Figure 15: Electricity Generation Comparison..................................53


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Figure 16: Wes Birdsall....................................................................57

Figure 17 Transmission losses from electricity plants.(Source: RMI.)..................................................................................................63

Figure 18: US Wind Resources. (Source US Department of Energy,National Renewable Energy Laboratory)...................................66

Figure 19: Farmers can plant crops right to the base of the turbines.(Source: Warren Gretz, National Renewable Energy Laboratory)..................................................................................................67

Figure 20: Rancho Seco, Sacramento...............................................69

Figure 21: Sacramento Municipal Utility District (SMUD) installingdomestic solar water heating systems......................................70

Figure 22: Maximum and average sizes of new generation units(fossil-fuelled steam utilities, 5-year rolling average) by year ofentry into service......................................................................71

Figure 23: Critical mass of innovations meeting real market needscreates new waves of innovations............................................72

Figure 24: A new wave of innovation in the energy sector..............73

Figure 25: Smelting for Iron............................................................75

Figure 26: EU steel industry energy consumption per tone of finishedsteel vs. EU steel industry CO2 emissions per ton of finishedsteel..........................................................................................76

Figure 27: Aluminum Ingots............................................................79

Figure 28: Carbon dioxide emissions from EU manufacturing sectorand gross value added..............................................................86

Figure 29: Harbec Plastics wind turbine..........................................88

Figure 30: IBM Circuit Board............................................................91

Figure 31: Business as usual PFC emissions vs. actual PFC emissionsdue to GHG emission reductions................................................92


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Figure 32: Wafer Chip, Motorola......................................................93

Figure 33: Cement Industry Greenhouse Gas Emissions..................94

Figure 34: Energy Consumption in U.S. cement production by fuel,1970 to 1997.............................................................................95

Figure 35: Carbon emissions from the U.S. cement industry by clinkerproduction process....................................................................96

Figure 36: The Ammonia Manufacturing Process.............................99

Figure 37: CO2 separation and capture at an ammonia plant........100

Figure 38: Map of soil degradation globally...................................101

Figure 39: Vertical Composting Units.............................................103

Figure 40: CSIRO Effluent plantation project, Wagga Wagga,Australia..................................................................................105

Figure 41: SF6 emission reduction partnership emission rate trend,

1999 2003............................................................................109

Figure 42: Cross-Sectional View of Cold Dielectric Design of High-Temperature Superconducting................................................111

Figure 43: Ford Escape Hybrid.......................................................113

Figure 44: Capturing methane from coal mines.............................116


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TABLE OF TABLES

Table 0: IPCC has identified the 6 major GHGs................................22

Table 1: Reducing GHGs and Gaining CFIs in Electric Power andSteam Generation Source: Cogeneration Technologies.............52

Table 2: Stationary Combustion: Onsite Energy Generation otherthan from Electric Power and Steam Generation.......................54

Table 3: Reduce CO2 Emissions from Stationary Combustion throughEnd Use Efficiency.....................................................................62

Table 4: Trends in energy use, by source, 1995-2001......................64

Table 5: Heat and gas recovery options...........................................78

Table 6: Components of net emissions for various municipal solidwaste management strategies..................................................84

Table 7: Carbon Dioxide Emissions from Manufacturing by IndustryGroup, 1998..............................................................................85

Table 8: Electronic gas applications and climate impact..................90

Table 9: Energy efficient practices and technologies in cementproduction.................................................................................98

Table 10: Abatement technologies Source: U.S. EPA, 2000............108

Table 11: The greenest vehicles of 2005........................................113

Table 12: Key forestry offset project types and their effect on GHGs................................................................................................117

Table 13: US EPA on Representative Carbon Sequestration Rates andSaturation Periods for Key Agricultural & Forestry Practices. .120


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Executive Summary for Business

CEOs surveyed by the World Economic Forum in Davos in 2000, stated that for

them, The greatest challenge facing the world at the beginning of the 21st Century

and the issue where business could most effectively adopt a leadership role - isclimate change.1 The 2005 Forum agreed. The BBC reported, On day one of the

forum, some 700 top business people and political leaders held a "town hall

meeting" to decide what the world's most burning issues are. Their verdict: What

worries us most are not taxes, overregulation and low-cost competition, but

poverty, equitable globalisation and climate change.2 In February of 2005 the world

agreed. Despite the fact that Australia and the United States yet still refuse to ratify

it, the Kyoto Protocol to reduce the emissions of greenhouse gasses (GHGs) came

into force, signed by essentially all of the worlds industrial nations.1 Fortunately,

enormous opportunities exist to enable businesses to address global climate changein ways that are profitable.2 Executives who embrace these opportunities will not

only gain an advantage in the future carbon-constrained world, but will strengthen

every aspect of their business.

In 2000, as part of its re-branding as Beyond Petroleum, British Petroleum (BP)

announced a corporate commitment to reduce its emissions of greenhouse gasses

to 10% below its 1990 levels by 2010. This was seen as an impossibly bold move

for a company entirely dependent on carbon-based fuels. In fact, BP achieved the

cuts in only two years, and in the process saved itself US$650 million. While returns

on traditional investments average 40-50%, investments in increasing energyefficiency often return more than 300%. Indeed, Rodney Chase, a senior executive

at BP, subsequently reflected that even if the program had cost BP money, it would

have been worth doing because it made them the kind of company that the best

talent wants to work for.3

BPs achievement is actually one of the less impressive corporate accomplishments

in the field of reducing carbon. DuPont has committed itself to reducing GHGs by

65% over the same time frame. The company proposed to raise revenues 6 percent

per year during the ten years with no increase in energy use, and by 2010 source

10 percent of its energy and 25 percent of its feed stocks from renewable energy.Did DuPont join Greenpeace?! The company made this announcement in the name

of increasing shareholder value. And indeed they are: Since 1990, DuPont has kept

energy use the same and increased production by 30 percent. Globally, DuPonts

emissions of GHGs are down 67 percent. Global energy use is 9 percent below 1990

levels, and the company is on track with its renewable energy targets. It estimates

that by the time it is done it will have saved about $2 billion. In one example four

engineers at DuPont recently figured out how to spend a little (less than $100,000)

and save a lot (more than $5 million per year in energy costs).4

And even this is not the cutting edge. STMicroelectronics (ST) pledged to have zero1 141 countries have ratified the Kyoto Protocol, Seven including the U.S., Australia and Indonesia signed it buthave so far refused to ratify the treaty


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net CO2 emissions by 2010 with a 40-fold increase in production over its 1990

levels. It set a 2010 goal of 15 percent renewable energy, 55 percent from

cogeneration and 30 percent from conventional sources. By the time ST is climate

neutral, it will have saved US$900 million. Perhaps more important, STs

commitment to this goal has driven the companys innovation, taking the company

from being the number 12 chipmaker in the world to being the number 6.

Figure 1: STMicroelectronics commitment to Carbon Neutrality

(Source: STMicroelectronics Sustainable Development Report 2003)

None of these companies were required to do this. Their leaders simply felt that it

was the responsible thing to do. Companies that embark on this exciting journey

find that not only does a commitment to behave in more sustainable ways cut their

costs, but it can also increase worker productivity. A survey of a dozen energy

savings programs that installed better lighting showed increases in labor

productivity of 6 to 16 percent.5 As the business case for energy efficient strategies

has improved, so has the imperative to act. The struggle to understand the science

of complex carbon cycles has afforded business leaders and politicians the luxury of

waiting. For better or for worse, that time has passed.

3

It is gone for two reasons.The first reason, science has revealed deeper trouble and shorter timelines for

solving global warming problems than had previously been thought. In January,

2005, Dr. Rajendra Pachauri, the chairman of the Intergovernmental Panel on

Climate Change (IPCC), the international scientific body charged with establishing

the science of climate change, told an international conference in Mauritius attended

by 114 governments that global warming has already hit the danger point that

international attempts to curb it are designed to avoid. Pachauri, picked by the Bush

Administration to head the IPCC, stated that he personally believes that the world

has "already reached the level of dangerous concentrations of carbon dioxide in theatmosphere," and called for immediate and "very deep" cuts in emissions. He cited


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a multi-year study by 300 scientists showing that the Arctic was warming twice as

fast as the rest of the world, and that its ice cap had shrunk by up to 20 per cent in

the past three decades. Remaining ice is 40 per cent thinner than it was in the

1970s and is expected to disappear altogether by 2070. In January 2005, as he

spoke, arctic temperatures were eight to nine degrees centigrade higher than

normal.

People have changed the carbon dioxide content of the atmosphere (one main

cause of global warming) by 20 percent in the last four decades, and today add

three times more annually than in 1960.6 The levels of carbon dioxide have leapt

abruptly over the past two years, suggesting that climate change may be

accelerating out of control. Pachauri stated that because of inertia built into the

Earth's natural systems, the world is now only experiencing the result of pollution

emitted in the 1960s, and much greater effects would occur as the increased

pollution of later decades worked its way through. Carbon released into the

atmosphere today will still be insulating the earth for decades. Pachauri concluded:

"We are risking the ability of the human race to survive."7 Recent scientific research

concludes that abrupt climate change could occur far faster than the models have

predicted.4 This would increase the urgency of corporate and societal action.

The second reason: to adopt an aggressive climate strategy is equally important for

business. As the examples above demonstrate, competent greenhouse gas

management is becoming a proxy for competent corporate governance. Leaders

already capturing the sustainability advantage often start because they realize that

acting now is actually a no regrets strategy: if climate change turns out to be real,

they will already be in a leadership position in dealing responsibly with it: but even

if the scientists are wrong and there is no threat to the climate, these are actions

that they want to take anyway, because doing so is profitable. In a world that

overwhelmingly recognizes climate change as a serious threat, behavior that

ignores it is coming to be seen as irresponsible. In 2003 the Columbia Journal of

Environmental Law published an article demonstrating the legal feasibility of

lawsuits holding companies accountable for climate change. The effects of such

litigation on companies' market value and shareowner value remains to be seen.8

The first such suits have already been filed.5

In 2003, the Wall Street Journal reported that With all the talk of potential

shareholder lawsuits against industrial emitters of greenhouse gases, the second

largest re-insurance firm, Swiss Re, has announced that it is considering denying

coverage, starting with directors and officers liability policies, to companies it

4 Tim Barrnetts Scripps work, From November 28 to December 9, 2005 approximately 10,000 scientists,environmentalists and politicians from 180 countries will meet in Montreal to begin a debate that will, in time,possibly lead to even stronger commitments to reduce carbon emissions by 2050. These discussions will form thebasis for development of a Post Kyoto Framework.5 FoE, in conjunction with Greenpeace and several western cities, filed one of the first climate change lawsuits last

year. The suit charges two U.S. government agencies with failing to comply with National Environmental Policy Act(NEPA) requirements to assess the environmental impact of projects they financed over the past decade. The statesof Connecticut, Massachusetts, and Maine have also filed a climate change lawsuit against another U.S. governmentbureau the Environmental Protection Agency for failing to regulate carbon dioxide emissions under the Clean Air


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decides arent doing enough to reduce their output of greenhouse gases .9 In the

United States, the new Sarbanes-Oxley Act10 makes it a criminal offense for a

company board of directors to fail to disclosure environmental liabilities (including

greenhouse gas emissions) that could alter a reasonable investors view of the

organization. In France, The Netherlands, Germany6 and Norway, companies are

required by law to publicly report their greenhouse gas emissions.

In January 2005 an independent commission of businesspeople, politicians and

scientists released a report to the G-8 meeting, urging all G-8 countries to cut

carbon emissions, double their research spending on green technology and work

with India and China to build on the Kyoto Protocol. The report recommended that

the major countries agree to generate a quarter of their electricity from renewable

sources by 2025 and to shift agricultural subsidies from food crops to biofuels. The

report further recommended wider international use of emission trading schemes,

which are already in use in the European Union, under which unused carbon dioxide

quotas are sold. The profit motive, stated the report, is expected to drive

investment in new technology to cut emissions further.11

Fortunately, it is now easier than ever for a company to reduce its emissions of

greenhouse gases technically, socially and economically. The advent of carbon

trading mechanisms such as the Chicago Climate Exchange (CCX) and European

Climate Exchange (EUX) provides organizations emitting greenhouse gases both the

opportunity to sell reductions in emissions, together with the ability to participate in

a proven risk-management system of futures contracts and financial derivatives.7

When combined with appropriately aggressive reductions in greenhouse gas

emissions, this is the path to both short-term and long-term success. Making sense

of climate change is synonymous with making money.12

This Management Report, and its accompanying Operations Report and Training

Modules, are offered by the Chicago and European Climate Exchanges to business,

non-profit organizations and government departments to present a profitable

mechanism to prosper in the new carbon-constrained world. The materials provide

additional resources for decision-makers, including leading-edge company and

government case stories; summaries of climate change science and expected

human impacts; emissions trading and regulation systems; the economics and

public policy of climate change; and management frameworks for getting started.

6 In Germany, only heavy industry is required to report greenhouse gas emissions.7 On December 12, 2003 the Chicago Climate Exchange commenced trading. Since then, major internationaldevelopments have included the opening of the EU Emissions Trading Scheme (EU-ETS) on Jan 1, 2005 and the

entering into international law of the Kyoto Protocol. Approximately 29 percent of the 500 largest companies in theworld (the FT500) are located in countries that are included in the European Union Emissions Trading Scheme. Ofthose companies, approximately 32 percent have facilities covered by the EU-ETS. In the US, over 20 states have


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Management Report: Operating in a Carbon

Constrained World

This Management Report demonstrates to managers of companies, communities

and such organizations as universities and religious organizations that there are

cost-effective and profitable methods to reduce emissions of greenhouse gasses

(GHGs). This report describes the opportunities to enter the market now being

created to create and trade carbon financial instruments, and how companies are

already committing to and achieving deep cuts in greenhouse emissions as a new

path to competitive advantage It discusses how in many industrial sectors,

environmental leaders are outperforming laggards, and how committing to carbon

responsible behavior is coming to be seen as a proxy for good governance. It

discusses the social political and regulatory forces that round out the business case,

describing why climate management strategy is todays risk management strategy.

The Report has three sections:

Section one presents the opportunity to become a participant in the cutting

edge greenhouse gas trading regimes now operating in North America and

Europe. It succinctly describes the array of Climate Financial Instruments

(CFIs).

Section two describes how various GHG reductions enable a member of a

Climate Exchange to achieve CFIs. It presents case studies of best practices

in emissions reductions. It discusses the cost effective ways to reduce both

carbon and non-carbon emissions of greenhouse gasses. It provides case

examples of best practice in profitable ways to cut each of these emissions.

Section three sets forth the business case for climate impact management. It

documents the claims made in the Executive Summary, describing how

approaching climate management wisely will improve your bottom line. It

shows how organizations that take a systemic approach to incorporating

strategies to reduce GHG emissions throughout the organization increase

shareholder value, and better serve community stakeholders and taxpayers.

It presents evidence that companies that implement climate management

programs can achieve high rates of return, outperform others in their sector,

reduce their risks and capture multiple benefits for the organization. It

demonstrates that there is an overwhelming case for undertaking a climate

management strategy


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Section One: The New World of Carbon Trading: How EmissionsReductions Make Sense and Make Money

Aidan Murphy, vice president at Shell International, stated in 2000: The Kyoto

treaty has prompted us to shift some of its [Shells] focus away from petroleum

toward alternative fuel sources. While the move has helped the company make

early strides toward its goal of surpassing treaty requirements and reducing

emissions to 10 percent less than 1990 levels, Shell is being driven largely by the

lure of future profits We are now involved in major energy projects involving wind

and biomass, but I can assure you this has nothing to do with altruism We see

this as a whole new field in which to develop a thriving business for many years to

come. Capital is not the problem, its the lack of ideas and imagination.13

Into this gap stepped Richard Sandor, the creator of the Chicago Climate Exchange.

The failure of the United States Senate to ratify Kyoto did not deter him. Sandor

remarked Wait a minute, governments dont make markets, traders do. Im a

trader, lets make a market. And on December 12, 2003, the Chicago Climate

Exchange (CCX) opened for trading and by July 1, 2004, had traded over 1

million tons14 of Carbon Dioxide.8 CCX is a greenhouse gas emission reduction and

trading program for emission sources in the United States and offset projects in the

United States, Canada, Mexico and Brazil. It is a self-regulatory, rules-based

exchange designed and governed by CCX members.

Figure 1: CCX Trading Interface

The members have made a voluntary, legally binding commitment to reduce their8 Carbon dioxide (CO2) is a long-lived gas that is considered a 'greenhouse gas' as it retains solar energy in the


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Figure 3: Forward Pricing Curve

(Source: European Climate Exchange)

Carbon trading is similar to the common practice of banks selling home mortgages

to other financial institutions: a financial instrument connected to an asset (in this

case, the certified saved carbon units) can be sold to the highest bidder in a

controlled and secure marketplace. The exchange requires a certification system for

the asset. It provides a user-friendly interface for making the trade (keeping

transaction costs low). Organizations that are efficient at developing credits (i.e.,

reduce emissions at least cost) can effectively sell these reductions in the form of a

financial instrument to others. In addition, the creation of carbon-credit futures

markets by both the CCX and EUX provides new risk management tools for

managing exposure to price volatility in the emissions allowances market. The

establishment of such carbon-trading systems and carbon financial instruments hascreated diverse opportunities for sector leaders to become carbon-credit producers

and profit from supplying the sectors laggards.

A member of the Exchanges can earn Carbon Financial Instruments by reducing:1. On-site direct emissions (ODE):


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stationary combustion: through fuel switching, including renewable energy

generation;9

energy-efficiency: improvements in operational efficiency and design that reduce

purchases of electricity and hence reduce the requirement for combustion; process emissions: reductions though industrial process changes, additional

treatment of waste gases, and design innovation resulting in new processes to

produce products with less or no emissions; and

sequestration and GHG capture activities (onsite).

2. Off-site emissions, offsets and demand management:

mobile combustion: reducing vehicle emissions through efficient use and fuel

switching (fossil fuels used in vehicles, trucks, rail, and airplanes);

offset projects: investment in activities such as forestry, soils, and methane

offset projects;10 and

demand management: electric utility customer energy-efficiency and peak load

shaving.

Most carbon-trading schemes primarily reward the reduction of direct emissions of

GHGs on-site. CCX is no exception. However, companies, municipalities, schools,and churches can also save a great deal of money and indirect carbon emissions

through electricity efficiency measures. Organizations that do not have direct onsite

emissions still can apply to the exchange to obtain credits for the reduced use of

electricity.11 This report will show that there is so much money to be saved through

wise end-use efficiency that it is worth doing anyway, even if end-use efficiency is a

relatively minor part of generating CFIs through the CCX.

9

Note that CO2 emissions associated with the combustion of renewable fuels shall be excluded from EmissionsBaselines as recognized by the Chicago Climate Exchange (CCX).10 As recognized by the Chicago Climate Exchange (CCX), refer to Chapter 9 of the Chicago Climate ExchangeRulebook July 2003


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Section Two: GHG reductions that achieve CFIs best practices

On-site Direct Emissions (ODE)

A growing number of companies have proved that setting GHG reduction targets

drives corporate innovation, uncovers waste (unsaleable production) throughout thecompany, and confers competitive advantage. The Operations Report more fully

develops these best practices, but the examples below provide an indication of what

is possible.

Opportunities to reduce fossil fuel combustion

There are numerous ways that companies and other organizations can reduce their

onsite GHG emissions, while improving services and cutting costs. Technologies

such as co-generation, fluidized-bed combustion, integrated gas and gasification

combined cycles, and supercritical steam cycle can help power stations achieve

higher conversion efficiency.15 Combined-cycle generation units produce electricity

and capture the waste heat energy, using it to generate more electricity or for

process heat at a nearby facility. Such co-generation applications increase energy

efficiency, uses less fuel, and thus produce fewer emissions per unit of service

delivered. Natural gas fired combined cycle generation units can be up to 60 - 90

percent energy efficient, whereas coal and oil generation units are typically only 30

to 35 percent efficient.16

A strong case now exists for companies to invest in fuel switching away from carbon

intensive fuels. The steel industry has shown the way by shifting from coal to

electric-arc furnace technology, which uses only about 13 percent of the energy of

the traditional process. Throughout industry, if all of the latest technological

innovations are applied, 70 percent efficiency gains are technically possible17.

Energy utility and power companies have been switching from oil and coal to

natural gas. A strong case now exists to increase the use of renewable energy.

Costs are falling for renewable such energy sources as wind, solar, mini-hydro,

biomass, geo-thermal, and tidal. Wind power in areas of high average wind speed is

already more cost effective (often at 3 per kilowatt hour) than existing coal-fired

electricity.18 Around the world wind is now the fastest growing energy supply,

increasing at over 30 percent per year19, and now adding more new megawatts of

capacity than nuclear power did at its height (over 5 GW per year). The next fastest

growing form of supply is solar photovoltaics. Significant innovations are also

occurring in harnessing energy from ocean waves12 and ocean currents13. The World

Energy Council estimates that "the global market for renewable energy could be

$625 billion by 2010 and $1,900 billion by 2020. Non-hydro renewables are

expected to grow faster than any other primary energy source to 2030, by an

12 Wavegen Ltd, UK are a world leader in wave energy. They have developed and operate the worlds firstcommercial-scale wave-energy device that generates power for the grid.13 Marine Current Turbines Ltds technology represents a novel method for generating electricity from a hugeenergy resource in the sea. Although the relentless energy of marine currents has been obvious from the earliestdays of seafaring, it is only now that the development of modern offshore engineering capabilities coinciding with


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average of 6% per annum. Europe is being most aggressive. It aims to generate

50% of its energy needs from renewables by 2050, corresponding to some $90-

$135 billion."20

Renewable energy sources, long considered future technologies, can be a cost

effective supply right now, even if the up front costs appear higher than continuing

to use conventional fossil fuels. The book Small is Profitable, voted #1 book for

2002 by The Economist magazine, showed that there are dozens of benefits of such

distributed energy systems.21 For instance, CCX member Green Mountain Power

now provides the 39 percent of its energy to customers through renewable energy.22

In 1989, the Sacramento Municipal Utility District (SMUD) California shut down its

1,000 megawatt nuclear power plant. Rather than invest in any conventional

centralized fossil fuel plant, SMUD invested $59 million locally on energy efficiency

measures to meet its citizens needs along with programs for renewable supplytechnologies as wind, solar, biofuels, and distributed technologies like co-

generation, fuel cells, etc. A recent econometric study showed that the program

has increased the regional economic health by over $124 million achieving an

economic multiplier of 2.11, compared to just running the existing nuclear plant.

SMUD avoided spending $45 million to purchase power from other regions and

added $22 million to the areas wage-earning households, and created about 880

direct-effect jobs, 250 of which were SMUD jobs.23 The utility paid off all of its debt

and was able to hold rates level for a decade, retaining 2,000 job in factories that

would have been lost under the 80% increase in rates that just operating the power

plant would have caused.24 Recently the utility, under new management, has begin

construction of a gas-fired plant.25 Ed Smeloff, Sacramentos former manager, is

now running the solar roofs program for the City of San Francisco.14

Figure 4: The Million Solar Roofs Initiative, San Francisco26

In 1997, British Petroleum (BP) became one of the first major companies, and the

first oil company, to commit to significant reductions of its emissions of CO2. 27 In

2000 the company announced that it would reduce its emissions 10 percent below14 The Million Solar Roofs Initiative is a unique public-private partnership, aimed at overcoming barriers to marketentry for selected solar technologies The goal of the Initiative is practical and market driven: to facilitate the sale


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1990 levels by 2010. This commitment proved to be a remarkable strategy for

unleashing creativity in the workplace. At the time BP committed to the 10 percent

reduction target the company only knew how to achieve 5 percent of the cut and

assumed it would take ten years to achieve a further 5 percent. BP created an

internal emissions trading scheme, to provide a clear incentive to the divisions of

the company to act. By sending this signal to staff, the company unleashed

innovation within the company and achieved its target of 10 percent in only two

years. BPs staff are encouraged to come forward with great ideas of how to be

more efficient. The companies GHG reduction program is saving the company $650

million, just on energy efficiency alone, and also underpins the companys re-

branding as Beyond Petroleum. Senior officials now state that even if their carbon

abatement program cost them money, it would be worthwhile because it makes

them the kind of company that the best talent wants to work for. The ability of a

company to attract and retain the best talent is one of the most significant businessreasons for a corporate commitment to behaving in more sustainable ways. BP has

shifted its investments from coal and heavy oils, formerly about 80 percent of BPs

hydrocarbon capacity was in that end of the spectrum, and about 20 percent in gas.

BP now has about 50 percent gas and 50 percent hydrocarbons,15 and it is also now

the worlds second largest manufacturer of solar cells28.

STMicroelectronics (ST), a Swiss-based US$8.7 billion semiconductor company, set

a goal of zero net GHG emissions by 2010 while increasing production 40-fold. 29

The main sources of STs GHG emissions are ~45 percent energy use, ~35 percent

PFC and SF6 emissions and ~ 15 percent transportation. Its strategy is to reduceon-site emissions by investing in co-generation (efficient combined heat and

electricity production16) and fuel cells (efficient electricity production). By 2010

cogeneration sources should supply 65 percent of STs electricity with another 5

percent coming from fuel switching to renewable energy sources. The rest of the

reductions ST is seeking are through improved energy efficiency (hence reducing

the need for energy supply) and reforestation projects (to sequester carbon17). STs

commitment has driven corporate innovation and improved profitability. During the

1990s its energy efficiency projects averaged a two-year payback (a nearly 71%

after-tax rate of return).18

15 A major study performed by the Environmental Protection Agency (EPA) and the Gas Research Institute (GRI) in1997 sought to discover whether the reduction in carbon dioxide emissions from increased natural gas use wouldbe offset by a possible increased level of methane emissions. The study concluded that the reduction in emissionsfrom increased natural gas use strongly outweighs the detrimental effects of increased methane emissions. Thusthe increased use of natural gas in the place of other, dirtier fossil fuels can serve to lessen the emission ofgreenhouse gases in the United States16 Conventional power stations that burn fossil fuels give off a lot of heat, wasting as much as 70% of the energythey consume.17 In theory, a carbon-emitting activity, such as a plane flight, can be neutralized by planting an appropriatenumber of trees to absorb the CO2. By the time theyre done, they reckon they predict that they will have savedalmost $1 billion18 STMicroelectronics Environmental Report, 2001.(http://www.st.com/stonline/company/environm/report01/index.htm) Accessed February 2007. It further reportedthat no energy efficiency project undertaken incurred more than a three year payback. The source of the
http://www.st.com/stonline/company/environm/report01/index.htmhttp://www.st.com/stonline/company/environm/report01/index.htm


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Non CO2 GHGs

Most of the examples above focused on reducing carbon emissions. But, as the ST

example above shows, there are other non-CO2 gas emissions that may be evenmore important to reduce as well. Again, there is a strong business case for doing

this. There are five classes of greenhouse gases, other than CO2, recognized by the

Kyoto Protocol as causing global warming. Though allowances for these substances

are not regulated by the European Union Emissions Trading Scheme until 2008,

reductions of these emissions will earn CFIs from the CCX. These gases have

significantly higher global warming potential than CO2. For instance, sulfur

hexafluoride (SF6) has a global-warming potential 23,900 times higher than that of

CO2. This means that one SF6 molecule has the same effect on warming the planet

as 23,900 CO2 molecules.


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Table 0: IPCC has identified the 6 major GHGs

Symbol Name Common Sources

Atmospher

ic

Lifetime

(years)*

Global

Warmin

g

Potential

Percentag

e of USA

Emissions

CO2 Carbon Dioxide

Fossil fuel

combustion, forest

clearing, cement

production, etc.

50-2001 79.9

CH4 Methane

Landfills, production

and distribution of

natural gas and

petroleum,

fermentation from the

digestive system of

livestock, rice

cultivation, fossil fuel

combustion, etc.

12 21X 9.5

N2O Nitrous Oxide

Fossil fuel

combustion,

fertilizers, nylon

production, manure,

etc.

150 310X 5.8

HFC's Hydrofluorocarbons

Refrigeration gases,

aluminum smelting,semiconductor

manufacturing, etc.

264

Up to11,700X

1.8

PFC's Perfluorocarbons

Aluminum production,

semiconductor

industry, etc.

10,000 Up to

9200X

SF6 Sulfur Hexafluoride

Electrical transmission

and distribution

systems, circuit

breakers, magnesium

production, etc.

3,200

Up to

23,900X

*Standard Industry Classification

(Sources: Energy Information Administration, Form EIA-846, Manufacturing Energy

Consumption Survey, and Form EIA-810, Monthly Refinery Report (1998);

Intergovernmental Panel on Climate Change, Climate Change 2001 The Scientific

Basis, Cambridge University Press, 2001.)


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There are a growing number of new processes that reduce emissions of non- CO 2

greenhouse gases. Emissions of Nitrous Oxide (N2O) from the production of adipic

acid and nitric acid can be reduced through the use of catalytic destruction, thermal

destruction, or various N2O recycling/utilization technologies. Currently, the three

largest adipic acid producing plants in the U.S. voluntarily control N2O emissions.

Sixty three percent of production employs catalytic destruction and 34 percent uses

thermal destruction. Only 3 percent of production has no N2O abatement measures.

Currently, the nitric acid industry controls for NOx using non-selective catalytic

reduction (NSCR), a very effective way of controlling N2O emissions.

It is now recognized that under normal operating conditions, anywhere from 10 to

80 percent of the PFC gases that pass through semiconductor-wafer manufacturing

tool chambers unreacted and are released into the air.19 In April 1999, the World

Semiconductor Council (WSC) announced its intention to reduce PFC emissions by

at least 10 percent below the industry's 1995 baseline level by year-end 2010. The

semiconductor industrys aggressive goal setting assures governments, industry

suppliers, and the public of their commitment to protect the environment.30

An example of leadership in reducing such emissions is the case of DuPont. In the

1990s DuPont set itself the goal of reducing its GHGs by 65 percent by 2010. It

achieved this goal in 2002, while reducing total global energy use in the company to

6 percent below 1990 levels. This saved DuPont over US$1.5 billion, compared to

what it would have paid had energy use increased in proportion to increases in

production.31 Setting this target encouraged the company to look for new and

creative ways to reduce GHG emissions. As Charles O. Holliday Jr., chairman, CEO

and chief safety, health and environment officer, DuPont stated:

Our goal for the 21st century is to become a sustainable growth company one

that creates shareholder and societal value while decreasing our environmental

footprint along the value chains in which we operate. As part of our transformation

we have worked hard on reducing our environmental impacts and have set

aggressive targets to be attained by 2010 in the areas of energy use, greenhouse

gas reductions and the use of renewable energy and feedstocks.32

19 Current semiconductor manufacturing processes require the use of high Greehouse Warming Potential fluorinatedcompounds including perfluorocarbons (e g CF4 C2F6 C3F8) trifluoromethane (CHF3) nitrogen trifluoride (NF3)


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Figure 5: Global GHG emissions for DuPont (1990 2002)

(Source: DuPont)

DuPont was able to achieve such significant, yet profitable, reductions in GHG

emissions largely by reducing and replacing the non CO2 GHG; that is, largely

through reducing the emissions of HFCs, PFCs, N2O (by 80 percent) and CH4 (Figure

3).

Numerous other companies have demonstrated such reductions as well. IBM

achieved a 10 percent reduction in onsite non-CO2 PFC emissions between 2000 and

200533, while also saving US$791 million, through a 65 percent reduction in CO2

emissions (1990-2002).34 The magnesium industry is in the process of phasing out

SF6 by 2010 through a voluntary partnership with the US EPA and the International

Magnesium Association.35 Nike is well on the way to phasing out all SF6 from its

manufacturing facilities.36

Efficient use of electricity

Many companies, throughout a range of industries, are increasing the efficiency

with which they use electricity.37

For example, there is a potential to achieve largeenergy efficiency improvements in heating, ventilating and air conditioning systems

(HVAC) control systems by optimizing the operation of equipment throughout the

year. There has also been a considerable increase in the efficiency of boilers and

furnaces. By combining control systems with higher efficiency motors and variable

speed equipment, the efficiency of building ventilation systems can be improved by

over 70 per cent.38 Industry examples of energy efficiency initiatives include:

1. Department of Energy's (DOEs) solid state lighting research may produce

dramatic changes in lighting technology that will fundamentally alter the way we

view artificial light. Lighting currently accounts for about 20 percent of U.S.electricity consumption. The most widely used sources of artificial light are

i d t d fl t l S lid t t li hti i t h l th t


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has the potential to be 10 times more energy efficient than incandescent

lighting. Accordingly, this technology could revolutionize the illumination of

homes, offices, and public spaces.39

2. Use of dry-process cement production, which requires significantly less energy

than the wet process, is growing. In addition, new cements such as the

magnesium based cement offer even greater reductions by reducing furnace

temperatures in production by 40-50 percent.40

3. In aluminum production, old Soderberg-type smelters, which use 18 or 19

megawatt hours of electricity per tone of aluminum, are being replaced by more

efficient smelters that use 14 megawatt hours per tone. Further innovations

could achieve even greater electricity savings.41

4. In the pulp and paper industry there has been a shift to mechanical pulping from

chemical pulping - a process which uses about 20 percent less energy.

Onsite sequestration

An alternative to reducing the emissions of GHGs is trapping the emissions and

sequestering them so that they do not enter the atmosphere. It is possible to

embody carbon in trees, in soil, and perhaps underground. There are significant

R&D projects underway in many countries to investigate this process. For instance,

the FutureGen Project in the USA is an effort to advance carbon capture and

storage technology as a way to reduce GHG emissions. The project is a US$1 billionpublic-private effort to construct the world's first fossil fuel, low-pollution climate

neutral power plant. Geological carbon sequestration is being demonstrated in a six

year project at the Sleipner Field in the Norwegian North Sea (see Figure 5) where

approximately 1 million tons of CO2 has been injected into the oilfields each year

over the last 5 years.

Figure 6: Onsite Sequestration

(S A t li P t l C ti R h C t 42)


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An especially interesting opportunity involves reforming natural gas at the

wellhead, separating the hydrogen from the carbon, and re-injecting the CO2 to

increase the pressure in the fields to increase natural gas extraction, recovering

enough additional natural gas to pay for the re-injection. A large plant would strip

the hydrogen for shipment to wholesale markets via new or existing pipelines.

Professor Robert Williams, of Princeton University, points out that the gas field can

typically hold about twice as much carbon in the form of CO2 as it originally held in

the form of natural gas. The abundant resources of natural gas (at least two

centuries worth) could thus be cleanly and efficiently used in fuel-cell vehicles, and

in fuel-cell powered buildings and factories, without harming the earths climate.

The hydrogen provider would be paid three times: for the shipped hydrogen, for the

enhanced recovery of natural gas, and a third time, under future Kyoto Protocol

trading, for sequestering the carbon.43

Off-site emissions, offsets and demand management

Mobile combustion

Fleet management strategies offer opportunities to reduce cost and GHG emissions.

The U.S. City of Denver, Colorado has already purchased 52 hybrid automobiles

that average 45 miles per gallon during in-city driving. It also conducted a pilot

project with biodiesel fuels in 2004 that achieved an estimated 78 percent lifecycle

CO2 emission savings over petroleum-based diesel. The environmental benefits of

the Denver pilot program of 50,000 bio-diesel gallons were projected to be 80 tons

of CO2, 711 lbs of carbon monoxide, and small reductions of minor diesel

pollutants.44

In 2001, Interface Inc., the worlds largest manufacturer of commercial flooring,

developed a green fleet program for company vehicles that rewards use of vehicles

that have lower CO2 emissions rates.45 The company is dedicated to resource-

efficient transportation to achieve carbon neutrality by eliminating or off-setting

greenhouse gas generated in moving people and products from point A to point

B.46 In addition, Interface created the Transportation Working Group, a monitoring

program designed to share its best transportation practices with business units

around the globe.47

Offset projects20

Exchange Methane Offsets (XMOs)

The global warming impact of methane gas is 21 times that of carbon dioxide,

therefore burning methane for energy can reduce GHG emissions significantly.

XMOs can be generated by systems that measurably collect and burn landfill and20 The Chicago Climate Exchange currently recognizes Offset Projects in the U.S, Canada, Mexico and Brazilhowever projects that meet the CCX eligibility criteria located in other regions may be registered with CCX and the


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agricultural methane that would otherwise be emitted into the atmosphere. The city

of Toronto, Canada, has cut its greenhouse emissions 42 percent since 1990, of

which 20 has come through harnessing the natural gas from landfills. The City of

Toronto has earned $20-30 million in cumulative revenue through this project.48

Exchange Forestry Offsets (XFOs)

A range of forestry and agriculture projects qualify as carbon-offset projects if they

increase carbon embodied in forests or soil and avoid deforestation. One exiting

industrial application is NECs use of kenaf to reinforce polylactic acid and produce a

superior plastic. Kenaf is an extremely fast growing plant that absorbs more CO2

than almost any other crop. The resulting bioplastic is biodegradable. Its superior

strength and heat resistance will allow its use in electronic products. NEC expects to

use the new material in 2005-2006. Kenaf can also be made into paper.49

Bamboo absorbs over 40 times as much CO2 as plantation forests while growing to

maturity three times faster than any other harvestable timber. Treated

appropriately, bamboo can last for over 500 years. The Costa Rican Government is

committed to building over 3,000 bamboo homes every year as the material is

excels at coping with and surviving earthquakes, and can produce extremely cost

effective homes. Architects and engineers are showing increasing interest in

adopting these modern applications of bamboo as used, for example, in Balinese

resorts. Bamboo is also being used in such products as flooring, wallboards and

furniture.50

Figure 7: ZERI Pavilion in Manizales, Columbia51.

(Source: Zero Emissions Research and Initiatives (ZERI))

Exchange Soil Offsets (XSOs)

Emissions from soil disturbance can be reduced by a number of approaches such asreduced tillage, erosion control and irrigation management, changes in rotations

d h h d d d


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tillage can allow increases in soil carbon at an initial rate of around 0.3 tons of

Carbon per hectare per year.52 The potential of carbon sequestration on a global

scale is about 0.7-billion tons, 0.6-billion to 1-billion tons per year.53

Demand Management

A profitable way for the energy supply sector to reduce on-site GHGs is to

encourage the end-use efficiency of its clients. Some state governments have

created innovative incentives to encourage utilities to increase their customers

efficiency. The best such regulatory reform allows the utilities to retain, as

increased profit, a percentage of any savings created for their clients and

customers. In the late 1980s being allowed to keep 15 percent of the savings

inspired Pacific Gas and Electric (PG&E), the US's largest private utility, to meet all

of its increased needs for capacity from efficiency and independent powerproduction. For example, in the early 1990s PG&E announced that it would never

need to build any new conventional power plants. In 1992, PG&E invested over

$170 million to help customers save electricity more cheaply than the utility could

make it. That investment created $300400 million worth of savings. Customers

received 85 percent of those savings as lower bills, while the utility's shareholders

received the restover $40 millionas extra profits: the perfect win-win option for

the energy supply sector.54 This market based mechanism is made possible by

effectively decoupling utilities' profits from the actual quantity of kilowatt hours

produced and sold, ensuring that the energy utility is no longer rewarded for sellingmore energy nor penalized for selling less.55

Another successful approach is for the utility regulatory body to allow all ways to

reduce demand or supply new capacity to compete on the same footing. In such

auctions, the utility would accept fixed firm bids to make or reduce the use of

electricity for 1 per kilowatt-hour, then 2, then 3, etc. A utility will typically

meet all of its needs at around 3 through efficiency and perhaps a portion of

renewable supply. This method could allow utilities to ramp-down its fossil plants,

building efficiency power plants instead.56


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energy and resources. Optimizing a whole pumping system, a whole building, a

whole factory or a whole economy, can typically yield resource savings of 3 to 10-

fold more than conventional practice, yet cost less to build. Company facilities

typically use fossil fuels directly for heating and cooling, and indirectly for

electricity. By adopting a whole-system approach to energy efficiency that involves

pumping, building design, heating/cooling, lighting, and office machines,

remarkable emissions reductions can be achieved in existing or new facilities.57

For example, at Toyota's Torrance office complex, completed in 2003, a

combination of energy-efficiency strategies such as roof color, photovoltaic solar

electricity, and little things including an advanced building automation system, a

utilities metering system, natural-gas-fired absorption chillers for the HVAC system,

an Energy Star cool roof system, and thermally insulated, double-paned glazing

resulted in the 600,000+ square foot (s.f.) campus exceeding California's stringent

energy-efficiency requirements by 24 percent at no additional cost than a

conventional office building.58 At the US Army's Fort Detrick, an energy performance

contract will save 33,000 tons of CO2 and $2.9 million annually.59

Many participants in the voluntary US EPA performance-challenge programs (such

as 33/5060 and Green Lights61) reported that re-examining their decision-making

methods enabled them to capture multiple benefits. For example, Sony Electronics

US and Mexican facilities voluntarily installed energy-efficient lighting where it was

cost-effective and did not interfere with the quality of light. By the end of 1994, the

organization had upgraded approximately 6.1 million square feet of floor space with

new lighting fixtures, reduced its operating expenses by more than $915,000 per

year, and lowered energy demand by almost 12 million kilowatt hours annually. In

addition, these lighting changes indirectly prevented more than 7,300 tons of air

pollution from being emitted by local utility companies.62 Sony found its participation

in the EPA's Green Lights program to be very advantageous. Lighting retrofits often

improve visual performance so significantly that they can lead to significant

increases in labor productivity and reductions in error rates. The financial benefits

from this far outweigh the value of the energy savings. For example, Boeing

implemented a lighting system retrofit in its design and manufacturing areas. The

program cut lighting energy costs by 90 percent with a less than 2-year payback,but because workers could see better they avoided rework the error rate

decreased 30 percent increased on-time delivery, and enhanced customer

satisfaction..63

In another example, Lockheed commissioned a new headquarters building for its

Sunnyvale facility. The architects successfully argued that the literium that

provided day-lighting throughout the structure was not merely an amenity, but was

essential to the performance of the building. They were right: the lighting system

resulted in a 75 percent reduction in lighting energy usage. This contributed to

enabling the building to use half the energy of a comparable standard building. Thedifferent design added US$2 million to the cost of the building, the reason the


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Lockheed $500,000 per year worth of energy, or a 4-year payback. More

importantly though, because workers enjoyed the space absenteeism dropped

by15%, and productivity increased 15%. The gains from this won Lockheed a very

competitive contract, the profits from which paid-off the entire costs of the

building.64

Such energy savings programs can lead to increases in worker productivity as well

as energy savings. It appears that people simply perform better in well designed

spaces. In 1987 the NMB Bank in The Netherlands completed a new the 538,000

square foot headquarters. The banks management, desiring to improve the

somewhat stodgy image of the company, commissioned the creation of a green

headquarters. The building uses 10 percent of the energy of a similar building

constructed at the same time. The annual energy savings of $2.9 million requiring

only $700,000 additional building cost - a three month payback on energy costs

alone. Employees report being more comfortable and absenteeism is down 15

percent, dramatically increasing project return on investment. The new

headquarters achieved its goal: it dramatically improved the image of the bank

which became the number two bank in the Netherlands, renamed itself ING and

subsequently bought Barings.65

Small office buildings can achieve similar savings. A 2,800 square foot law office

remodeling in Louisiana improved employee productivity with energy systems that

save over $6,000 and 50 tons of CO2 emissions per year.66 A study by Pacific Gas

and Electric showed that in good green design buildings, daylighting can enable

students to achieve 20 to 26 percent higher test scores, and retail stores to have up

to 40 percent higher sales than conventional stores.67

Whole system design can also assist companies to develop new products and

achieve real product differentiation in the market. The Toyota Prius hybrid car, now

in its second generation, achieves 63 percent more miles per gallon than other cars

of its size. In the United States, the Prius has been backordered since its debut in

late 2003 and has dramatically exceeded Toyotas sales projections.


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Section Four: The Business Case for GHG Emissions ReductionStrategies

Companies that address GHG emissions, especially in the context of a broader

whole-system corporate sustainability strategy, will achieve multiple benefits for

shareholders beyond reducing their contribution to global climate change.

Governments that take a similar course of action will accrue similar benefits to their

citizen stakeholders.68 These include:

1. Energy and materials cost savings in:

- industrial processes;

- facilities design and management;

- fleet management; and

- government operations.

2. Enhanced core business value:

- sector performance leadership;

- first mover advantage;

- improved corporate governance;

- enhanced reputation and brand development;

- insurance access and costs;

- legal compliance;

- exposure to increased carbon regulations;

- reduced shareholder activism;

- access to capital;

- reduced risks of exposure to higher carbon prices; and

- increased employee productivity, retention, improved communication,

creativity, and morale in the workplace.

Cost Reductions

Even businesses that do not, as yet, see climate change or the control of GHG

emissions as a threat can reduce their costs and increase their competitive

advantage through GHG reduction measures. Energy-efficiency initiatives that

renovate outdated processes can create simultaneous improvements in resource

productivity and economic performance. Research on energy decision making has

indicated that decisions to run or retire a facility are often based on the inaccurateassumptions that equipment should be used until fully depreciated, instead of being


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simply bad economics. A policy that leads firms to re-examine the assumptions

underlying inefficient manufacturing processes will lead firms to discover

opportunities for simultaneously reducing costs and GHG emissions.69 3M is an

organization world-renowned for its innovation. What is less well known is that 3M

achieved a 50 percent reduction in worldwide GHG emissions between 1990 and

2004, and has saved $200 million since 1973 from their environmental strategies. 70

Since 1995, 65 percent of this 50 percent reduction was achieved through

implementing energy efficiency solutions and 35 percent came from improvements

in process and products.

Much can be done to reduce GHGs profitably with the equipment and technologies

now on the market and thousands of companies globally are doing so. A vast body

of experience exists, both through government-funded programs and worldwide

business practice, demonstrating the multiple cost-savings benefits and reduced

risks for businesses pursuing GHG emissions reductions.21 Leading corporations such

as Dow Europe, Mitsubishi Electric, Panasonic, Sony, Matsushita, and aerospace

company Pratt and Whitney are committing to 50-75 percent more reductions in

material and energy carbon intensity, otherwise known as Factor 2 and Factor 4

reductions respectively. They see such commitments as a powerful strategy to gain

a competitive advantage.71 The Center for Energy & Climate Solutions (Arlington,

VA) points out that such leading businesses are earning the equivalent of 40 to 50

percent returns on energy-saving investments.72 STMicroelectronics averaged a 300

percent return on investment (ROI) in efficiency projects throughout the 1990s. An

energy efficiency project at a 30-year old DuPont ethylene plant has producedextraordinary results. In 2003, re-engineering turned a capital investment of less

than $75,000 into annual energy savings of $6.8 million per year. The following

year two more projects have saved another $9.5 million per year with internal rates

of return exceeding 100 percent.22 Heavy industry is also achieving remarkable

savings. For instance, in the aluminum sector, Alcan (UK) has achieved a 65

percent reduction in GHG emissions.

Similar results are emerging in other sectors. Universities are demonstrating that

significant financial savings are possible through wise GHG reduction strategies,

which is a good thing as universities can be significant emitters. A recent YaleUniversity study reports that the school emits more GHGs than 32 developing

countries. Some 84 percent of Yale's emissions come from on-campus power plants.

The report Green Investment and Green Return73 showed that a large University

could, in principle, save up to $17 million annually if it implemented best practice in

GHG reduction strategies.

21www.coolcompanies.org is a project of the non-profit Center for Energy & Climate Solutions. The Center wasfounded in 1999 by Dr. Joe Romm former Under Secretary for Energy Efficiency and Renewables at the USDepartment of Energy to promote clean and efficient energy technologies as a money-saving tool for reducing

greenhouse gas emissions and other pollutants. The Center helps businesses, government, and environmentalorganizations develop technological, strategic, financial, and regulatory tools to foster the adoption of cleansolutions22 Dawn Rittenhouse DuPont Director of Sustainable Development correspondence of 14 March 2005 For more
http://www.coolcompanies.org/http://www.coolcompanies.org/


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The report cites the following leading examples:

- The State University of New York-Buffalo saved over $9 million with a clever

mix of wise energy-saving strategies. This allowed the university to prevent 63.4

million pounds of emissions of carbon dioxide, 140,000 pounds of sulfur dioxide,

and 214,000 pounds of nitrous oxide.

- Cornell University worked with local public transport companies to greatly

increase patronage by students and faculty to delay the need to build another

vertical car park. "Getting students out of the car" saved them over $3 million and

also indirectly saved 417,000 gallons of gas, preventing GHG emissions of 6.7

million pounds of carbon dioxide.

- Brevard Community College saved more than $2 million through energy-

efficiency strategies and has been dubbed "the energy miracle" by its local utility

company, Florida Power & Light.

- Municipal and local governments are also reducing GHG and saving money.

Communities are achieving from 5 to 50 percent reductions in GHG emissions, for example:

- Toronto, Canada, will achieve a 20 percent GHG emission reduction by 2005

over 1990 levels simply by capturing methane emissions from the citys landfills and

using them for energy production. This has earned the city between $20 to 30

million (Canadian dollars) in cumulative revenue.74 Strategies like building retrofits

and efficient street lighting are enabling Toronto to achieve a 42 percent reduction

in carbon dioxide emissions by 2005 over 1990 levels. These strategies have saved

the city an additional $17.5 million (Canadian).75

- Heidelberg, Germany, achieved a 30 percent reduction in energy usage

through retrofitting buildings and achieved a $1.5 million reduction on municipal

fuel bill.76

- Woking Borough Council, England, has used a variety of programs to achieve

a 43.8 percent reduction in energy consumption over 1990 levels. They used a wide

range of onsite, offsite and offset GHG reduction strategies. Woking even introduced

a carbon-offset charge for the use of car parks. Their program for reducing CO2

emissions from council-owned vehicles and facilities has achieved an amazingreduction of 96,588 tons of CO2.

77

Globally, over 300 cities are achieving significant GHG savings as part of the

International Council for Local Environmental Initiatives (ICLEI) Cities for Climate

Protection program. Five hundred local governments are participating in the

campaign, representing 8 percent of global GHG emissions.78 Institutions such as

churches are also reducing their costs through energy efficiency. Co-founders of the

Episcopal Power and Light (IPL) program,79 Rev Sally Bingham, Steve MacAusland,

and others are mobilizing religious communities to promote renewable energy,

energy-efficiency and conservation. Episcopal Power and Light assists churches toimplement energy-efficiency strategies and to purchase their electrical power from

i th t t it f bl I th Di f C lif i 50


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percent of Episcopal churches are now more energy-efficient and are buying green

energy. In 2001, Bingham and MacAusland co-founded California Interfaith Power

and Light (CIP&L),80 which helps people of faith in California to organize and

promote positive environmental change around energy and global warming. They

are now working to establish Interfaith Power and Light programs81 in every state.

Sector Performance of Companies Reducing GHGs

Companies with good corporate environmental governance and proactive stances on

GHG reductions generally out-perform the rest of their sector, according to data

across numerous sectors.82 These studies show the average share price movement

of firms with strong climate change responses (or an above average carbon

rating). Such companies outperform the lagging companies in that sector (those

with below average carbon rating). In the forest and paper products sector, theperformance difference was 43 percent over a four-year period.83 (see Figure 7.)

Figure 8: Percentage change in total return of environmental leaders vs. laggards

in the forest and paper products sector 1999-2003.

(Source: Innovest Group84)

The same is true in the oil and gas industry, where companies with a pro-active

climate/carbon management strategy (plotted in light green) outperformed their

peers (plotted in light blue) by 11.8 percent over a 3-year period.85 (See Figure 8.)


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Electric utilities in the U.S. exhibited the same pattern. (See Figure 10.)

Figure 11: Percentage change in total return of environmental leaders vs laggards

in the USA electric utilities sector 2000-2003

(Source: Innovest Group88)

First Mover Advantage

Investing in innovative technologies and/or new emerging markets is often

perceived as risky. That is why wise companies strategically position themselves formarket opportunities from real changes in demographics, consumer trends or

government policy that will underpin the creation of new markets. History has

shown that, for instance, the Montreal Protocol significantly helped DuPont to

improve global market share as it had already innovated new non-ozone destroying

chemicals.89 Similarly those companies that have strategically positioned

themselves to be ready for the new carbon-constrained world can expect to do well

given that the Kyoto Protocol has been ratified. The Kyoto Protocol coming into

effect on February 16, 2005, will ensure that there is a growing market for

technologies that help reduce GHG emissions.

The World Energy Council estimates that the global market for renewable energy

could be $625 billion by 2010 and $1,900 billion by 2020. Non-hydro renewables

are expected to grow faster than any other primary energy source to 2030, by an

average of 6 percent per annum. Europe is being most aggressive with its aim of

generating 50 percent of its energy needs from renewables by 2050, equating to

some $90-$135 billion.90 In 1998, the Royal Dutch Shell external relations

newsletter, Shell Venster, stated that In 2050, a ratio of 50/50 for

fossil/renewables is a probable scenario, so we have to enter this market now!

Shells Dynamics as Usual scenario found it plausible that renewables wouldsupply 20 percent of world energy by 2020, and a third by 2050. Their more

aggressive scenario Spirit of the Coming Age found a transition to a hydrogen


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economy plausible by 2050, driven in part by a Chinese conversion to hydrogen.91

In 1995, Londons Delphi Group began advising its institutional investment clients

that alternative energy industries offer greater growth prospects than the carbon-

fuel industry.92

Leading companies, communities, universities, and churches are finding that

making a serious commitment of management attention to reducing their emissions

of GHGs is leading them into new markets, introducing them to new ways to solve

problems, and is thus driving their innovation as an organization. The growing

number of technologies and climate solutions internationally are forming a new

wave of innovation. Since the first industrial revolution, technologies have driven

innovation and created the basis of economic activity and prosperity. Building on

from the IT revolution, the group of technologies that might collectively be called

green technologies offer an enormous opportunity for existing and new

enterprises to increase competitive advantage, enhance shareholder value, satisfy

stakeholder concerns, improve delivery of services, and operate facilities

affordably.93

Figure 12: A critical mass of enabling technologies and methods to achieve end useefficiency is creating a new wave of innovation in the energy sector.

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Even such traditionalist commentators as Michael Porter have forecasted that there

can be a significant first mover advantage for companies that take advantage of

such opportunities.

Our central message is that the environment-competitiveness debate has been

framed incorrectly. The notion of inevitable struggle between ecology and the

economy grows out of a static view of environment regulation, in which technology,

products, processes, and customer needs are all fixed. In this static world, where

firms have already made their cost-minimizing choices, environmental regulation

inevitably raises costs and will tend to reduce the market share of domestic

companies on global markets. Managers must start to recognize environmental

improvement as an economic and competitive opportunity, not as an annoying cost

or an inevitable threat. Environmental progress demands that companies innovate

to raise resource productivity - precisely the new challenge of global competition. It

is time to build on the underlying economic logic that links the environment,

resource productivity, innovation, and competitiveness.95

Good Corporate Governance

The challenges posed by climate change warrant a serious commitment of

management attention. Responses to the climate change issue have significant

short-term and long-term implications for competitive advantage, shareholder

value, satisfaction of stakeholder concerns, delivery of services, and ability to

operation facilities affordably.96 CEOs and management who do not seriouslyaddress their GHG emissions face significant risks. Conversely, there are also

remarkable opportunities for improved profitability and image enhancement for

those that implement the best practices to reduce emissions. There are numerous

reasons why it is now vital for companies respond to the challenge of global

warming. One of the most significant is that a companys proactive strategy to

address climate change is coming to be seen as an indicator to shareholders, the

investment community, banks, and the broader community of good governance.

Numerous companies already recognize this and have addressed this at board

level.97

Innovest Strategic Value Advisors have found that 85 percent of studiesshow a positive correlation between environmental governance and financial

performance.98 How companies perform on environmental, social, and strategic

governance issues is having a rapidly-growing impact on their competitiveness,

profitability, and share price performance, said Dr. Matthew Kiernan, founder and

CEO of Innovest Strategic Value Advisors.99

Leading companies are beginning to build real accountability into their top-level

structures. Alcoa, for instance, formally linked environmental accountability with

performance expectations and compensation in 2000. Its Primary Metals Group has

linked compensation to reductions in perfluorocarbon (PFC) emissions and has hiredthird parties to verify its emissions baseline and annual inventory of GHGs. DuPont

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1990s. In 2002, International Paper launched a senior-level climate change task

force. Ford Motor Company has a strategy and business governance committee,

comprised of senior managers, that submits annual GHG emissions data to the

board of directors for review.

Reputation Management

In an internet-empowered world, corporations and organizations can have their

activities broadcast to an audience of millions, and risk losing their reputation

overnight. A 2004 survey of some of the worlds leading CEOs, undertaken by the

World Economic Forum at Davos, found that the responding leaders felt that

corporate reputation is now a more important measure of success than stockmarket

performance, profitability, and return on investment. Only the quality of products

and services edged out reputation as the leading measure of corporate success.Fifty-nine percent of the respondents estimated that corporate brand or reputation

represents more than 40 percent of a companys market capitalization.100 A

February, 2005, Los Angeles Times article reported, Aided by the internet, activists

can swiftly spread the word about alleged corporate misdeeds and enlist help from

like-minded people in other countries. They have become more adept at

fundraising; some organizations that once ran on a shoestring [now] have large and

global staffs, replete with lawyers, researchers, and webmasters. Many have

expanded their use of financial tools - buying company shares and pressing for

shareholder resolutions, for example - h

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