Air Pollution Control Equipment Services, Coal

Five Questions on Carbon

Issue 9 and Volume 110.

By Dan Bakal, Ceres

Two conflicting trends keep getting clearer and gathering momentum as they threaten to erupt into a full-scale confrontation. The first is the reality of climate change and the increasingly urgent calls to transition to a “low-carbon” economy. Some day soon, greenhouse gas (GHG) emissions will be regulated in the U.S., which will mean that carbon will have a cost and power generators will be required to factor those costs into their business plans.

The second trend is the shift back toward coal as a means to generate electricity in various power markets. Renewable energy continues to experience rapid growth, but the 140+ coal plants currently being proposed dwarf the proposed renewable energy investments by an order of magnitude. That is precisely why the Energy Information Administration is projecting a 43 percent increase in CO2 emissions from the electric sector by 2030.

The conflict results from the fact that we do not have an effective way to reduce carbon emissions from pulverized coal plants. This means that we need to find ways to accelerate the development of technologies that will eliminate greenhouse gas emissions from coal plants. Any company proposing new coal plants should be prepared to answer the following questions, and make this kind information part of routine financial disclosure:

  1. Is the power really needed? This may seem like a basic question, but many localities still do not adequately consider options to reduce demand for electricity. More than 50 leading organizations recently endorsed the National Action Plan for Energy Efficiency, which recommends that the U.S. make an aggressive commitment to energy efficiency. Any company proposing a new coal plant should provide detailed information to ensure investors that the electricity is needed.
  2. Does your company assume that CO2 will have a cost in the future? If so, what assumptions do you make regarding cost ranges, timing and emission baselines or allocation of allowances? Many power companies are now modeling CO2 cost ranges for all existing and proposed plants, and financial analysts such as Bernstein Research are beginning to provide in-depth research on the impacts of imminent GHG regulation on the power sector. Companies should explain to investors how a range of carbon cost scenarios would impact its operations and plans.
  3. How has your company’s consideration of climate change affected its business strategy and capital allocation plans? How must your plans to maximize shareholder value and protect corporate credit be modified as a result? What are the implications for your company’s choice of generation technology? Some companies, like AEP, are developing Integrated Gasification Combined-Cycle plants, which hold promise for carbon reductions. Others, like PG&E are making significant investments in demand reduction programs and renewable energy.
  4. Does your company believe it will receive credit for any greenhouse gas reductions it makes prior to a regulatory requirement? Some companies have been making voluntary GHG reductions and hope to earn credit for them when regulations are enacted. Others consider this risky and claim it is an inappropriate use of shareholder assets. Companies should provide assurance to investors that any voluntary reductions meet widely accepted protocols.
  5. Will you commit to make the project “carbon neutral” from the first day of operation? Climate change is urgent enough that the company should internalize the costs of greenhouse gas emissions by purchasing credible and verifiable GHG offsets for all of its projected emissions. This would not be necessary if state or regional regulation on GHG’s is in place.

Ceres attempts to tackle these kinds of issues with an approach that involves the collective influence of a diverse coalition of leading investors, environmental groups and other public interest organizations. First, we promote robust corporate disclosure and transparency as the bedrock for strong corporate governance on environmental issues. Ceres believes that disclosure is key to shifting corporate behavior because information drives the financial markets. Disclosure also improves corporate environmental performance: what gets measured gets managed.

Second, Ceres works with leading institutional investors to engage with the companies whose shares they own, through proxy voting and direct negotiations, to encourage stronger disclosure and performance on environmental and social issues. These long-term investors, including public and private pension funds, insurance companies, university and foundation endowments and bond rating agencies, are naturally concerned about building long-term shareholder value in their assets, as well as quarterly performance.

Third, Ceres is pushing companies to integrate environmental issues into their core business strategies by bringing together diverse stakeholder groups to help them respond to pressing environmental challenges and identify emerging issues.

Ceres launched the Global Reporting Initiative (GRI), now used by over 850 companies for corporate reporting on environmental, social and financial performance. And, in 2003, we formed the Investor Network on Climate Risk (INCR), whose members manage more than $3 trillion in assets. INCR members have the dual objectives of mitigating the risks associated with coal-fired generation and encouraging the development of low-carbon power.

Investors and companies are beginning to recognize how the decisions they make today will influence the climate and global economy for generations to come. For sustained economic growth, effective climate practices must be embraced and pursued now across electric power sector and other key industries.

Dan Bakal is director of electric power programs at Ceres (www.ceres.org), a coalition of investors and environmental groups that works with companies to address sustainability challenges such as global climate change.