Corporate America leaves Bush behind on carbon question

The US government is becoming isolated, even from major US corporations, in its resistance to the low-carbon agenda, says Janet Wood.

“US public policy should encourage a transition to a lower-carbon-intensive economy through a broad-based approach, such as a carbon tax or other mechanism which addresses all sectors of the economy.”

That quote comes not from an environmental organization but from a letter to shareholders from Duke Power chairman and CEO Paul M Anderson. What is more, he said, “We will be proactive on the issue of global climate change” adding Duke would take a leadership role in advancing such policies.

Duke is not the only US utility to take this step. In this year’s annual report Cinergy included excerpts from interviews with members of its major stakeholder groups in which their views on the issue of global warming were canvassed – and found largely to be anticipating action, albeit with varying degrees or welcome. Cinergy said the interviews were an attempt to find common ground on the issue. “As a major coal-burning utility, some might expect us to duck this issue. But avoiding the debate over global climate change and failing to understand its consequences are not options for us,” said chairman and CEO James E Rogers.

More companies are responding to the Carbon Disclosure Project’s questionnaire on how they plan for climate change.
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Duke Power is a coal-burning utility, based almost entirely in the US following recent divestments, so it might be thought that it could ignore the Kyoto consensus – especially since, as Anderson admitted in a later meeting, a carbon tax would mean higher utility bills and more expensive fuel for American cars. Cinergy has a similar profile and US focus. They might be expected to follow the US government line on global warming and tread carefully when suggesting to consumers that their prices will rise.

But consumers are not the only stakeholders to be satisfied. Shareholders and investors take a different view: for them, it is risk that matters. They do not have to be convinced that global warming is a fact; but they do have to be convinced that companies have assessed the risk and prepared for it. Simply saying that the science of climate change does not convince is not sufficient for a potential investor, or a major shareholder with pension funds to safeguard. Unless a company has fully quantified and minimized that risk it is likely to have less access to investment, and at less favourable terms, and to see a slow loss of share-holders moving to more forward-looking companies.

The Carbon Disclosure Project (CDP) annually questions companies on the FT500 Global Index about the implications they see from climate change. It found that weather related disasters caused about $70 billion in damage during 2003, of which only $18.5 billion was covered by insurance; that the effect would be felt by a variety of sectors including insurance, commodities and utilities; that mainstream pension trustees, analysts, bankers and fund managers saw the implications of the risk in financial terms and that pressure was growing on financial bodies to incorporate climate change risk into financial statements and offerings. It noted that the companies saw the future cost of carbon as of major importance. It highlighted the possibility of litigation against major emitters and against parties for abdication of fiduciary responsibility if they did not consider the implications of climate.

CDP said the responses to its survey are increasing, from 47 per cent in 2003 to 59 per cent in 2004, leaving non-responders in the minority. Responses to this year’s survey, which was distributed in February, are due by the end of May and a report will be published in September.

Ceres, a US group that brings together environmental groups and investment funds, reported on the financial risks electric companies face from climate change, and said that in response, institutional investors had written to 50 investor-owned power companies to ask how future greenhouse gas limits will affect their bottom lines and what steps they are taking to minimize the impact.

Ceres found that investors were very concerned about financial risks from regulatory uncertainty, because although the US government has turned its face against Kyoto it is increasingly out of step, not only with other countries but with its own states.

A bid to set a Renewable Portfolio Standard (RPS) at Federal level that would require a proportion of power to be generated from renewable sources failed, but that did not stop many states setting their own RPS standards – all different, and all differently managed and regulated. Power utilities fear a similar scenario for carbon management: Duke Power’s Anderson said: “The worst scenario would be if all 50 states took separate actions and we have to comply with 50 different laws”. Already, according to Ceres, “two states in the northeast have already imposed carbon emission limits on power plants and a handful of other states, including California, Colorado and Utah, now expect power companies to factor carbon emissions costs at up to $15 per ton, into proposals for new power plants.”

Anderson said he did not expect to see a carbon tax during this administration, but recent surveys suggest he is far from the only power company CEO who expects it to be imposed over the next decade or two. Anderson says: “If we ignore the issue we would be the easy target” for lawsuits and other action. It seems that US utilities are moving far ahead of the Bush administration in strategic planning. Given the option of a single carbon tax, or a patchwork of regulations leaving utilities vulnerable to legal action, the former makes increasingly good business sense.

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