Futurepast

Winter Olympic Games in British Columbia focused the attention of the world recently on Canada’s Pacific Coast province. The gold, silver and bronze medals earned by athletes from around the world celebrated achievement in demanding individual and team competitions and showcased the province’s world class communities and sporting event venues.

British Columbia also stands out in ways not related to the Olympic Games. It is a North American leader in its commitment to addressing climate change. Through acts of parliament and regulation, British Columbia has directed the provincial government and public sector organizations to reduce greenhouse gas emissions, directed consideration of environmentally sustainable planning and development at the local level, begun preparations to adapt to climate change, and implemented mandatory greenhouse gas (GHG) reporting for regulated industry.

As a member of the Western Climate Initiative, British Columbia, along with the provinces of Ontario, Quebec, and Manitoba and six western US states, is preparing to implement a regional cap-and-trade program to reduce GHG emissions. Cap-and-trade will take effect in British Columbia (BC) on January 1, 2012, the same date that market-based mechanisms are scheduled to start in California and the other WCI member states.

Legislation passed in 2007 set ambitious goals for reducing BC’s greenhouse gas emissions: 33% fewer in 2020 compared to 2007 levels, and a target of 80% reductions by 2050. The law also requires that public sector organizations in British Columbia be “carbon neutral” for the 2010 calendar year and for each subsequent year thereafter. The law specifically targets GHG emissions related to public officials traveling on public business. Carbon neutrality under the law can be met both by GHG emission reductions and by application of emission offsets.

In 2008, British Columbia enacted a “Green Communities” statute. This law strengthened the ability of local governments and Regional Districts to reduce GHG emissions through Community Action Plans and other mechanisms. New and existing authorities allow municipal governments to achieve GHG emission reductions from energy efficiency, more sustainable use of water (moving water requires the use of energy), restrictions on development, promotion of alternative forms of transportation, zoning and building code changes, economic incentives for construction of small residential units, and consideration of land-use planning and environmental impacts when approving development.

Recognizing that the effects of climate change will be felt for decades, even as emission reduction actions are implemented within the province now and for years to come, British Columbia has identified a number of climate change impacts that require adaptation strategies. The impacts include more long-term warming, more extreme weather, changes to precipitation patterns, and rising sea levels. Ministry of Environment public information cites adverse impacts that have already been felt, such as the mountain pine beetle infestation, triggered by warmer winters, seasonal droughts of above-average magnitude in 2003 and 2009, and intense wildfire seasons in the same years. Strategies to prepare for climate change impacts include development of improved knowledge and tools to address climate change, makinge adaptation a part of BC’s planning and decision-making processes, and assessing risks and implementing priority actions in key climate sensitive sectors.

The strategies identified by British Columbia to address climate change are more akin to Olympic team events than to feats of individual performance. The objective is transformational in scope and collaborative in nature. Through its public actions, BC is showing that responding to climate change is a challenge that promises dividends to generations of current and future residents for decades to come.

© 2010, Futurepast: Inc.

The US Federal Trade Commission is expected to extend the reach of its “Guides for the Use of Environmental Marketing Claims” when it updates the regulation codified at 16 CFR Part 260. Although FTC’s “Green Guides,” as they are commonly called, are provided only as guidance, organizations that make environmental marketing claims ignore them at their peril. The Federal Trade Commission Act grants the Commission the authority to file complaints against firms that engage in misleading or deceptive business practices. Under the law, the FTC can seek injunctions, issue cease-and-desist orders, and impose civil penalties. In practice, the majority of cases is settled without the imposition of sanctions.

The Green Guides help businesses make environmental claims that are truthful and verifiable. In the parlance of the FTC, companies making environmental claims should have a “reasonable basis” for doing so. FTC oversight extends to claims that are made both by businesses to consumers as well as to other businesses.

The Green Guides caution companies against making overly general claims like “eco-friendly.” Claims about recyclability should specifically state whether the claim applies to the packaging or to the product, or both. Enforcement actions by the FTC have increased under the administration of President Barack Obama. In 2009 the Commission filed three complaints against companies it said misused claims of biodegradability and four claims related to the purported environmental friendliness of clothing made from bamboo fibers. In the two terms of the George W. Bush administration, no complaints were filed against firms for misleading or deceptive environmental claims.

Some observers of the FTC hope the Commission’s updated Green Guides will address new types of environmental claims. At public workshops conducted in 2008, participants asked the Commission to expand the document to cover topics such as greenhouse gas emission reduction offset credits and Renewable Energy Certificates. Other environmental claims that have become common since the last issuance of the Green Guides address products that their marketers consider “sustainable” or “carbon neutral.”

The Commission’s Green Guides track closely ISO 14021, an International Standard published in 1999 with the title “Environmental Labels and Declarations—Self-declared environmental claims (Type II environmental labelling)” and adopted in 2001 as an American National Standard. Subcommittee 3 of ISO Technical Committee 207 is currently amending ISO 14021 and has before it some of the same issues that arose in the FTC’s public workshops.

ISO’s draft amended standard would allow qualified claims of “sustainable” or “sustainability” to be made as long as they can be justified in accordance with the 18 tests enumerated in clause 5.7 of the ISO 14021 standard. The draft amended standard addresses claims made about greenhouse gases, such as those relating to the “carbon footprint” of a product and claims that a product is “carbon neutral.” A new definition of “offsetting” refers to a “methodology by which the removal of CO2 from the atmosphere or prevention of emissions to the atmosphere from one process can be procured by the operators of another separate and unrelated process to counterbalance their own CO2 emissions that occur from the production or use of that process or product.” Claims that products composed of biomass are “renewable” are also discussed, as are claims related to “renewable energy.”

Given the past influence of ISO 14021 on the Green Guides, it can be reasonably expected that the FTC will take the amended ISO 14021 into consideration when finalizing its Green Guides revisions.

There are practical reasons for basing FTC guidance on International Standards. Primary among them is the influence that ISO standards have in international trade. When regulations adopted in the United States parallel ISO standards, actions the FTC takes to protect consumers against misleading or deceptive product claims are easier to sustain when challenged in bodies such as the World Trade Organization. Moreover, Congress in the National Technology Transfer and Advancement Act of 1995 instructed federal agencies to give preference when possible to voluntary consensus-based standards.

Futurepast is an active member of the US Technical Advisory Group to ISO Technical Committee 207, and is participating in the development of US positions related to the amended ISO 14021 standard. Futurepast provides expertise to clients on the development of environmental claims that can be substantiated in accordance with FTC Green Guides.

© 2010, Futurepast: Inc.

Prices for voluntary carbon offset credits issued in the United States have declined considerably since the beginning of 2010. Diminishing prospects for the passage of climate change legislation in the US Senate is most often cited as the major reason for the price of Climate Reserve Tonnes (CRTs) dropping to around $6 per ton from approximately $10 at the beginning of the year. CRTs are issued by the Climate Action Reserve for carbon offset projects undertaken mainly in the United States and are viewed as “compliance grade” offsets under a future US federal cap-and-trade program.

Meanwhile California and other states and Canadian provinces continue to plan for the introduction of a regional cap-and-trade system within their jurisdictions by the start of 2012—now less than two years away. And in the United States the Environmental Protection Agency continues to develop an approach to regulating greenhouse gas emissions under existing authority granted to it by the Clean Air Act.

The consensus view among many climate change experts is that it is only a matter of time before real constraints are placed upon the emission in the United States of carbon dioxide and other greenhouse gases, and that some form of market mechanism will be used to help ease the transition to a low-carbon future. The success of the 1990s Acid Rain program in reducing emissions of sulfur dioxide is too compelling, market advocates say, for significant reductions in greenhouse gas emissions to be achieved across broad segments of the economy without taking advantage of emissions trading. Trading, they contend, provides needed price signals concerning the value of future carbon emission reductions and helps companies implement the most efficient abatement strategies.

Six dollars per ton is cheap compared with the cost of driving down emissions in America’s power plants, factories, and transportation networks. This can only mean that the price reflects skepticism about the political will of leaders in either the nation’s capital or in state capitals to cap greenhouse gas emissions. However, few voices among the many speakers at the Electric Utility Environmental Conference (EUEC) held in Phoenix earlier this month thought that no action was likely, if for no other reason than the industries most affected by greenhouse gas regulation would prefer the more flexible cap-and-trade mechanism to the blunt instrument that a command-and-control approach would take under existing provisions of the Clean Air Act.

Many speakers at the EUEC speculated that a billion tons of carbon offset credits will be needed to make a cap-and-trade program work at the federal level in the United States. This amount of voluntary emission reductions is enormous compared to the Climate Action Reserve’s current output in millions. In the face of political uncertainty about the timing of climate change legislation, the price of CRTs appears to be supported at current low levels by electric utilities—and others—hedging future carbon risks by taking “pre-compliance” positions in CRTs. It is estimated that such buying may have motivated as much as three quarters of the market in 2009.

At present prices, CRTs are trading at approximately one third the cost of Certified Emission Reductions (CERs) issued by the Clean Development Mechanism (CDM) under the Kyoto Protocol. Companies whose greenhouse gas emissions are currently capped under the European Union Emissions Trading System (EU ETS) are able to use CERs interchangeably with Assigned Amount Units when meeting their compliance obligations. CRTs trade at a discount to CERs because CRTs are not currently priced for use under a mandatory cap-and-trade system, though it is virtually certain that they will play a role similar to CERs under the Western Climate Initiative’s cap-and-trade program that begins in 2012.

Now is the time for companies with exposure to climate change risks to consider adding voluntary emission reductions to their investment portfolios. Since not all voluntary emission reductions are created equal, the present time provides an excellent opportunity to learn how to perform due diligence when conducting trades or financing emission reduction projects. Carbon traders may well look back to 2010 as the time when forward-thinking companies got a head start on their competition by building positions when CRTs were cheap.

© 2010, Futurepast: Inc.

The decision of the European Union last year to include aircraft operators in the EU Emissions Trading System (EU ETS) has given a sense of urgency to the development of sustainable aviation biofuels. In 2013 operators will be required to surrender allowances equal to their carbon dioxide emissions in 2012. Allocated allowances will be capped at 97% of historical aviation emissions taken as an average of the base years 2004, 2005 and 2006. In the period 2013 through 2020, the cap declines to 95% of the historical aviation activity emissions.

Starting this year, regulated aircraft operators flying within or to Europe are required to monitor their carbon dioxide emissions. Monitoring data provided to the member state of the EU with regulatory authority over each aircraft operator will be used in 2011 to make applications for allowances under the EU ETS. Certain small aircraft, some commercial operators with a low volume of flights, and a number of defined categories of aircraft operators are exempted under the regulation.

Aircraft operators included in the regulation will be able to offset up to 15% of their emissions by submitting Certified Emission Reduction credits verified under the Clean Development Mechanism of the United Nations Framework Convention on Climate Change (UNFCCC). Emission Reduction Units from the Joint Implementation program of the UNFCCC also can be used to supplement allocated allowances.

However, the long-term growth trends in commercial aviation could result in limits on air travel to and within Europe if additional means for reducing aviation carbon dioxide emissions are not found. Already the industry is improving aircraft fuel efficiency in order to limit the impact of annual air traffic growth that is projected by the Air Transport Action Group to rise at 5% per year through 2050. And within Europe, greater use of high speed rail could shift some passenger traffic from airplanes to more fuel-efficient trains and therefore ease constraints imposed by the cap.

Improved efficiency is not the only answer the aviation industry has in mind. It is also pursuing “carbon neutral growth” by embracing biofuels called “synthetic paraffinic kerosene” (SPK). Bio-SPK can be made by refining oils derived from plants like Jatropha and Camelina, and from algae. Test flights by Air New Zealand, Japan Airlines and Continental Airlines have already demonstrated the performance of this new biofuel, and ASTM International and the UK Defence Standards Agency are working on fuel certification standards. Certification of a 50% blend of Bio-SPK with petroleum-based Jet A-1 fuel could be ready by the end of 2010.

Already the performance characteristics of Bio-SPK look promising. In early tests, Bio-SPK outperformed petroleum-based Jet A-1 on two key parameters, freezing point and energy density. The first is a key safety metric for the fuel, the second means that less fuel by volume is needed to deliver an equal payload over the same distance. With these kinds of results, the aviation industry has high hopes that Bio-SPK will help reduce carbon emissions while increasing the diversity of fuel supplies.

In embracing Bio-SPK, the aviation industry has also recognized the importance of demonstrating that the biofuels of the future are sustainably developed and deployed. To this end it participated in a multistakeholder consultation process, the Roundtable on Sustainable Biofuels (RSB), hosted by the École Polytechnique Fédérale de Lausanne (Switzerland). RSB published “Indicators of Compliance for the RSB Principles & Criteria” in December 2009. This document provides a variety of environmental, social and economic indicators applicable to the entire biofuel supply chain, from feedstock producers and processors to biofuel producers and blenders.

By embracing a rigorous standard for biofuel sustainability, the aviation industry is seeking to avoid the negative unintended consequences associated with corn-based ethanol. That product has been criticized for not reducing total life-cycle carbon dioxide emissions, soaking up scarce water supplies and diverting agricultural lands from food to fuel production, thus contributing to rises in food prices. Instead, the aviation industry intends to make meeting sustainability criteria a requirement for the new biofuel industry that is just beginning to take off.

© 2010 Futurepast: Inc.

International standards published in 2006 define principles for greenhouse gas (GHG) accounting. Five principles are provided in ISO 14064 Part 1, Greenhouse gases – Specification with guidance at the organization level for quantification and reporting of greenhouse gas emissions and removals:
• Relevance
Select the GHG sources, GHG sinks, GHG reservoirs, data and methodologies appropriate to the needs of the intended user.
• Completeness
Include all relevant GHG emissions and removals.
• Consistency
Enable meaningful comparisons in GHG-related information.
• Accuracy
Reduce bias and uncertainties as far as is practical.
• Transparency
Disclose sufficient and appropriate GHG-related information to allow intended users to make decisions with reasonable confidence.

These five characteristics of GHG accounting are principles, rather than requirements, because they are aspirational in nature. In some cases trade-offs are either explicitly stated or strongly implied. The first principle of relevance is explained by reference to a process of selection. It is expected, therefore, that an inventory manager will make choices concerning the identification of sources, sinks and reservoirs, data sources, and quantification methodologies in establishing the inventory. Even when a choice does not compromise the principle of completeness, it may imply some arbitrary decision making. An example could be selecting an appropriate degree of aggregation for individual sources. Relevance, therefore, guides the inventory manager in pursuing the next principle, completeness.

In theory, organizations should strive for 100% completeness in reporting. In practice, some sources will be reported at higher or lower levels of detail, and some may even be missed, especially when an inventory is first established. The relevance principle is not intended to permit organizations to underreport their emissions, but rather to acknowledge that 100% completeness is not likely to be achieved. For example, organizations may have trees on their properties. It is rare among organizations, except those with large numbers of trees under professional management, to account for the changes in carbon stocks in their inventories.

Consistency refers to the manner in which GHG emissions information is stated, both in terms of data aggregation and consolidation practices within an organization’s inventory for a single reporting period, and with respect to the application of accounting methodologies from one reporting period to the next. This principle may on occasion be at odds with the accuracy principle, which exhorts inventory managers to reduce bias and uncertainties. Why would such a tension arise? In the case where an inventory manager decided to revise the organization’s accounting methods in a subsequent year for quality improvement purposes, the emissions accounting would no longer be consistent with prior year reporting. Inventory managers may in reality make such choices, but they should not do so casually, and the facts of any significant accounting methods changes should be fully disclosed. In some cases, restatements of prior year emission accounts may be called for. Another application of the principle of consistency is the adjustment of an organization’s base year. Triggered by acquisitions and divestitures, base year adjustment ensures the consistency of reports from one reporting period to the next.

The principle of accuracy seems self evident. Organizations should neither underreport nor overreport their GHG emissions. ISO 14064-1 introduces the concept of “practicality” in this principle, however, because in reality it is no more possible to be 100% accurate than it is to be 100% complete in reporting emissions. The principle of accuracy is tempered by the concept of materiality, which recognizes that coming close to the “true number” is good enough. Common reasons for not achieving 100% accuracy may arise due to limitations of measurement devices or to the application of intermittent measurement instead of continuous measurement. Or it may be due to the use of emissions factors, which are based upon the averaging of values.

The last principle, transparency, challenges organizations to gather and report GHG information in sufficient detail so that intended users can properly evaluate it. This is not normally an issue when an inventory manager gathers information and reports it internally. Questions typically only arise when an organization has to decide how much detail to include in publicly disclosed reports. This involves choices, and the exercise of judgment. Other business considerations may come into play, such as not wanting to report information in such detail as to disclose appropriately confidential business information.

The principles of quantifying and reporting greenhouse gas emissions at the organization level were designed as guideposts for inventory managers, not straitjackets. The use of common sense in their application is recommended. In cases where it appears necessary to compromise a principle, the reasons for the divergence should be explained.

In addition to the five principles described above, a sixth principle, conservativeness, applies to greenhouse gas projects. This principle is found in ISO 14064 Part 2, Greenhouse gases – Specification with guidance at the project level for quantification, monitoring and reporting of greenhouse gas emission reductions or removal enhancements, and is presented in the following terms:

• Conservativeness
Use conservative assumptions, values and procedures to ensure that GHG emission reductions or removal enhancements are not over-estimated.

Conservativeness is appropriate for project accounting because verified emission reductions must have environmental integrity to sustain environmental markets. The principle is most often applied where uncertainty has been identified in project accounting methodologies. By applying the principle of conservativeness, confidence is increased for those who may purchase GHG emission reductions or removal enhancements.

© 2010 Futurepast: Inc.

The US Securities and Exchange Commission (SEC) on January 27, 2010, approved interpretive guidance on climate change reporting for publicly traded companies. The new guidance is intended to clarify the circumstances in which existing SEC regulations require companies to disclose climate change–related information that could have “material” financial impacts. The text of the guidance will be published soon in the Federal Register.

According to an SEC press release, the new interpretative guidance highlights the following areas where climate change may trigger disclosure:
• Impact of legislation and regulation
• Impact of international accords
• Indirect consequences of regulation or business trends
• Physical impacts of climate change.

Investors and environmental advocates in 2007 had urged the SEC to issue guidance on disclosure of climate-related impacts. Petitioners included pension funds, state treasurers, investor advocates and environmental groups, among others.

SEC chairman Mary Shapiro made clear in remarks at the hearing that adopted the new interpretative guidance that the SEC is not changing regulations related to disclosure of material information to investors. Rather, the new guidance will help companies interpret existing disclosure rules with respect to climate change–related financial impacts.

The SEC’s action should prompt more companies to collect, analyze and report on climate change information. Companies that do not do so face added risks of litigation or regulatory action if future developments show that management failed to disclose material financial impacts linked to climate change. Actions against companies have already occurred. In 2008, the New York state attorney general set a precedent when he negotiated an agreement with Xcel Energy to disclose climate change information after subpoenaing the firm for information related to the construction of a new coal-fired power plant.

In October 2009 the US Environmental Protection Agency issued a new regulation requiring approximately 10,000 US facilities to report their emissions of greenhouse gases, starting in January 2010. For affected companies that had not previously counted GHG emissions, the US EPA regulation imposes the requirement to do so. The facility-based regulation, however, does not require corporatewide accounting, and not every public company is covered by the regulation. Moreover, companies will have to analyze the data they collect in order to calculate potential financial impacts.

Companies that do not currently report GHG emissions information at the corporate level have several options with respect to standards. The most widely used corporate reporting standard in North America is the GHG Protocol, published by the World Business Council on Sustainable Development/World Resources Institute. The GHG Protocol formed the basis for the General Reporting Protocol of The Climate Registry, a non-profit organization that accepts voluntary GHG reports from organizations based in the USA and Canada. The Carbon Disclosure Project is another venue for companies to report GHG information. Finally, ISO 14064:2006 Part 1 offers a concise set of requirements for quantification and reporting of greenhouse gas emissions at the organizational level.

The SEC announcement puts into question the fate of an ASTM International standard that was developed to provide guidance on the same topic. According to Gayle Koch of The Brattle Group, technical contact for the recently balloted standard, if the proposed ASTM Guide for Financial Disclosure Attributed to Climate Change has been incorporated in the SEC document, there may be less reason to publish it. On the other hand, if the ASTM document adds significant value after taking into account the SEC interpretive guidance, ASTM is more likely to publish it and include in it a reference to the SEC guidance. The text of the SEC guidance is closely held, and not expected to be known until its publication in the Federal Register.

Climate change can have material financial impacts on companies. Where their magnitude can be estimated, they should be disclosed by companies regulated by the SEC. Privately held companies should also quantify these impacts for strategic planning purposes. Moreover, companies should consider information they may release voluntarily to greenhouse gas registries or to mechanisms such as the Carbon Disclosure Project when they are preparing regulatory filings to the SEC.

Companies that quantify their GHG emissions in accordance with one or more reporting protocols or standards should consider, as a matter of quality assurance/quality control, hiring a third party to verify their inventory reports. This is equally true whether the company is required to report its emissions to a state or federal regulatory body, or whether the company gathers the information for strategic planning and potential disclosure under applicable SEC regulations. Futurepast can perform this service as an internal audit or recommend qualified and accredited third-party verification bodies.
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In “Tips for Greenhouse Gas Project Developers, Part 1” (2010-01-17), we discussed the important project attributes of emission baselines and additionality, and described how a “performance-based” project protocol differs from the model employed in the Kyoto Protocol’s Clean Development Mechanism (CDM).

This blog addresses another important greenhouse gas (GHG) project element, the “Project Design Document” (PDD). The PDD name comes from CDM but has its equivalent in voluntary GHG programs as well, even if called by a slightly different name. The International Standard ISO 14064:2006 Part 2 refers to it simply as project “documentation.”

There are multiple audiences for a PDD. The first audience is internal. A PDD describes the project in detail, including relevant GHG sources, sinks and reservoirs; emission reduction or removal enhancement quantification methodologies, and the number of tons of CO2-e that the project is expected to create. The PDD also defines requirements for quality control/quality assurance and for monitoring and measurement. It may discuss applicable crediting periods, plans for validation and/or verification, and plans for registering project offset credits.

A second audience for the PDD is an organization that may provide project financing prior to the creation of the offset reductions, or a prospective purchaser of offset credits. Both a carbon financing source and a buyer use PDDs as initial screens for identifying potentially attractive projects and making preliminary assessments of risk.

The third audience for a PDD is the project’s validation or verification body (VVB). VVBs use PDDs to assess audit risk and to develop verification plans and data sampling plans.

Because the PDD is often the means by which outside parties are first introduced to a project, the document should be carefully prepared. It should make a convincing case that the project is eligible, additional, and monitored, and that emission reductions or removal enhancements are (or will be) properly quantified and reported.

A central element of the PDD is the monitoring plan. This section of the PDD describes the need for and purpose of monitoring, and the types of information to be tracked. It discusses where monitored information comes from, and what monitoring methodologies are employed. The latter can include estimation, modeling, measurement or calculation. The monitoring plan defines intervals for monitoring, and discusses roles and responsibilities. It describes any GHG information management systems to be employed, such as automated equipment and data loggers, and specifies the location and retention time for stored data. The monitoring plan also describes plans for calibration and maintenance of monitoring equipment, and includes or refers to procedures needed to carry out the monitoring function.

Monitoring plans should provide for tracking regulatory compliance and other eligibility criteria as well as applicable flows of gases, fluxes in carbon stocks, project emissions, project leakage and changes to the baseline scenario.

A well designed PDD is essential for proper project implementation. It can open the door to project financing and sale of credits, and ease validation and verification. Project developers can undertake this important task on their own or engage the help of qualified consultants, such as Futurepast.

Recent publicity surrounding the climate change negotiations in Copenhagen raised public awareness about the need to transition to a low carbon economy. As a result, inventive people are thinking about new ways to avoid, reduce, or sequester carbon dioxide. But where to start?

Greenhouse gas (GHG) projects are defined as “[an] activity or activities that alter the conditions in the baseline scenario which cause greenhouse gas emission reductions or greenhouse gas removal enhancements” (ISO 14064:2006, Part 2, 2.12). This means the activities of a project need either to reduce GHG emission or increase carbon removals compared to what would have otherwise occurred had the project activities not been implemented. The project emissions then, are always compared against a baseline, which represents “business as usual.”

The following diagram illustrates the basic concepts of a baseline scenario, the calculation of emission reduction credits, and a time-limited project. The diagram shows a flat baseline—that level of GHG emissions that would be expected to exist in the absence of the GHG project. The curved line on the graph illustrates how a project might reduce GHG emissions compared to the baseline scenario. In the example, GHG emissions decline relative to the baseline as a result of project activity, and then level out. Emission reductions, then, are represented by the quantity, measured in metric tons of CO2-equivalent, of emission reductions achieved by the project compared to the baseline. The solid line shows a finite crediting period, which for many projects is 10 years. After that time period, the project may still generate emission reductions, but no longer earn offset credits.

Projects are implemented for many reasons. It is important to keep in mind that the project developer has to demonstrate that the project activity is “additional to” what would have occurred in the baseline scenario. Some projects do not qualify for the issuance of carbon offset credits because they fail this test of “additionality.” For example, the US EPA regulates large municipal solid waste landfills. Once a landfill’s design capacity exceeds 2.5 million metric tons or 2.5 million cubic feet, the landfill is required to install a landfill gas collection and combustion system to control nonmethane organic compound (NMOC) emissions. The same requirement is triggered if the landfill emits more than 50 metric tons per year of NMOCs. Consequently, such a landfill could not claim greenhouse gas emission reduction credits if it installed a landfill gas capture and combustion system after crossing the regulatory threshold.

Another test of additionality is “common practice.” In other words, if everyone else is doing it, because it makes good business sense, the emission reduction activities may not qualify as “additional.” How common practice is defined is subject to interpretation, so people who pass judgment on these things apply other tests as well. We’ve discussed the “regulatory additionality” test already.

Other tests are technology and financial. The technology test is met when the project uses a technology that has been approved for GHG crediting by a GHG Program. Prominent GHG programs include the Clean Development Mechanism (CDM) of the United Nations Framework Convention on Climate Change (UNFCCC), the Climate Action Reserve, and the Chicago Climate Exchange.

The financial test asks whether the project would be implemented anyway regardless of the money that would be raised from the sale of carbon offset credits. The project is only additional from a financial perspective if the answer is “no.”

It should be apparent that judgments about “additionality” can be tricky to make. Fortunately, there are many cases where a case-by-case determination does not have to be made. This occurs when a project is developed that meets a specific “performance standard” established by a GHG program. The term “performance standard” means that if a project fulfills all the criteria set out in a project methodology or protocol, then it is deemed by the GHG program that issued or recognized that methodology/protocol to be additional.

Project protocols developed by the Climate Action Reserve in the United States are of the “performance standard” type. A project developer need only find a suitable CAR protocol, fulfill all its requirements, have the project verified, and credits will be issued.

In the CDM, by contrast, a project developer follows an approved methodology, or proposes a new one. Next, the project developer hires a GHG validation body to “validate” the project. Validation means that an auditor examines the project design, scrutinizes the monitoring plan and other project controls, and renders a decision about whether the project, if properly implemented, will generate GHG offset credits that are real, additional and permanent. Validation of the project takes place prior to implementation. Once the project has been validated and implemented, verification that the planned emission reductions have been achieved is also required.

In North America, the project protocols of most GHG programs are of the performance-standard type. However, the Voluntary Carbon Standard (VCS) is one notable exception. It issues offset reduction credits for projects that, in most cases, have followed a CDM methodology and have been validated and verified. I say “in most cases” because VCS also has a mechanism whereby a project developer can propose a new methodology and have it accepted if it passes muster by two independent validation bodies.

Would-be project developers face a steep learning curve when implementing projects for the first time. The field is highly technical, requires a thorough understanding of complex sets of rules, and demands attention to detail during implementation. For this reason, the use of project consultants from firms such as Futurepast can be highly cost-effective.

Reducing Emissions Below A Project Baseline

An emerging focus of managing climate change risks centers on greening the supply chain. Organizations do this for a variety of reasons. They want to ensure the dependability of the raw or intermediate materials they source, and materials produced and transported in an environmentally sound manner have lower risk profiles. They take an interest in the readiness of their supply chain partners to meet new greenhouse gas regulatory requirements and to absorb potentially higher or more volatile energy costs. And they seek to protect their corporate reputations by dealing with supply chain partners that conduct their businesses sustainably and in compliance with legal requirements and ethical principles.

Greenhouse gas emissions from supply chain partners increasingly are analyzed to detect missed opportunities to increase energy efficiency and reduce emissions. This scrutiny may begin when an organization inventories its “Other Indirect” greenhouse gas emissions, also known as “scope 3” emissions. Other Indirect emissions are those that are influenced by a reporting organization, rather than emitted directly as combustion, process or fugitive emissions. Other Indirect emissions are also distinguished from “Energy Indirect” emissions, which result from the consumption of purchased electricity, steam or cooling. Other Indirect emissions from the production and transportation of raw or intermediate materials that occur outside the organizational boundary of the reporting organization are known as “upstream emissions.” Other Indirect emissions resulting from wholesale and retail distribution of products, and during the use and disposal phases of a product’s life cycle, may be called “downstream emissions.”

Other Indirect emissions can be more difficult for organizations to quantify and report than either Direct or Energy Indirect emissions. Often, the data needed to inventory these emissions reside outside the reporting organization in its supply chain, and are difficult to access. Complicating matters further are questions of allocation, which arise when a supplier furnishes a diverse set of products for multiple customers and then is asked to account for only the emissions associated with a subset of those. Practical questions include “how much to count,” and “how far upstream and downstream” the supply chain accounting should go.

Requests for business-to-business greenhouse gas emission information are becoming more common, and are likely only to increase. Business customers, particularly those with well-known brand names to protect, want assurance that suppliers are managing their risks, including those related to climate change. The concern does not stop with emissions accounting, as a broad examination of climate risks include physical risks from climate change, regulatory risks, and shifting consumer preferences. The first category of risks includes increased frequency of extreme weather conditions, flooding and sea level rise, and changing temperature and rainfall patterns. Resource scarcity is a corollary impact from climate change, which may be triggered by decreasing biodiversity, higher rates of disease, or an increase in desertification. Regulatory risks include the potential imposition of cap-and-trade programs, carbon taxes, or requirements for installation of Best Available Control Technology (BACT). Changes in consumer preferences can impact organizations by shifting consumption from one product category to another, enhancing or harming reputations, and creating markets for new products and services.

Business drivers for taking action now are gaining board room attention. According to PriceWaterhouseCoopers analysts who interviewed more than one thousand CEOs from the world’s leading companies for the Carbon Disclosure Project, “48% of CEOs were already making changes in their supply chain in response to climate change or would start in the next 12 months. 66% of these CEOs were already making a return on this investment or expected to do so within the next 12 months. We have seen a number of examples delivering real cost reductions as a result of using carbon as the value driver within the supply chain. For example, one major clothing retailer recently reduced their supply chain operating costs by 17% and saved over 4,500 tonnes of carbon by redesigning their distribution and logistics chain.” (CDP Supply Chain Report 2009, p. 7, accessed on 2010-01-10 at www.cdproject.net/reports.asp.)

For companies whose primary customers are other businesses, meeting the demand for information concerning their greenhouse gas emissions and other climate risk management strategies can be challenging. Many corporate staffs find it difficult to respond, with in-house expertise thinned and overextended. What’s more, the desired response from customers seeking climate change related information is not satisfied with the provision of a copy of the supplier’s environmental policy or ISO 14001 registration certificate. Real data are demanded that meet data quality standards and adequately characterize uncertainty.

Help is available from specialized consultancy firms like Futurepast. And new international standards and consensus-based protocols are under development. One of the first documents specifically to address supply chain reporting of greenhouse gas emissions is the Scope 3 Accounting and Reporting Standard, to be published as a Supplement to the GHG Protocol Corporate Accounting and Reporting Protocol. This document is available in draft form (November 2009) from the Greenhouse Gas Protocol Initiative, at www.ghgprotocol.org/standards/product-and-supply-chain-standard (accessed on 2010-01-10).

The International Organization for Standardization (ISO) also has begun to develop a document. ISO Technical Report 14069, Greenhouse gases – Quantification and reporting of GHG emissions for organizations (carbon footprint of organizations) – Guidance for the application of ISO 14064-1, is intended to complement the ISO 14064 Part 1 standard published in 2006. Publication of the ISO technical report is not likely before the end of 2012. Futurepast’s president, John Shideler, serves as a US Expert on the ISO working group developing this document.

The main purpose for counting Other Indirect emissions is, of course, to manage them better. Once quantified, organizations in all parts of the supply chain can focus on initiatives to design more sustainable products, improve energy efficiency in manufacture, optimize transportation and logistics resources, and promote end-of-life recycling. Some observers will see connections to other business planning tools such as Six Sigma and Lean Manufacturing which now will be applied to help meet the goals of reducing carbon emissions and managing climate risks.

New Year’s resolutions may date back millennia, perhaps as far as early Babylonian times. In the modern era individuals may make solemn commitments to lose weight or exercise more. Meanwhile, organizations set about to achieve quality and environmental objectives while maintaining or improving financial performance metrics. Fortunately, when it comes to climate change resolutions, organizations—and individuals—can often achieve win-win outcomes. In this spirit Futurepast offers its Top Five Climate Change Resolutions for Organizations in 2010.

We rank as number five the establishment of an organizational inventory of greenhouse has emissions. For leading organizations, GHG inventories are not new. However, getting one is the place to start for organizations that have put off formal consideration of the carbon intensity of their operations and products. An inventory allows companies, governmental units, and other types of organizations the chance to quantify how much carbon dioxide equivalent gases they emit on an annual basis. The inventory is broken down by type of emission, such as Direct Emissions from stationary and mobile combustion, as well as process and fugitive emissions. Another category is Energy Indirect Emissions, which acknowledge how an organization’s demand for purchased electricity or steam frequently causes utility companies to combust fossil fuels to produce the energy an organization needs. A third category of accounts is Other Indirect Emissions which includes emissions associated with both the upstream supply of raw and processed materials an organization uses as well as the downstream effects of the products and services it furnishes to the market. Transportation of these materials, goods and services typically are also included in the upstream and downstream calculations. Definitely, if your organization doesn’t already have one, now is the time to establish an accurate and verifiable GHG inventory.

Number four on our list of resolutions for the New Year is to obtain information from your supply chain about the carbon intensity of their inputs to your organization’s activities. Leading companies like Walmart have pioneered in this field, and more and more market leading organizations understand the importance of doing so. It comes down to sustainability. Simply put, organizations that are not able to reduce their carbon footprint in the coming years run the risk of falling behind their competitors and losing market share. This is bad for them, their customers, and other stakeholders. Now that market leading organizations have inventoried their carbon emissions and considered ways to reduce them, the next logical place to look is in the upstream part of the value chain.

Our number three resolution is to use the organization’s inventory to set emission reduction targets. An inventory allows organizations to see clearly where their most carbon-intensive operations or activities lie. Armed with this information, objectives for performance improvement can be set. This typically occurs at the highest level of the organization during periodic exercises known as “management reviews.” Top management sets the direction, assigns responsibilities and time frames, and allocates the resources necessary to achieve the targeted improvements.

Futurepast’s second most important resolution for organizations this year is to communicate its GHG performance and improvement objectives to stakeholders. The audience for this communication is both internal and external. Employees must understand the message so they can take needed actions to meet the organization’s climate change objectives. Suppliers need to know what part of the value chain the organization has identified as bearing the highest potential for targeted emission reductions, so they may rise to the challenge and deliver them. Customers are an important audience as well, because increasingly they will make business-to-business or consumer decisions based upon least intensive carbon options, when all other factors are equal. Last but not least, the investor community has a growing desire to know how the organizations they own are meeting the climate change challenges of the twenty-first century. Indeed, in some cases, climate change disclosures may already be called for in securities regulations in those cases where a publicly traded company has determined that a reasonable person could be influenced by its climate change risks and management’s decisions about how to address them.

This year we cap our suggestions for resolutions with our number one recommendation: Reduce the carbon footprint of your organization’s activities and products. Implement actions that reduce consumption of energy, squeeze carbon emissions from the upstream supply chain, and reduce the carbon footprint of products over their life cycles. Increase the efficiency of lighting and heating/cooling systems, optimize distribution networks, reduce packaging, and improve recyclability. Encourage employee car-pooling, transit use or biking to work. Like the individual that goes on a diet and exercises more, organizations that produce equivalent products and services that use less materials and energy will gain an edge in the competitive marketplace and augment its appeal to customers. And in the classic win-win way, it will achieve these benefits while benefiting the organization’s bottom line.