Business Perspectives - A Quickly Changing Tune

The Sixth Session of the Conference of the Parties to the United Nations Framework Convention on Climate Change (UNFCCC COP-6) represents the first time in the international negotiating process that parties were unable to reach an agreement at a critical session. The lion's share of media and governmental commentary on COP-6 has focused on rifts between the EU and the "Umbrella Group" of countries, including the United States, Canada and Japan, on a few key issues. Divergent and highly charged political perspectives on matters such as how to account for the role of forestry and land use practices as carbon 'sinks', the removal of carbon dioxide from the atmosphere through photosynthesis, and 'supplementarity', the extent to which parties can utilize the protocol's flexibility mechanisms to gain credits for emissions reduction activities outside their borders, precluded agreement in the final days. Limiting the focus solely to political difficulties with specific issues, however, emphasizes only part of the story and takes no account of the complex context in which the international negotiations are embedded. Most important of all, a focus on selected issues does not give sufficient credit to the growing momentum gathering outside the negotiating halls, particularly the recent and rapid changes in attitude and awareness among business and industry on the issue of global climate change.

Background

Early in the run-up to COP-3 in Kyoto, few individual businesses or business associations could be found at the negotiating sessions. Among those few, a handful watched cautiously while others took a more active role in advising governments of the impending perils of stringent emission limitations and assisting them in tactics to delay substantive discussion. Most warned that the science was unproven, reductions could be economical ruinous, trade competitiveness could be damaged, fuel cost could skyrocket, and countless jobs would be eliminated. With each passing session the number of industry representatives began to grow and, following the announcement by the U.S. that it would support strengthening the UNFCCC through a legally-binding instrument, their number and vehemence against internationally agreed restrictions began to grow exponentially.

As COP-3 approached in December 1997, U.S. industry groups representing oil and coal, such as the Global Climate Coalition (GCC), waged multi-million dollar campaigns to discredit the science underlying the climate negotiations and, through advertisements in newspapers, radio and on television, as well as speeches before the U.S. Senate and President, warned that a treaty that was not truly global would harm U.S. citizens and lower their standard of living. Other industry sectors, such as auto manufacturers, farming, labor groups, chemical companies, electric and railroad industries joined in the campaign as well. While in Kyoto, a huge contingent of business lobbyists actively campaigned against adoption with governments and delivered speeches in the plenary sessions. An agreement, however, was ultimately reached and following its adoption, oil producers, automakers, electric trade associations and others solidly denounced the Protocol and vowed to fight its ratification, while a few provided a cautious welcome.

The most adamant detractors continued their campaigns the following year, for example, arguing against the Protocol before U.S. Congress and producing studies stating that the U.S. was underestimating the impact of curbing greenhouse gases on American household electricity bills, economic growth and unemployment. The GCC sponsored a study stating that implementing the Kyoto Protocol would cost the U.S. over 2.4 million jobs and reduce gross domestic product by as much as US$300 billion annually. The U.S. Chamber of Commerce launched an Internet campaign to connect foreign policy veterans with the public to raise awareness of its opposition, which it said threatened U.S. security and sovereignty. Other groups, such as one led by the American Petroleum Institute, began to reassemble themselves to coordinate opposition.

At this same time, however, competing signals were beginning to emerge. Earlier, in May 1997, British Petroleum CEO Sir John Browne, in a speech at Stanford University, acknowledged the role of fossil fuels in the buildup of "greenhouse gas" emissions and the need to address the problem of global warming, and was widely viewed as breaking ranks with the industry. By September, he had announced that the BP Group would begin voluntarily measuring and seeking ways to limit the greenhouse gases as a 'constructive contribution' to halting global warming. The Chair of French oil group Elf Aquitaine, Philippe Jaffre, pledged to cut carbon emissions by 15 percent by the year 2010, which would mean cutting Elf's annual carbon emissions of 42 million tonnes by six million. In 1998, a growing number of major oil company executives, such as Royal Dutch/Shell Group, Texaco and Sun Oil Co., began publicly acknowledging that fossil fuels may be changing the climate and suggesting that companies begin focusing on how to reduce greenhouse gas emissions. Some went as far as suggesting that the debate was no longer about the science, but actions by companies, such as examining the next generation of technologies and improving efficiencies of operations, reducing emissions of refineries.

Some attributed the shift in attitude among utility and car companies to their desire to shape the emerging rules or as a public relations gambit. According to some industry leaders, the Kyoto Protocol provided a "wake-up call" to those industries that failed to derail an agreement, even though they tried hard to debunk the science and warn of economic ruin. In April 1998, Shell Oil Co., following a similar action by BP, withdrew from the GCC following irreconcilable differences over the ratification of the Kyoto Protocol. In May, the Pew Center on Climate Change was established with a number of major corporate participants, including aerospace giants Boeing and Lockheed-Martin, Toyota, Maytag and Whirlpool, United Technologies and 3M, and several major energy companies including British Petroleum, Sun Oil, American Electric Power, U.S. Generating Co., Enron, and Intercontinental Energy. They promised to seek ways to reduce their own emissions and to invest in new, more efficient products and technologies. BP and Shell began work on internal emissions trading programmes. Companies also began to initiate forestry "carbon sink" projects, set voluntary emission reduction targets, and undertake work on new and renewable technologies, such as solar and wind energy and fuel cells. Companies also began to engage in carbon trades in anticipation of future regulations and some were faced with stockholder resolutions that would require them to examine the impacts of their policies on global warming.

By COP-4 in Buenos Aires 11 months later, changes in attitude had become even more apparent. Major global giants attended the conference and actively engaged participants with formal presentations on what they were doing to prepare for the transition from fossil fuels. For some, participation may have been an effort to present themselves as part of the solution in the hope of staving off regulatory responses like taxes, while others stated they were participating in a fundamental shift in their industries. At the end of the talks, one U.S. representative said "the conference reflected a changing attitude among nations and among corporations - a prime focus of any serious anti-pollution campaign—that is encouraging." Based on their media statements at COP-4, many industry representatives reported that the economic signal needed to make the Kyoto Protocol effective was penetrating new business and industry constituencies who were responding with greater pragmatism and increasing interest in identifying business opportunities.

This trend continued to grow in following years as more corporations began to calculate greenhouse gases, change business practices to achieve real cuts in emissions and, like Dupont and Motorola, announce efforts to cut greenhouse gas emissions or set emission reduction targets. Engineers at United Technologies Corporation's Pratt & Whitney unit switched to computers to simulate some tests of jet engines instead of running the turbines, managers at BP Amoco PLC were being evaluated on how well they cut emissions, alongside their financial results, and executives at American Electric Power Company decided to spend $5.5 million on a Bolivian reforestation project in an attempt to offset the carbon dioxide it releases. Even though some business leaders still questioned the science, companies like General Motors (GM) stated there is enough cause for concern to warrant immediate action. With increasing frequency, corporations undertook forestry-based projects and experimental emissions trade deals, hired new professional staff to address environmental concerns, and made substantial investments in alternative fuels. In late 1999, Ford Motor Company withdrew from the GCC, followed soon after by DaimlerChrysler, GM and Texaco, while anti-Kyoto business groups, such as the U.S. Business Roundtable, re-focused their public statements from warning against the economic folly of ratification to combating the regulatory roadblocks hampering technological developments. At the Annual Davos World Economic Forum in January 2000, hundreds of business and government leaders, when polled, said the greatest challenge facing the world at the beginning of the century is climate change.

The concept of emissions trading gained considerable new ground, with the establishment of many public and private "carbon" funds designed to provide emission reductions to corporate or government investors. The World Bank established a Prototype Carbon Fund, with investments a from private sector firms, and European Bank for Reconstruction and Development (EBRD) and the Franco-Belgian banking group Dexia, likewise launched a new private equity fund aimed at reducing energy consumption and emissions of greenhouse gases in central and eastern Europe. Meanwhile, governments considered or established pilot emissions trading projects in cooperation with firms, while companies such as Shell launched internal emissions trading schemes. In October 2000, the U.S. brokerage Cantor Fitzgerald and eSpeed, joined forces to launch two new electronic markets for trading emissions allowances and created a new company, CO2e.com, a business-to-business venture focusing on the understanding, mitigation and management of greenhouse gas (GHG) emissions. In November 2000, Arthur Andersen, Credit Lyonnais, and Natsource, a New York-based brokerage, launched an Emissions Market Development Group to focus on developing infrastructure and services to help companies manage their carbon risks and exploit value extraction opportunities.

Other signs of changing opinion continued as COP-6 approached. For example, a poll of Fortune 5000 business executives in the U.S. found them split in their view of the Kyoto Protocol and that 75% of Fortune 5000 executives believe that global warming is a serious problem. A Ford Motor Executive went as far as to predict that reign of the polluting internal combustion engine was coming to an end, to be replaced by the hydrogen fuel cell. Renewable energy, such as wind, solar, fuel cells, and high-efficiency gas-driven "micro-turbines" has seen renewed interest from politicians and consumers. The European Union, for example, wants a fifth of its power to come from "renewable" sources by 2010.

COP-6

Following the disappointing talks in The Hague, not just government officials and environmentalists were disappointed, but some business leaders as well. As Nick Campbell, chairman of the Climate Change Working Group at the International Chamber of Commerce stated, "We came here expecting a decision which would have clarified the rules and guidelines of the Kyoto Protocol. We now walk away as empty handed as everyone else and leave as confused as when we arrived about the role we might play in contributing to solutions." A poll by the American Business Conference, a Washington-based coalition of chief executives of midsize growth companies listed the collapse of negotiations in The Hague in its annual list of the most significant news stories relating to business and government in 2000. This does not suggest a wholesale acceptance of the Protocol or domestic regulations it engenders. Indeed, a proposed Climate Change Levy in the UK has provoked heated resistance and led the Conservative Party to include its abolition among its campaign promises. However, it does suggest that business executives are not as monolithically opposed to the Protocol as in years past and that many now view limitations on carbon dioxide and other global warming pollutants as inevitable. As Frank Loy, U.S. chief negotiator at COP-6 told delegates, "The consensus on climate change has deepened in the last three years. Nowhere is this more true than in the business community. They [companies] went to Kyoto largely to block action, but they have come to The Hague to contribute constructively."

Business Following the Bush Announcement

On March 28, Christine Whitman, head of the U.S. Environmental Protection Agency announced that the Bush administration had no plans to carry out the Kyoto Protocol because it was clear that Congress would not ratify it anyway. In telling reporters the administration would not implement the treaty, Whitman also said that if the Europeans, Japan and other countries want the U.S. to participate in an agreement, they would have to abandon the framework and come to new terms. Ms. Whitman said the administration would remain "engaged" in international negotiations on ways to address climate change. But it was unclear what position the administration intended to take at the next UN meeting on the Kyoto Protocol, scheduled for this summer in Bonn.

Whitman's announcement came a week after Condoleezza Rice, Bush's national security advisor, reportedly told EU ambassadors Kyoto was "dead" during a meeting in Washington. In early March, the US met with officials from other G-8 countries in Trieste, Italy and agreed they would aim to finalize the Protocol when talks resume in Bonn in July. After that meeting, Whitman sent Bush a memo warning him to demonstrate his commitment to cutting GHGs or risk weakening the US's standing among its global allies. However, a week later, after intense lobbying by the coal industry, Bush broke his campaign pledge and said he would not seek to regulate power plants' carbon dioxide (CO₂) emissions. The latest announcement has gone a step further, as the White House has reportedly sought advice from the State Department about how the U.S. can legally withdraw its signature from the Protocol, signaling its intent to pull out of the agreement.

Following Whitman's statement, the global reaction has been swift and furious with world leaders urging Washington to reconsider and editorial writers slamming President Bush's "arrogance" and "in-your-face truculence." Governments condemned the US President's stance as uninformed and reckless, noting with outrage that the U.S. is home to 4% of the world's population but produces 25% of its greenhouse gases. They were also reportedly shocked to have learned of the rejection of the treaty, which represents years of difficult international negotiations, through the press.

The possible economic impact of the Protocol weighed heavily in Bush's decision. He said he would reject "anything that will harm our economy and hurt our American workers." Bush's comments reflect the powerful influence that business exerts on global warming policy. Behind the scenes, companies are trying to shape the regulatory environment in an attempt to minimize the impact of climate change on their businesses and control the threat posed by government action designed to control carbon emissions. Already, some governments have introduced taxes on fossil fuels, improved energy efficiency standards and imposed targets for cutting emissions. Bush's decision to withdraw from the Kyoto protocol has lessened the likelihood of tough action on emissions in the U.S. to the relief of many executives. The decision was welcomed by the United States Council for International Business, the US affiliate of the International Chamber of Commerce, which deplored the Kyoto protocol's "unrealistic" targets and lack of developing country participation.

But the relief is not universal and the Bush Administration appears to have been caught off guard by the negative reaction he has been receiving from some corporate groups. The Pew Center, a group of 32 companies, including Boeing, International Business Machines, Du Pont, Shell and BP Amoco, that favor action on global warming, described Mr Bush's decision as "a profound disappointment and, potentially, a serious setback to international efforts to address the very real threat of global climate change." It's not that these companies are eager to spend a lot more money on environmental protection or that they adamantly support the Kyoto Protocol. But they're convinced that global warming is real and, sooner or later, they will be forced to do something about it. So they want to be involved in setting the international rules as soon as possible. That way, they will be able to comply with the regulations as efficiently and as cheaply as possible.

The mixed response to the Bush administration's move partly reflects the perception that tackling climate change will create winners as well as losers. Some companies would benefit from curbs on carbon dioxide emissions. Others might not benefit but would prefer governments to face the issue rather than be left in a state of uncertainty about when and how it will be tackled. Continuing support for limits on carbon emissions comes largely from companies that make energy-efficient products and sophisticated controls. A more surprising source of support comes from certain car companies, despite the industry having to cope with more stringent regulations. The explanation, according to an article in Harvard Business Review in July, was that companies such as General Motors and Ford Motor "see climate change as an opportunity to gain advantage over their less technologically sophisticated rivals." Some go so far as to claim that Bush's stance could damage the US economy because it would give its competitors a head start in developing and using climate-friendly technologies. They draw an analogy with the oil price shock of the 1970s, which spurred the Japanese car industry into producing highly efficient cars that won new markets.

At the other end of the spectrum, some companies are now lobbying for surprisingly radical solutions to the problem of climate change. The Chartered Insurance Institute, a professional body for the UK insurance industry, recently called on governments to replace the Kyoto protocol, which calls for a 5 per cent cut in emissions by 2010, with a proposal known as "contraction and convergence", a longer-term plan to reduce global emissions by 60 per cent. The Respect Group, a Europe-wide business network based in Stockholm, is putting another business initiative forward. It says it is "critical" that the EU introduce policies that make the use of fossil fuel more expensive. Most businesses will take the opposite tack. Lobbying efforts will center on avoiding extra taxation and promoting flexible, cost-effective ways of reducing emissions.