Taking Stock of Carbon Emissions and Risk

July 2008

Last month we discussed how things are heating up in the Canadian climate change arena.

Whether through carbon taxes or current or imminent cap-and-trade schemes, the greenhouse gas (GHG) free ride is ending for Canadian energy users and others affected by carbon dioxide and other GHG emissions. In this article we'll focus on CO2.

Both types of mechanisms will put a cost on carbon, directly through taxes such as British Columbia's initial levy of $10 / tonne CO2 or indirectly through carbon markets driven by factors such as the cost of emissions-reductions, program rules and supply and demand.

Why Bother?

Besides regulatory requirements arising from GHG reporting programs, there are other qualitative and quantitative reasons to "bother" with keeping track of GHG emissions.

Qualitative reasons include the following:

• Tracking, verifying and achieving organizational social responsibility goals
• Identifying opportunities to reduce waste and costs
• Benchmarking performance and identifying competitive improvement opportunities
• Providing information to shareholders and stakeholders
• Preparing for future GHG policies such as reporting and/or reduction programs

Concerning the qualitative, it's said that "You can't manage what you don't measure". Emitters will eventually pay for emitting CO2 and other GHGs. Total dollars at risk is a function of price times quantity, i.e. "$ at risk = P x Q".

In terms of "P", BC's initial carbon tax has set the current bar while provincial and federal cap-and-trade programs are pointing to near-term prices of $ 15 - 20 / tonne CO2.  The upper end of this range is consistent with the early (2010) carbon price proposed by entities such as the National Round Table on the Environment and the Economy.

What to Measure?

"P" will go where it wants to go. That then leaves "Q" or quantity of emissions, which originate from three types of sources or "scopes":

1. direct, arising from energy sources that your organization owns or controls
2. indirect, arising from electricity, heat, steam, etc. purchased from a source not owned or controlled by your organization
3. indirect, arising from other activities

Reporting emissions from scopes 1 and 2 are typically required in GHG programs.

For the Canadian GHG reporting program for large emitters, only direct / scope 1 emissions are reported. Generators of electricity, heat and steam report their own direct emissions so purchasers of those energy forms then don't report indirect (scope 2) emissions.

What's at Risk?

Under a cap-and-trade program, direct emissions may be the only apparent area of interest, in that meeting a cap will have some cost, either to reduce one's own emissions, purchase offsets or pay a compliance fee. However, focusing only on direct emissions ignores carbon costs related to other emissions, that will also impact companies' bottom lines. These costs will arrive implicitly via cap-and-trade processes covering large providers of scope 2 energy or more explicitly via carbon taxes that could affect all emitters, scopes 1, 2 and 3.

So, to get a good understanding of one's carbon cost risk, getting a clear picture of emissions from at least scopes 1 and 2 is a must. Depending on how material your scope 3 emissions and risks are, you may want to take a close look at those as well.

Aegent will continue to monitor and report ongoing developments surrounding the emissions measurement and reporting protocols. For more information about how these issues will impact your business and the steps that you should be taking to prepare, contact Aegent at 416-622-9449.